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Insurance Law

In A New York State Of Bind: Achieving Allocation Between Covered And Uncovered Claims [A First For New York?]

I have said this so, so many times. But given the huge importance of the issue, it is restated here. If you’ve read this before please forgive me.

You have just written the greatest reservation of rights letter ever. If Felix Unger handled claims, this is what his letter would look like. If there were a hall of fame for reservation of rights letters, you would soon get to see how yours looked in bronze. Your letter compares the specific allegations in the complaint, to the policy language, and explains, with laser-like precision, why, despite the insured being provided with a defense, no coverage may be owed for any settlement or judgment. You mail the letter, put a copy in the file, take a deep breath of satisfaction, waste a few minutes reading a couple of meaningless articles on Yahoo, and then off you go to your next claim. It’s a fine day.

But the challenge with reservation of rights letters is not writing them. It is enforcing them. Because a reservation of rights letter is written in a sterile environment – at someone’s desk – it can easily spell out, in black and white terms, those claims and damages at issue in the underlying suit for which coverage may not be owed. The underlying litigation, on the other hand, is likely proceeding in a manner that is anything but as neat and tidy.

It will frequently be the case that the underlying litigation is simply not capable of producing an outcome that makes it possible for the insurer and insured to compare its results, with the reservation of rights letter, and easily decide which claims and damages are covered and which are not. To the contrary, the underlying litigation may result in a verdict that does not specify the extent to which it represents this or that type of damage or the claims on which the relief is based. In this situation, often-times referred to as a “general verdict,” the policyholder is likely to argue that, because the basis for the jury’s verdict cannot be determined, it must be presumed that the entirety of the jury award represents covered claims and damages. Adding to the difficulty for insurers is that it cannot ask appointed defense counsel to seek special jury interrogatories, which would go a long way toward solving this problem. [And similar problems may come from a settlement.]

Some courts have accepted the policyholder argument that, if the insurer created the problem of an inability to allocate between covered and uncovered claims, it must therefore bear the consequences. In other words, if it cannot be determined which portion of a verdict is covered and which is not, then all of the damages will be considered covered. Or the insurer may be given a difficult burden to prove covered versus uncovered damages. In these situations, the fact that the insurer issued a world class reservation of rights letter, spelling out in detail its precise position on what is and what’s not covered, is no protection against failing to prevent a general verdict and the consequences that it causes.

At the heart of these decisions is the placing of blame on the insurer for being aware that the underlying litigation may result in a verdict that does not enable a determination to be made between covered and uncovered claims and/or damages, yet it took no steps to prevent such outcome. Indeed, these decisions sometimes speak in very harsh tones -- essentially blaming the insurer for being its own worst enemy.

With all that said, allocation between covered and uncovered claims was at the center of the court’s opinion in Uvino v. Harleysville Worcester Insurance Company, No. 13-4004 (S.D.N.Y. Mar. 4, 2015), [enhanced version available to subscribers]. And the underlying claim at issue was of the type where allocation is frequently needed. All allocation of covered versus uncovered claims are noteworthy – as the issue is so important and the case law not abundant. At least not as abundant as you would think, given the frequency in which the issue arises. But Uvino v. Harleysville has an extra reason why it is noteworthy. It involves New York law, not to mention that, in discussing the issue, the court cited to all non-New York cases. So if Uvino isn’t the first New York case to address the issue, it appears that there certainly can’t be many.

Uvino v. Harleysville involves coverage for an underlying construction defect suit. Nothing you haven’t seen before. A contractor, JBI, was hired to serve as Construction Manager for the construction of a home in Long Island. As seems to happen so often, the relationship went south and the homeowners, the Uvinos, filed suit against JBI alleging construction defects and related claims.

Harleysville insured JBI under a commercial general liability policy and retained counsel to defend it pursuant to a reservation of rights. As is often the case in construction defect, there was an issue of uncovered damages (related to the repair and replacement of JBI’s faulty work) versus covered damages (related to damages to other property).

Recognizing this issue, Harleysville, shortly before trial was to begin, “sought leave to move to intervene for the purpose of requesting that the court ‘submit special interrogatories to the jury to allocate between those damages related to the repair and replacement of [JBI’s] faulty work versus damages to other property.’ . . . Harleysville argued that the burdensome prospect of undertaking subsequent litigation to allocate covered damages favored allowing Harleysville to intervene to submit interrogatories at trial. JBI opposed the motion, asserting that the motion was untimely and that while JBI would be harmed by jury confusion caused by the interrogatories, Harleysville faced no prejudice if intervention was denied as it could resolve the coverage issues in a later proceeding.”

At this point, the opinion gets a little confusing as there was a mistrial and a disqualification of counsel. Putting all of that aside, the court denied Harleysville’s motion to intervene. The case went to trial a jury found JBI liable for damage to the Uvinos’ home and awarded them $317,840 in general damages, $83,788 in consequential damages and $51,231.04 in damages for breach of fiduciary duty. This was a general verdict and the court made no determination whether the losses were covered under the Harleysville policy. Shortly thereafter, Harleysville disclaimed coverage. The Uvinos initiated the action seeking a judgment that Harleysville must indemnify JBI for the damages.

The court in the declaratory judgment action undertook a long analysis of whether coverage was owed, under New York law, for the damages awarded. The issue before the court was the one so often seen in construction defect coverage disputes: “Generally, damages to remedy a contractor’s defective work will not be covered under a general commercial liability policy like the one at issue here; rather, coverage exists only where the contractor’s defective work causes harm to others or others’ work.”

It is unnecessary to get into this several page analysis. All that matters here is that, when all was said and done, the court held that the claims submitted by the Univos to the jury may include claims covered under the Harleysville policy.

Here is where it gets interesting. Harleysville argued that, “even if some of the Uvinos’ claims are covered under their policy, Harleysville is entitled to summary judgment because the Uvinos cannot prove what portion of the $401,628 general verdict awarded by the jury is attributable to covered claims and what portion is attributable to noncovered claims.” The court agreed, but with one caveat.

The court stated that, “[j]ust as the insured has the initial burden of establishing its entitlement to coverage, the insured generally has the burden of identifying covered damages. However, the court also noted there is an exception: “[I]in certain circumstances, that burden may be shifted to the insurer, and/or the party seeking recovery may be permitted to withstand summary judgment and proceed to further litigation on allocation of covered versus noncovered claims. For instance, if the insurer did not adequately make known to the insured the availability and desirability of receiving a special verdict, or if it is not clear that the insured was apprised its interest in receiving a special verdict, the parties seeking coverage need not be required to prove what portion of a general verdict is covered at the summary judgment stage.”

In setting forth this exception, the court string-cited four cases. Critically, none were from a New York court – state or federal. They were from the Fifth Circuit, District of Rhode Island, District of Florida and the Idaho Court of Appeals. That’s quite a combination.

The court concluded that, by its actions, Harleysville did not cause the burden of allocation to shift. This was because Harleysville “moved to intervene for the purpose of requesting special interrogatories to forestall a coverage-allocation dispute and therefore made known both the availability of the interrogatories and the parties’ divergence of interests, did not fail in its fundamental responsibilities to its insured such that the burden of proving allocation should shift to Harleysville.”

Thus, the case would move to an allocation proceeding and, because Harleysville took preemptive took steps to achieve allocation, the burden of proving covered damages would remain on the Univos. [There is some more to it but it’s unique to the case and unnecessary for the discussion here.]

While Univo v. Harleysville may be a federal District Court opinion, it is worthy of note. The court stated that, if an insurer did not take some affirmative steps, to address allocation between covered and uncovered damages, the insured need not be required to prove what portion of a general verdict is covered. In stating this, the court cited four non-New York cases. While time constraints precluded me from researching New York law on this issue, I suspect that the judge’s law clerks were not so constrained. The fact that Univo cites only non-New York cases suggests that New York law is sparse on the issue, perhaps even to the point where the decision is the first. [If there are others, I’d appreciate someone telling me.]

This gets back to the beginning. That an insurer issues a world class reservation of rights letter, spelling out in detail its precise position on what is and what’s not covered, may be no protection against failing to prevent a general verdict and the consequences that it can cause. Reservation of rights letters are not self-enforcing. Writing them is often just the first step to limiting exposure to covered claims alone. Getting there may require that the insurer take a second step.

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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