Where a defendant’s insured litigation risk exceeds the defendant’s assets, insurance drives the outcome of settlement negotiations, as naturally it’s the horse that pulls the cart, and not vice versa. The Eighth Circuit’s recent decision in UnitedHealth Grp. Inc. v. Exec. Risk Specialty Ins. Co., 870 F.3d 856 (8th Cir. 2017), is an object lesson that the same metaphor usually applies where the insured defendant’s pockets are deep, as in most high stakes class action litigation. Insurance considerations should at least be among the leading factors affecting litigation strategy, settlement negotiations, and decisions—they ought to be among the team of horses that drives the litigation and settlement cart.

In United Health, the Eighth Circuit denied coverage outright for a $350 million settlement. The sum at issue makes this coverage litigation unusual; what makes it extraordinary is that a substantial portion, if not all, of the settlement was admittedly covered by the insurance policies at issue. But the district court dismissed the case entirely on summary judgment, holding that the insured, UnitedHealth, failed to carry its burden to allocate the settlement among covered and non-covered claims. It was an outcome that did not have to occur.

UnitedHealth had paid $350 million to settle two class action lawsuits related to reimbursement for out-of-network medical services. One lawsuit, known as the AMA Suit, involved only antitrust claims that the insurance policy at issue explicitly covered. The second action that was settled, known as the Malchow Suit, involved ERISA and breach of contract claims that the parties agreed were not covered. The Eighth Circuit held that because UnitedHealth failed to offer evidence sufficient to enable a jury to allocate the settlement’s $350 million cash consideration between the covered and non-covered claims, or between the AMA Suit and the Malchow Suit, the district court’s grant of summary judgment to the insurers should be affirmed.

The key to the decision is the following: “To prove allocation, parties can present testimony from attorneys involved in the underlying lawsuits, evidence from those lawsuits, expert testimony evaluating the lawsuits, a review of the underlying transcripts, or other admissible evidence.” 870 F.3d at 863. “To survive summary judgment, an insured need not prove allocation with precision, but it must present a non-speculative basis to allocate a settlement between covered and non-covered claims.” Id.

The need for non-speculative evidence supporting allocation in coverage litigation confirms the need for close collaboration between defense counsel and coverage counsel. Optimally, such collaboration ought to be ongoing during the underlying case, particularly at the time of settlement. Note that coverage litigation following a settlement is not a case within a case, like an attorney malpractice case; the issue is not what would have happened had the case been tried to verdict. The key issue is which claims were settled and for how much.

At the time of settlement, defense counsel and coverage counsel should be discussing what evidence from the underlying lawsuit, and any expert testimony, they may use to prove coverage. They should discuss whether to call defense counsel as witnesses. Ideally during the underlying case, they should agree upon whether in the coverage litigation to waive the attorney-client privilege concerning defense counsel’s real time written risk assessments of the underlying case. And defense counsel’s real time communications to clients valuing the underling case for settlement purposes ought to be made with the coverage dispute firmly in mind, and in collaboration with coverage counsel.

Complicating matters further, where allocation between covered and non-covered claims is the issue, it will not help significantly to explicitly allocate in the settlement agreement the settlement consideration among covered and non-covered claims. At best, the agreed allocation would raise a rebuttable presumption as to the proper allocation, and at worst it would undermine the insured’s credibility.

Two tell-tale signs from the UnitedHealth opinion seem to suggest that, during the underlying litigation, UnitedHealth placed a low priority on coverage considerations, which likely proved fatal. First, it is well-settled that an insured may prove that a settlement should be allocated entirely to covered claims, because the core facts supporting the claims were the same or interrelated. See e.g., United States Steel Corp. v. Hartford Acc. and Indem. Co., 511 F.2d 96, 99 (7th Cir. 1975) (underlying judgment was covered in its entirety where facts showed that the policy holder was liable for the same damages under both covered and non-covered claims). Accordingly, UnitedHealth argued that the covered and non-covered claims were so interrelated that the entire settlement should be allocated to covered claims, but the court held that the argument was untimely and barred because the amended complaint had specifically alleged that UnitedHealth claimed only coverage for the AMA claim. 870 F.3d at 861-62.

Second, one insurer, National Union, successfully argued that it failed to receive timely notice of the covered (AMA) claim (an issue the Eighth Circuit did not have to address given its ruling on the absence of allocation evidence). 870 F.3d at 867. This fatal misstep can be avoided easily, by giving notice to all possible insurers as soon as possible after learning of the claims.

Success in a later allocation dispute represents only one of the many benefits of collaboration between defense counsel and coverage counsel. Understanding coverage issues should inform the underlying settlement negotiations themselves, as well as the client’s appetite for litigation risk in the underlying case. Where coverage and defense counsel have a solid grasp of the coverage claim and how to prove it, the client will be better advised as whether to settle a dispute, how to memorialize the negotiations and settlement, and how to prove allocation in a subsequent coverage dispute.