A frequent topic in CO is allocation between covered and uncovered claims.  It is usually in the context of an insurer that must take steps, pre-trial, to secure a verdict that allows for a determination to be made between damages that are covered and those that are not.  If an insurer’s failure to do so leads to a “general verdict,” the insurer’s inaction could make it liable for the entirety of such verdict, even it includes some surely uncovered damages.

But allocation between covered and uncovered claims also arises in the context of settlement.  And since the vast majority of cases settle, the issue is of paramount importance here. 

This is demonstrated in clear terms in Great American Ins. Co. v. Employers Mutual Casualty Co., No. 18-1819 (N.D. Tex. Oct. 15, 2020).  The facts at issue are confusing and somewhat difficult to follow.  The parties of course understand them but it would take a lot of effort for an outsider to.  So let me get to the lesson here without getting bogged-down in this quagmire.

This case involves an insurance-coverage dispute, between two umbrella insurers, arising from a vehicle accident.  Gerald Decker was performing tire collection services as an employee of Corona Management and on behalf of Liberty Tire Recycling.  His vehicle collided with two other vehicles, killing one driver and injuring another.

Employers Mutual issued an auto policy and commercial umbrella policy to Corona. Great American issued an umbrella policy to Liberty Tire. Liberty Tire also had a primary auto policy from Liberty Mutual.

An underlying law suit resulted in a $7 million settlement agreement.  The first $2,668,537.90 of the settlement was funded by the primary insurers.  Great American and Employers Mutual disputed their respective liability for the remaining $4,331,462.10.  Great American felt compelled to fully fund the remaining amount [although Employers Mutual offered to contribute to the remaining balance on a pro rata basis].

As Decker was performing services for one entity, while an employee of another, there was an issue concerning the extent to which policies applied to various insureds’ direct and vicarious liability.  Trust me, it’s really complex and I had zero desire to figure out the nitty gritty.

Here’s the bottom line as the court put it: The settlement agreement contained “no language purporting to segregate covered from uncovered damages. In other words, the settlement agreement in the underlying lawsuit was a complete release[] of liability, but the agreement[] did not allocate the proceeds of the settlement[] to the damages/liabilities they covered.”

More specifically, the court explained that “Great American failed to offer any evidence allocating damages covered by the Employers Mutual umbrella policy (i.e., amounts paid for Liberty Tire’s vicarious liability for Corona or Decker/Corona’s liability) from damages not covered by the Employers Mutual umbrella policy (i.e., amounts paid for Liberty Tire’s direct liability).”

As a result of this failure to allocate the settlement, the court held that “[a]llowing Great American to recover the total value of the Employers Mutual umbrella policy when it cannot produce any evidence as to what Employers Mutual actually owes—if anything—lacks legal authority.”

In reaching this decision, the court rejected, as impermissible conclusory statements, affidavits from a defense attorney for Liberty Tire and Great American’s lead claim adjuster that addressed which claims the settlement encompassed. 

Lesson: “While the Court agrees with Great American that allocation doesn’t require ‘mathematical certainty,’ there still needs to be some ‘reasonable, reliable, non-arbitrary basis’ for allocation of covered from uncovered losses.”

Given that settlement agreements often state that they are simply a release of everyone’s liability, with no description provided of what money is being paid for which claims, this decision offers a potentially sharp tool in some cases involving multiple insurers liable for a settlement.