Defining Occurrence – When Policy Definitions Do Not Apply To All Coverages
September 24, 2020
In a recent decision, QBE Specialty Ins. Co. v. Scrap Inc., Nos. 18-13926 and 19-13894, 2020 WL 1228648 (11th Cir. Mar. 13, 2020), the United States Court of Appeals for the Eleventh Circuit held that the insured failed to carry the burden of proving allocation of damages between covered and uncovered claims where the insurer advised the insured early and often of the need to obtain an allocated verdict. The Eleventh Circuit’s decision reaffirmed the Duke v. Hoch 1 standard, that notice to the insured of the need to obtain an allocated verdict is required for the insurer to avoid the burden of proving which portion of an unallocated jury award pertains to uncovered damages.
The general rule under Florida law is that the party claiming insurance coverage has the initial burden to show that a settlement or judgment represents damages that fall within the coverage provisions of the insurance policy. 2 An insured’s inability to allocate the amount of a judgment between covered and uncovered damages is generally fatal to its indemnification claim. 3 Under Duke v. Hoch, the burden of 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 and the divergence of interest between the insured and insurer springing from whether damages are or are not allocated.4
In Scrap, the insured appealed the district court’s grant of summary judgment in favor of the insurer with respect to the insurer’s indemnity obligation in an underlying nuisance action against the insured. In defending under a reservation of rights, the insurer warned its insured of the need to obtain an allocated verdict as early as sixteen months before trial, and the insurer reiterated the warning four more times prior to trial. In its letters to the insured, the insurer specifically told the insured it would need to request a special verdict, differentiating covered from uncovered damages, and that if the insured did not, the failure to seek allocation could result in forfeiture of coverage. The insurer also unsuccessfully attempted to intervene in the underlying action twice for the purpose of assisting with the special interrogatory verdict forms.
The insured failed to seek or secure an allocated verdict. Counsel for the insured argued that the current legal framework can “trap” the insured and that submitting interrogatories regarding coverage issues creates a conflict of interest for defense counsel, who is paid by the insurer. The insured’s counsel claimed that the Court should adopt as a rule the suggestion from Employers Insurance of Wausau v. Lavender, 506 So. 2d 1166 (Fla. 3d DCA 1987). In that case, the court commended the insurer’s intervention in the initial trial to request a second verdict from the same jury, allocating damages if there were any.
The Scrap Court rejected the insured’s argument. The Court observed that this was not a case where the insured was blindsided by late notice that it needed to present a special verdict form. Instead, the insured was given ample time to accommodate the allocation request. Further, although the insured’s defense counsel claimed a conflict and therefore refused to participate in discussions of intervention and special-verdict forms, the insured’s personal counsel had notice of the allocation requests. Last, the Court noted that intervention rests with the discretion of the judge and that it would seem “manifestly unjust” for an insurer’s liability to depend on a decision that is out of its control. However, the Court stated that “[t]he Wausau procedure, ultimately, may or may not be wise as an exception to Duke in some narrow circumstances—but those are not circumstances that apply here.”
The Court, relying on Duke v. Hoch, held that the burden of proving allocation rested with the insured because the insurer had advised the insured of the availability and advisability of a special verdict. Accordingly, the Court found that the insured was not able to meet its burden of proving allocation, and it affirmed the district court’s grant of summary judgment in favor of the insurer.
The Scrap case indicates that, in cases where an insurer defends an insured under a reservation of rights, the insurer should advise its insured early of the need to obtain a special verdict differentiating between facts or categories of damages upon which coverage may depend and of the divergence of interest between the insurer and the insured. Ideally, an insurer would advise the insured of its need to allocate early enough so that discovery may be conducted in regard to whether the damages at issue fall inside or outside of coverage. As trial approaches, it would also be prudent for the insurer to remind the insured regarding the need to obtain an allocated verdict.
1 Duke v. Hoch, 468 F.2d 973 (5th Cir. 1972).
2 Scrap Inc., 2020 WL 1228648, at *2 (citing U.S. Concrete Pipe Co. v. Bould, 437 So. 2d 1061, 1065 (Fla. 1983); Keller Indus., Inc. v. Employers Mut. Liab. Ins. Co. of Wis., 429 So. 2d 779, 780 (Fla. 3d DCA 1983)).
3 Id. (citing Trovillion Constr. & Dev., Inc. v. Mid-Continent Cas. Co., 2014 WL 201678, at *8 (M.D. Fla. Jan. 17, 2014) (citing Keller, 429 So. 2d at 780)).
4 Hoch, 468 F.2d at 979-80).