Policyholders need to be aware of their obligations, at least in some jurisdictions, to allocate amounts between covered and uncovered claims, because, if they do not, they risk their insurers being relieved, entirely, from paying under their policies. A recent decision from the United States Second Circuit Court of Appeals demonstrates the potential peril of not allocating between covered and uncovered claims. Uvino v. Harleysville Worcester Ins. Co., Nos. 16-3225-cv(L) & 16-3356-cv(XAP), 2017 WL 4127538 (2d Cir. Sept. 19, 2017).

Uvino v. Harleysville Worcester Ins. Co.

In this case, the Uvinos sued their construction manager, alleging that it had breached the parties’ contract and negligently damaged their property. The construction manager’s insurer, Harleysville, defended the construction manager under a reservation of rights. Before trial, Harleysville moved to intervene in that action in order to submit special interrogatories to the jury to allocate damages between the uncovered claims relating to the repair and replacement of the construction manager’s own work and the covered claims involving damages to other property. The construction manager, however, successfully opposed Harleysville’s motion to intervene, and special interrogatories were not submitted to the jury. The jury eventually entered a general verdict in the Uvinos’ favor in an amount in excess of $400,000.

Thereafter, the Uvinos commenced a declaratory judgment action against Harleysville in an attempt to collect the judgment entered against its insured, the construction manager. The trial court, however, entered summary judgment in favor of Harleysville. On appeal, the Second Circuit affirmed, applying New York law and holding that the Uvinos failed to meet their burden to show which portions of the jury award were covered by the policy, and, therefore, Harleysville had no obligation to pay any portion of the judgment. In reaching its holding, the Second Circuit declined to shift the burden to the insurer because the Uvinos and the construction manager were fully aware of the allocation issue based on Harleysville’s unsuccessful motion to intervene, and the Uvinos had ample opportunity in the underlying and coverage actions to allocate the damages, but failed to do so.

The Uvino decision itself leaves open the possibility that the Second Circuit would shift the burden of proof on allocation to the insurer had the facts of the case been different. For example, the Court arguably would have shifted the burden to Harleysville had it not attempted to intervene in the underlying case and had it otherwise failed to bring the allocation issue to the Uvinos’ and the construction manager’s attention.

Takeaways

Generally, it is important for policyholders to recognize that different jurisdictions decide the allocation issue differently. Some jurisdictions, for instance, shift the burden of proof to the insurer when the insurer wrongfully refuses to defend, or when the insurer, while providing a defense, fails to timely raise the allocation issue with its insured. If the insurer has the burden of proof and fails to satisfy it, the insurer would pay the entire unallocated amount of the judgment. Given the differences in the law on the allocation issue and its significant impact on coverage outcomes, policyholders would be welladvised to understand the law of their jurisdiction and to position themselves in a way to maximize recovery under the applicable law.