As a majority rule, the burden is on the insured to allocate between covered and uncovered claims. For example, when a judgment against an insured includes damages for which an insurer is liable and also damages beyond the coverage of the policy, the insured has the burden to establish (i.e. to allocate) which percentages of the verdict represent covered damages versus uncovered damages. Given this allocation burden, an insured’s inability to allocate the judgment between covered and uncovered damages can be fatal to the insured’s indemnification claim against its insurer.
Significantly, however, some courts have found that the allocation burden may be shifted to the insurer if the insurer does not adequately notify the insured about the availability and advisability of a special verdict. See Duke v. Hoch, 468 F.2d 973, 983-84 (5th Cir. 1972) (applying Florida law). A special verdict would allow the jury to make written findings on specific issues of fact, which could be used to differentiate between covered and uncovered damages for allocation purposes.
In QBE Specialty Insurance Co. v. Scrap Inc., 806 Fed. Appx. 692 (11th Cir. 2020), the United States Court of Appeals for the Eleventh Circuit held that Florida law adopts the majority rule of placing the burden on the insured to allocate between covered and uncovered claims. While the court acknowledged the Florida’s court holding in Duke, the Eleventh Circuit concluded that the insured had forfeited coverage by not obtaining a special verdict allocating damages, and affirmed the District Court’s grant of summary judgment for QBE. The facts at issue involved an underlying lawsuit in which the insured, Scrap, was sued for nuisance by neighbors complaining of various damages. The insurer, QBE, agreed to defend Scrap pursuant to a reservation of rights because the lawsuit alleged both covered and non-covered damages. On multiple occasions throughout the underlying lawsuit, QBE wrote to Scrap’s attorneys advising Scrap of the need for allocation. In these letters, QBE told Scrap explicitly that Scrap would have to request a special allocated verdict, differentiating covered damages from uncovered damages, and that if it did not, the failure to seek allocation could result in forfeiture of indemnity coverage for all damages. Ultimately, no special instructions were given to the jury, and the jury awarded the underlying plaintiffs $750,000 by way of a general verdict that did not differentiate covered damages from uncovered damages. QBE then sought a declaratory judgment that it had no duty to indemnify Scrap for the verdict because of Scrap’s failure to obtain a special allocated verdict. The District Court ruled in favor of QBE, and the Eleventh Circuit affirmed. Thus, Scrap’s failure to obtain a special verdict meant that QBE had no obligation to pay for the $750,000 judgment against Scrap.
In ruling that Scrap had forfeited its right to indemnity coverage for the $750,000 general verdict, the Eleventh Circuit found that QBE had satisfied its obligation to notify Scrap of the need to seek a special verdict. The Eleventh Circuit noted that QBE had actually twice attempted to intervene in the underlying suit for the purpose of assisting with the preparation of a special-interrogatory verdict form, but the underlying court refused to allow QBE’s intervention. Scrap argued that QBE’s failure to successfully intervene should shift the allocation burden to QBE. Rejecting that argument, the Eleventh Circuit ruled that “the standard is notice, not successful intervention,” (emphasis added) and that the “[notice] standard was certainly met here” where QBE had repeatedly notified Scrap of the need to seek a special verdict.
The Eleventh Circuit also rejected Scrap’s argument that it was relieved of its burden to allocate the damages because defense counsel, paid by QBE, refused to prepare the special verdict in light of a conflict of interest. The court concluded that Scrap was required to seek a special verdict either through its “private counsel” or by hiring an attorney.
Other courts have continued the trend towards adopting the majority rule of placing the allocation burden on the insured. See Uvino v. Harleysville Worcester Ins. Co., 708 Fed. Appx. 16, 20-21 (2d Cir. 2017) (applying New York law). In Uvino, the insurer had moved to intervene in an underlying lawsuit against the insured for the purpose of requesting the submission of special interrogatories to the jury in order to allocate between covered and uncovered damages. The insured objected to the use of special interrogatories and, ultimately, the jury issued a general verdict that did not allocate damages. The Second Circuit found that by attempting intervention, the insurer had put both the insured and the claimants on notice of the availability of the interrogatories and the parties’ divergence of interests with respect to allocation. The Second Circuit, therefore, held that there was no reason to shift the allocation burden to the insurer, and that the burden properly remained on the insured and/or the claimants seeking to enforce the insured’s rights under the policy.
The QBE v. Scrap and Uvino decisions clear up any question that Florida and New York have adopted the majority rule placing the burden on the insured to allocate between covered and uncovered damages, even when defense counsel is paid by the insurer. The decisions also highlight, depending on the jurisdiction, the importance of informing an insured of its obligation to obtain a special verdict in cases involving both covered and uncovered damages.