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Preserving the Insurer’s Right to Allocate Loss

As most insurers know, a reservation-of-rights letter is only useful to the extent that it can be enforced at a later date. Prudent insurers will clearly spell out the relevant policy provisions and identify portions of a claim that are or may be excluded from coverage in whole or in part. However, when a claim proceeds to trial and a verdict is rendered, insurers must consider the extent to which their reservations can be enforced.

Absent any insurer action, underlying litigation involving multiple causes of action often results in a “general” verdict that does not specify the extent to which damages or other relief arise from each particular cause of action. In this situation, a policyholder is likely to argue that, because the specific basis for the jury’s verdict cannot be determined, the entirety of the verdict is covered.

The burden generally falls upon the policyholder to demonstrate that a verdict or settlement is covered under the policy, but several court decisions demonstrate the inherent risks arising when an insurer does not clearly and consistently assert its right to allocate between covered and uncovered claims.  For example, under the oft-cited Duke v. Hoch, 468 F.2d 973, 976 (5th Cir. 1972) and its progeny, an insurer that does not advise the policyholder of the importance of a special verdict (and the divergence of interests between insurer and insured in the event damages are allocated) runs the risk of shifting the heavy burden of proving the existence of non-covered loss to itself.

Fortunately, the Eleventh Circuit provided helpful guidance last year when deciding the case QBE Specialty Ins. Co. v. Scrap Inc., 806 F. App’x 692 (11th Cir. 2020). The facts of the underlying litigation in Scrap, Inc. are relatively simple: Scrap, Inc. (“Scrap”) operated a metal-shredding facility in Florida. The underlying plaintiffs filed a state-court lawsuit against Scrap for nuisance stemming from its operation of the shredding facility, alleging that Scrap’s facility created loud noises, offensive odors, fumes, and other emissions of undisclosed content.

QBE agreed to defend Scrap pursuant to a reservation of rights. Numerous times throughout the proceeding, QBE advised Scrap of the availability of and need for special jury instructions and special-interrogatory verdict forms. Additionally, QBE sought leave to intervene on two occasions for the limited purpose of requesting special jury instructions and special-interrogatory verdict forms. The underlying court, however, denied QBE’s motion, stating: “QBE has informed [Scrap’s trial counsel] as well as the Defendants’ private counsel that this case requires a special interrogatory verdict form. There will be adequate lawyers at the table to make sure this Court provides a proper verdict form.’”

A jury found Scrap liable for nuisance damages and awarded $750,000 to the plaintiffs.  QBE filed an action seeking a declaratory judgment that it was not obligated to indemnify Scrap for the judgment.  The district court found for QBE, and Scrap appealed to the Eleventh Circuit U.S. Court of Appeals.

On appeal, the Eleventh Circuit noted that, under Florida law, the party claiming insurance coverage has the initial burden to show that a settlement or judgment represents damages that fall within the coverage of the insurance policy.  “An insured’s inability to allocate the amount of a judgment between covered and uncovered damages is therefore generally fatal to its indemnification claim.”

The court further provided, however, that “the burden of apportioning or allocating between covered and uncovered damages in a general jury verdict may be shifted to the insurer if the insurer did not adequately make known to the insured the availability and advisability of a special verdict.”

The record indicated that QBE went to great lengths to “make known to the insured the availability and advisability of a special verdict.”  During the underlying litigation, which lasted approximately one year and a half, QBE wrote to Scrap’s attorneys four times advising Scrap of the need for allocation. The court noted, “In these letters, QBE told Scrap explicitly that Scrap would have to request a special verdict, differentiating covered damages from uncovered damages, and that if it did not, the failure to seek allocation could result in forfeiture of coverage for all damages.”

Additionally, “QBE also twice attempted to intervene in the underlying suit for the purpose of assisting with the preparation of special-interrogatory verdict forms…”  The key takeaway from the opinion is the following: “Though Scrap protests at length that QBE’s attempted interventions were procedurally defective, the standard is notice, not successful intervention.  That standard was certainly met here.”  (emphasis added).

Accordingly, QBE’s actions serve as a helpful roadmap for insurers seeking to preserve their rights to allocate. Prudent insurers should make it known, early and often, that they intend to enforce their rights to allocation and should take affirmative steps to enforce those rights when the time comes. Most notably, an insurer that files an intervention motion does not need to succeed on its motion. The insurer still meets the standard of notice to the insured simply by the act of seeking intervention.