Montana Supreme Court: Insurer Not Bound by Insured’s Settlement

K. Alexandra Byrd | SDV Insights | October 24, 2019

In Draggin’ Y Cattle Co., Inc. v. Junkermier, et al.1 the Montana Supreme Court held that where an insurer defends its insured and the insured subsequently settles the claims without an insurer’s participation, a court may approve the settlement as between the underlying plaintiff and underlying defendant, but the settlement will not be presumed reasonable as to the insurer. Therefore, an insurer who defends its insured cannot be bound by a stipulated settlement that the insurer did not expressly consent to.

The case involved Draggin’ Y Cattle Company (the “Cattle Company”), a ranching and cattle business that utilized the services of an accounting firm, Junkermier, Clark, Campanella, Stevens, P.C. (“Junkermier”), to structure the sale of real property to take advantage of favorable tax treatment. It was discovered that Junkermier’s employee misinformed the Cattle Company’s owners of the tax consequences of the sale. The Cattle Company’s owners subsequently filed suit against Junkermier and its employee and alleged nearly $12,000,000 in damages due to the error. Junkermier’s insurer, New York Marine, provided a defense for Junkermier and its employee.

The Cattle Company’s owners offered to settle the claims against Junkermier and its employee for $2,000,000, the policy limit of the New York Marine policy. New York Marine refused to give its consent or tender the policy’s limit. Subsequently, Junkermier, its employee, and the Cattle Company entered into their own settlement agreement for $10,000,000. The settlement was contingent upon a reasonableness hearing to approve the stipulated agreement.

New York Marine moved to intervene and challenged the stipulated settlement. The trial court, relying on Tidyman’s Mgmt. Svs. Inc. v. Davis, 330 P.3d 1139 (Mont. 2014), held that New York Marine had effectively abandoned its insured when it had refused to settle the claim in good faith and therefore it was “as if it had breached the duty to defend.” The trial court concluded that the settlement was reasonable and entered judgment against Junkermier.

On appeal to the Montana Supreme Court, New York Marine argued that a stipulated judgment, entered into without the insurer’s consent or participation, is only reasonable when the insurer has refused to provide a defense, effectively abandoning the insured. New York Marine noted that it provided its insureds with a defense throughout the relevant proceedings.

The Montana Supreme Court agreed with New York Marine and held that if parties decide to settle without the insurer’s participation, a court may approve the stipulated judgment as between the underlying plaintiff and the underlying defendant, but it will not be presumed reasonable as to the insurer. The judgment against Junkermier and the proceedings were reversed and remanded to the lower court for further proceedings.

This case underscores the importance of involving coverage counsel in settlement negotiations when a defending insurer refuses to agree to a reasonable settlement. Montana policyholders should also consider whether a declaratory judgment action is necessary if their insurer has reserved its rights as to any indemnity owed.

Avoid Five Common Fraudulent Schemes Used in Construction

Ken Van Bree | Construction Executive | October 13, 2019

Here’s an attention-getting statistic: A typical case of fraud in the construction industry has a median loss of $227,000, according to the 2018 Report to the Nations issued by the Association of Certified Fraud Examiners (ACFE) on occupational or internal fraud. This report further showed that the construction industry’s median loss is approximately $119,000 higher than the average fraud losses across all industries.

Construction companies are most at risk for fraud related to corruption (such as bribes and kickbacks), billing related schemes, expense reimbursements, check tampering and equipment or material theft.

This brings up three important questions:

  • What are the fraud schemes affecting your company?
  • How can contractors keep their companies from experiencing these types of fraud?
  • What is the profile of fraudster?

The threat of fraud can never be wholly removed; however, companies should take steps to identify likely fraud schemes they might face. Below are a number of schemes frequently used to defraud construction companies.


Contractors are subject to the risk of bid rigging and other forms of corruption. In the ACFE study, 42% of the fraud cases examined in the construction industry had an element of corruption.

Whether it was bribery, kickbacks or quid pro quo situations, the bid process can be riddled with opportunity for this type of fraud.


 The ACFE report indicates that billing schemes account for 37% of the fraudulent activity in construction companies.

The schemes can be payments to fictitious vendors, overpayment to vendors (often through collusion with an internal employee) and purchase of personal items with company funds.


The construction industry is subject to the same fraudulent activities faced by almost every other industry when it comes to expense reimbursements. Overstated expense reports accounted for 23% of fraudulent activity found in construction companies.


The construction industry is particularly susceptible to theft of materials due to the location of jobs and the difficulty of tracking construction materials. Jobsites can be in remote areas or some distance from the corporate headquarters and subject to less supervision.

Additionally, materials on jobsites are hard to track and measure during the construction process. Items lying around a jobsite such as lumber, concrete, copper pipe, wire and cable can create an opportunity for thieves if proper controls are not in place.


Similar to theft of materials, misuse of company equipment can also become an issue if there is a lack of controls present. For instance, an employee could operate a side business using a company’s idle equipment.


 A company must design a control structure that will reduce the opportunity for fraud and increase the chances fraud will be detected. Although there are no guarantees related to fraud, the foundation to a strong internal control environment is proper segregation of duties.

For example, the person in charge of setting up vendors should not be the person who approves vendor payments or reconciles bank statements. Moreover, the payroll clerk should not be the same person who disburses paychecks.

Proper segregation of duties applies to all areas of business and can be employed effectively at little or no cost.

Here are some other simple yet effective internal controls that can be implemented with relative ease.

  • Check all estimates for accuracy of calculations, labor rates and correspondence with drawings.
  • Compare job cost estimates with actual costs. Require approvals for cost adjustments or transfers of costs between jobs.
  • Require that materials estimates above a specified amount include quotes from two or more vendors.
  • Make purchases only with pre-numbered purchase orders and match them to receiving reports and invoices before payment is made.
  • Review all billings for timeliness, accuracy, conformity with contract terms and correct customer information.
  • Reconcile contract billings with general ledgers monthly and calculate under billings and overbillings.
  • Prepare and review financial statements monthly and reconcile them to supporting ledgers, bank statements and loan schedules.

Preparing financial statements on a monthly basis can be very helpful for understanding the health and viability of a business in addition to maintaining a secure control structure.

It is important not to put too much reliance on a single control, but rather have a series of processes that will prevent and detect fraud.


It can be just as important to understand the profile of a fraudster as it is to know the typical fraud schemes. Less than 10% of the fraudsters had been previously convicted of a fraud-related offense prior to committing the crimes examined in the ACFE study.

Additionally, 82% of fraudsters had never been punished or terminated by an employer for fraud-related conduct. This shows that while background checks are useful in screening out some bad applicants, they might not be effective in predicting fraudulent behavior.

Most fraudsters display some warning signs, such as living beyond their means, financial difficulties or having unusually close associations with vendors or customers.

Training for employees, management and auditors to recognize these warning signs is important to help detect fraudulent behavior.

Insurer Must Pay for Matching Siding of Insured’s Buildings

Tred R. Eyerly | Insurance Law Hawaii | September 11, 2019

    The Seventh Circuit found that the insurer was obligated to pay for siding of a building that was not damaged by hail so that it matched the replaced damaged portions of the siding. Windridge of Naperville Condominium Association v. Philadelphia Indem. Ins. Co., 2019 U.S. App. 23607 (7th Cir. Aug. 7, 2019). 

    A hail and wind storm damaged buildings owned by Windridge. The storm physically damaged the aluminum siding on the buildings’ sought and west sides. Philadelphia Indemnity, Windridge’s insurer, contended that it was only required to replace the siding on those sides. Windridge argued that replacement siding that matched the undamaged north and east elevations was no longer available, so Philadelphia had to replace the siding on all four sides of the buildings to that all of the siding matched. 

    Windridge sued and moved for summary judgment. The district court ruled that matching was required. The only sensible result was to treat the damage as having occurred to the building’s siding as a whole. 

    The policy was a replacement-cost policy. Philadelphia promised to “pay for direct physical ‘loss’ to ‘Covered Property’ caused by or resulting from” the storm, with the amount of loss being “the cost to replace the lost or damaged property with other property . . . of comparable material and quality . . . and . . . used for the same purpose.” The loss payment provision offered four different measures for loss, leaving Philadelphia free to choose the least expensive: (1) pay the value of the lost or damaged property; (2) pay the cost of repairing or replacing the lost or damaged property; (3) take all or any part of the property at an agreed or appraised value; or (4) repair, rebuild or replace the property with other property of like kind and quality. 

    The Seventh Circuit noted that the district court’s conclusion that the buildings as a whole were damaged – and that all of the siding must be replaced to ensure matching – was a sensible construction of the policy language as applied to the facts. Philadelphia’s interpretation – pay to replace only the specific panels of siding that were directly hit by hail, leading to two-tone buildings – was less reasonable. Regardless, the unit of covered property consider under the policy (each panel of siding vs. each side vs. the buildings as a whole) was ambiguous as applied to the facts, so the interpretation that led to coverage was favored. 

    Here, each building as a whole suffered direct physical loss as a result of the storm. The storm altered the appearance of the buildings such that they were damaged. Due to the extent of the damage and the lack of matching siding available on the market, the better construction of the ambiguous policy was to require Philadelphia to replace the siding on all four elevations of the buildings. The district court’s judgment in favor of Windridge was affirmed. 

Design-Assist, An Ambiguous Term Causing Conflict In The Construction Industry [1]

John P. Ahlers | Ahlers Cressman & Sleight | October 31, 2019

“Design-Assist” is one of the recent cost-saving trends being touted for construction projects and, in particular, construction projects utilizing alternative procurement methods.  If an internet search for the term, “design-assist” is made, the result will be numerous construction industry articles and white papers lauding “design-assist” as a recent cost-saving trend in construction procurement.  From a legal perspective, however, the term “design-assist” is notably absent from court opinions and most state licensing laws.  With the exception of the ConsensusDocs, few standard form contracts even include the term “design-assist” in their text.

The ConsensusDocs agreement provides examples of the Constructor’s obligations to perform “assisting activities” (the term “design-assist” is not used) and states that, notwithstanding the performance of such “assisting activities” by the Constructor, the responsibility of the design remains with the Designer unless otherwise stated in the Contract:

  • Article 4.5 DESIGN PROFESSIONAL’S RESPONSIBIITIES The Designer shall furnish or provide all design and engineering services necessary to design the Project in accordance with the Owner’s objectives … the Designer shall draw upon the assistance of Constructor and others in developing the design, but the Designer shall retain overall responsibility for all design decisions….
  • Article 4.6 CONSTRUCTOR’S RESPONSIBILITIES [T]he Constructor shall assist the Designer in the development of the Project Plan and Project Design but shall not provide professional services which constitute the practice of architecture or engineering unless the Constructor needs to provide such services in order to carry out its responsibilities … or unless specifically called for by the Contract Documents.
  • Article 6.3.3 INTEGRATED DESIGN PRINCIPLES In order to achieve the Project objectives, the design process must occur in a collaborative manner, informed by the free-flow of accurate information concerning program, quality, cost, and schedule.  While retaining overall responsibility for the Project design, the Designer must work collaboratively with the other members of the IPD Team, drawing on their respective expertise in order to achieve the Project objectives.[2]
  • Design-assist contracting is a construction management method to improve quality and maintain cost.  It is most commonly used when a specialty trade, fabrication, or building method requires a unique solution or set of trade skills.  Design-assist contracting is best suited for design building or construction management at risk (CM@R) projects in which the architect and owner work with trades people, manufacturers, and subcontractors to develop a budget and project schedule for a unique solution, material, or construction application, such as reproducing historic windows or finishing plaster walls.[3]

Thus, without an accepted definition, the term “design-assist” is open to multiple interpretations and expectations within the industry.  Allocation of design responsibility is a significant risk and hence, the use of undefined terms, such as the use of “design-assist” in contract documents creates unintended consequences for the participants in Design-Build, GCCM, Engineer-Procure-Construct (EPC) contracts where the term “design-assist” is used.

The term “assist” means to “give help to; aid.”[4]  Clearly, design-assist does not encompass all design responsibilities on a given project.  The demarcation as to when contractors, in assisting with design services “cross the line” and enter into professional territory is fuzzy.  If a contractor is deemed to cross the threshold into professional territory, there are significant additional risks to the contractor:

  • A contractor may likely be held to a higher standard than that which governs design professionals;
  • A contractor will not, as a matter of public policy, be permitted to limit its liability for negligent acts because it is now subject to claims based on professional liability as well as contractual liability;
  • A contractor risks criminal liability for unlicensed practice of engineering or architecture if performing professional services rather than working as a contractor; and
  • Pursuant to the “professional acts” exclusion, coverage for professional liability is generally excluded under commercial general liability or other commercial liability policies.

Then the issue becomes how best to limit the liability of a contractor if the owner insists on using the term “design-assist.”  If “design-assist” is going to be used in a contract, it should be defined, the scope of the Contractor should be clarified, and, if possible, the Contractor’s liability should be limited.  For example,

Define/Defining the Contractor’s design-assist role:

  • Using an electrical subcontractor as an example, the Contractor shall review the electrical design documents and specifications for any errors, inconsistencies, or omissions;
  • Review of the electrical design documents and specifications for clarity and constructability to reduce the risk of field conflicts and changes to the Work;
  • Coordination with the Design Professionals to identify routing and eliminate conflicts among the Work of other trades;
  • Alternatively, if it is desired that the Subcontractor is responsible for the design, the Contract should clearly so state the responsibility that the Subcontractor is able to price its work accordingly.

The Subcontractor shall be responsible for addressing any questions which arise as to the interpretation of the design and as to the fulfillment of the Subcontract Agreement.


Another way to limit the design-assist obligations is to clarify specifically what the Subcontractor or Contractor’s role is as follows:

  • The recommendations and advice of Contractor concerning modifications and alternatives shall be subject to review and approval of the Engineer.


Finally, the Contractor should limit its liability for its role in the design.  A suggestion:

  • It is expressly recognized that Contractor is neither acting in the capacity of a licensed design professional nor assuming any design liability in its review of the design or collaboration on the constructability.

[1] This blog article is based on the Journal of American College of Construction Lawyers, Vol. 11, #1 Winter 2017, Joel D. Heusinger, “Ambiguity Breeds Conflict: The Importance of Defining ‘Design-Assist’ in the Construction Industry.”

[2] ConsensusDocs 300, Standard Multi-Party Integrated Project Delivery (IPD) Agreement (emphasis added).

[3] “The Basics of Design-Assist Contracting,” David Hart, AIA Best Practice (October 2007).

[4] New World Dictionary of American English, 83 (3d College Ed. 1991).

Policyholders and Contractors Unite Against Wrongful Insurance Company Claims Practices

Chip Merlin | Property Insurance Coverage Law Blog | December 5, 2019

While working on and researching for answers to questions posed by Professor Feinman regarding the growing insurance coverage gaps crisis, I came across a very pointed article published about how modern insurance company claims practices are destroying the construction restoration industry.

In Cleaning & Restoration (Quarter 1, 2019) an article, “Our Greatest Need—The Case For, And Path To, Industry Advocacy For The Restoration Industry,” by the Restoration Industry Association (RIA) Board member Mark Springer, stated the following:

In a previous C&R article…. I described a situation where an insurance carrier refused any payment on a water mitigation claim due to a technicality in document upload. It is not my intent to relitigate that argument but rather to expand on some of the issues that restoration contractors face. In that article, I stated a thesis that poses a somewhat grim outlook for the restoration industry. However, with each passing month, I continue to see challenges emerge that reinforce this position. The thesis is this:

‘If restoration companies are unwilling to unite, advocate for sustainable claims practices and take a proactive approach with insurance carrier claims policies, then the restoration industry as we know it will cease to exist within a decade.’

I agree. The significance is that leadership from the largest and most longstanding restoration construction association is promoting this “call to arms” in its own battle with the property insurance claims handlers. It is not only policyholders suffering from catastrophic physical damage to their businesses and homes, the insurance claims industry has focused its claims techniques on those contractors repairing and rebuilding those structures.

Springer made his point further:

‘Claims policies’ go much deeper than the specific policies that a carrier dictates to issue payment. The issues we face are many, and they all impact the entire claims process that a property restoration company must navigate in the course of their day-to-day operations. What follows are some examples of the challenges and threats we face. Realistically, each of these areas, or sectors of concern, are not only necessary but essential in the claims environment. However, there are some key questions that each restorer, and the industry at large, should be examining if we are going be able to operate our businesses sustainably. These questions are not rhetorical; they are not intended to be presented sarcastically or with bias. This isn’t a time for conspiracy theories, but we would be exceptionally naive if we were to think that the largest fiduciaries in the world, who incidentally are the repositories of the largest quantities of data in the world, were looking out for any interest other than their own and that of their shareholders.

Springer provided several examples of methods the insurance claims Industry is leveraging lower claims payments through wrongful claims practices, which are often involving partners of the insurance companies.

  1. Pricing and Scoping platforms found in Xactware, which is operated by Verisk—a company owned primarily by insurance companies until it went public.
  2. Non-adjuster insurance company construction consultants who often delay and raise roadblocks to payment without legitimate reason. The RIA named JS Held as an insurance industry partner consultant that RIA leaders need to have “talks” with.
  3. Third-Party Administrators Growing Influence and Expanded Role in claims adjustment.
  4. Government regulations and rules not under insurance carrier claims rules. Indeed, Springer notes that the result is that less affluent contractors breaking the law will get paid by insurers for the illegal construction, which is performed, but not caught by, government regulators.

Certainly, the insurance company will claim that many contractors overprice materials and labor. They will also point to those that over-scope the damage and method of repair so that Xactware performs a very valuable function in the claims process. They will also point out that expert consultants can help prevent contractors from “gaming” the claims payment system and prevent unreasonable overpayments payments. These are two legitimate concerns. Still, two wrongs never make a right.

I am not certain how insurers get away from the refusal to pay government safety laws for construction workers. Of course, insurance claims managers just saying “no” and then conspiring with financial support for those that break the law is one way to do it, as Springer noted. I am certain that the audit committees checking on governmental compliance for the publicly traded insurers would not like to read these accusations by Springer.

I would suggest that contractors and those concerned about what they can do to help stop the growing trends of wrongful claims practices of the insurance claims industry read the various articles archived by the RIA and support many of their efforts. The RIA has over 1,200 member firms and has been in existence for over 70 years advocating for restoration contractors.

Policyholder interests for high standards of ethical construction practices and fair and ethical claims practices are aligned with the RIA—so should the insurance industry.