Insurer’s Obligation to Notify the Insured of the Need for Allocated Verdicts and Settlements

A majority of courts in the country have found that if a claimant files a mixed lawsuit containing both covered and uncovered claims the insurance company is generally obligated to defend all claims against the insured, notwithstanding the fact that the complaint contains allegations outside the policy’s coverage. See, Plitt & Plitt, Practical Tools for Handling Insurance Cases, § 2:15 (ThomsonReuters 2011) (citing cases supporting the majority view).

When a mixed complaint is served upon an insured, insurers will typically defend the entire lawsuit (except in those few jurisdictions which limit the defense to only covered claims) under a reservation of rights. See, Practical Tools for Handling Insurance Cases, § 2:17 (discussing reservation of rights defenses).

Typically, the reservation of rights is initiated with a reservation of rights (ROR) letter. The standard ROR letter cites to the policy language that is applicable which supports the insurer’s belief in its no coverage position. A timely and properly detailed ROR letter will usually insulate the insurer from arguments of waiver or estoppel against its no coverage position.

The insured bears the burden of proof in establishing that a covered loss has taken place. Most claim representatives and some coverage attorneys leap to the conclusion that because the insured has the burden of proving coverage, the insured must prove what part of a stipulated settlement or judgment involves covered claims. If the insured fails in proving the allocation, the insurer typically asserts that because the insured has not met the burden of proving the amount of the covered loss, i.e., the allocated alleged portion of the settlement or verdict, that the insured has failed the meet the burden of proof in establishing coverage. This conclusion makes analytic sense when considered in isolation. However, claim representatives and coverage lawyers must proceed carefully in reserving rights in mixed lawsuits.

There is a line of cases which imposes a duty upon the insurer, when the insurer controls the defense, to notify the insured of the need for an allocation of any settlement or verdict between covered and uncovered claims. The principal case imposing this obligation was Duke v. Hock, 468 F.2d 973, 979 (5th Cir. 1972). The Duke analysis has been utilized in a few jurisdictions. See, e.g., Camden-Clark Mem’l Hosp. Ass’n v. St. Paul Fire and Marine Ins. Co., 224 W.Va. 228, 682 S.E.2d 566, 575-76 (2009); Gay & Taylor, Inc. v. St. Paul Fire & Marine Ins. Co., 550 F.Supp. 710, 716 (W.D. Okla. 1981); Buckley v. Orem, 112 Idaho 117, 730 P.2d 1037, 1044-45 (Idaho Ct. App. 1986).

Duke was recently utilized by the Minnesota Supreme Court when it imposed the duty of notification on the insurer in Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819 N.W.2d 602 (Minn. 2012).

Under the above line of cases, the courts have found that where the insurer controls the defense through a reservation of rights, the insurer is obligated to notify its insured of the need to allocate any settlement or verdict between covered and uncovered claims. Failure to request that the insured allocate any settlement or verdict results in a burden shifting in which the burden of proof initially born by the insured to prove that any specific settlement or verdict amount is covered, shifts to the insurer to prove the portion of the settlement or verdict that is not covered.

Presently, this line of cases represents only a small minority of jurisdictions. However, many jurisdictions have not considered the issue and so it is unclear how widespread the duty will be in the future. Whether a particular state will require this duty of notification is dependent upon the idiosyncrasies of that state’s law. As an example, in the native state of this author, Arizona, the intricacies and nuances of consent settlement agreements would not likely require the type of notification that the courts in the above cases have required.