All's Fair: How to Achieve a Fair Allocation in Suits with Covered and Non-Covered Claims

I. Introduction and overview of the issues

Many lawsuits involve both covered and uncovered losses. In nearly every state, if a complaint alleges both covered and uncovered claims, the insurer is obligated to defend the entire suit. E.g., Liberty Mut. Fire Ins. Co. v. Copart of Conn., Inc., 75 F.4th 522, 529 (5th Cir. 2023) (Texas law); Buss v. Superior Court, 16 Cal.4th 35, 48, 939 P.2d 766 (1997); General Agents Ins. Co. of America, Inc. v. Midwest Sporting Goods Co., 215 Ill.2d 146, 155, 828 N.E.2d 1092 (2005).

Indemnity is a different question.  Of course, the duty to defend is typically deemed broader than the duty to indemnify.  Further, as one court explained, “while the duty to defend depends only on the allegations made against the insured, the duty to indemnify depends upon the facts established at trial and the theory under which judgment is actually entered in the case.” Capstone Bldg. Corp. v. Am. Motorists Ins. Co., 308 Conn. 760, 805, 67 A.3d 961 (2013). 

Thus, allocating damages for purposes of indemnity, or determining indemnity, based merely upon a complaint can often be deemed “premature.” Copart of Conn., 75 F.4th at 537. On the other hand, if an insurer waits until an underlying judgment occurs to determine how to allocate damages (or address coverage) for indemnity purposes, some courts may find it to be too late.  It may be too late if the insurer defended without reserving its right to limit or deny coverage.  Or it may be too late to the extent that “collateral estoppel” – as to an underlying judgment -- precludes the insurer from asserting one or more coverage defenses.

Even if insurers act properly and timely at each step, difficult issues of allocation can arise when a judgment or settlement occurs in an underling matter – as facts may be unclear as to whether the damages at issue are covered, non-covered or mixed (allocated between covered and non-covered claims).   The steps for addressing coverage in these circumstance, and the typical issues that arise, are discussed below.

II. Case examples involving issues of allocation between covered and non-covered claims

In Barton v. Nationwide Mutual Fire Ins. Co., 524 F.Supp.3d 433, 2023 U.S. App. Lexis 433, *3-4 (11^th Cir. 2023) (Alabama law), the underlying plaintiff was a homeowner who brought claims against a builder for construction defects.  The allegedly defective construction of the home lead to water damage.  The plaintiff had alleged claims against the builder for negligence as well as wantonness (asserting that the builder knew he was violating building codes and that damages were likely to result).  The underlying court granted summary judgment to the plaintiff homeowner, against the builder, for $900,000.  It granted that judgment after the plaintiffs’ underlying summary judgment motion had asserted both negligence and wantonness.  Id. at *14. The Court issued “a brief order that did not specify any injuries.”  Id.  Thus, when the plaintiff homeowner sued the insurer for payment, issues of allocation and coverage arose. See further discussion below, finding no coverage.

Other defective construction cases often alleged damages for the cost to replace the insured’s faulty work, which would likely be excluded, and damages to other property resulting from the negligent construction. While the insurer will have to defend the entire suit, after the suit is settled or judgment is entered, the insured and the insurer will need to determine which damages are covered and which are not.  E.g., Acuity v. M/I Homes of Chicago, LLC, 2023 IL 129087, __ N.E.3d __ (Ill. 2023)(insurer had duty to defend insured since complaint alleged faulty workmanship, including damage to insured’s work and to other property); Pekin Ins. Co. v. Richard Marker Associates, Inc., 289 Ill.App.3d 819, 682 N.E.2d 362 (1997)(insurer had duty to defend because complaint alleged damages both to the insured’s work, which was likely excluded, and to furniture, clothing and antiques when uninsulated pipes burst, which was likely covered.)

Another coverage issue from many construction defect claims involves additional insured coverage. In most construction projects, the general contractor requires the subcontractors to obtain CGL coverage naming the general contractor as an additional insured. Under more recent additional insured endorsements, the coverage for the additional insured may be limited to the additional insured’s (general contractor’s) vicarious liability for the negligence of the named insured subcontractor. The general contractor may also be named as an additional insured on the policies of two or more subcontractors, and some of the damages may be due to the work of one subcontractor, while other damages are due to the work of another subcontractor, and other damages may be due to the general contractor’s work. In these situations, again, it will be necessary to determine a way to apportion damages attributable to each subcontractor and to the general contractor. Pekin Ins. Co. v. Centex Homes, 2017 IL App (1st) 153601, 72 N.E.3d 831 (2017) (additional insured potentially liable for retention of control over the work of the named insured, so there was a duty to defend. Duty to indemnify would depend on actual facts of whether additional insured was vicariously liable for the actions of the named insured.)  

Toxic tort class action cases often involve injuries to numerous claimants, which take place due to exposure to toxic substances over many years.  In those cases, manifestation of the injuries from that exposure occurs in different years. At the same time, the insured may have several different insurers during the period when the toxic exposures were taking place. For example, one insurer may provide coverage to damages suffered by claimants who were exposed to the toxic substances or manifested their injuries in years 1 through 5, while another insurer provided coverage for damages for claimants during years 5 through 10, and the insured had a self-insured retention during years 10 to 15.  Some claimants will fall under the coverage of both insurers and the self-insured year. After the suit is resolved, the insurers and the insured will need to determine the damages attributable to each policy period. E.g., U.S. Gypsum Co. v. Admiral Ins., 268 Ill.App.3d 598, 643 N.E.2d 1226 (1994)(insured manufactured asbestos containing building materials during the period from the 1930s through 1984, and sought coverage for property damage caused by the release of asbestos. Insured settled tort case and was required to show reasonable anticipation of liability. The court apportioned liability among insurers using continuous trigger theory.)

III. Possible collateral estoppel as to coverage, foreclosing coverage arguments

The law of many states generally provides that the policyholder or plaintiff who is seeking indemnity from an insurer has the “burden of proving that coverage exists.” Barton, 524 F.Supp.3d 433, 2023 U.S. App. Lexis 433, *1; Huntington Nat'l Bank v. AIG Specialty Ins. Co., 646 F. Supp. 3d 950, 957 (S.D. Ohio 2023) (reviewing allocation arguments and finding no coverage of the bank’s financial losses; The insured bears the initial burden of proving the policy provides coverage for a particular loss”).   But see Part IV.A below addressing the shifting burdens when exclusions and certain allocations are at issue. 

Absent proof that an insurer failed to reserve its rights before defending, “waiver and estoppel cannot be invoked to create coverage under an insurance policy where coverage otherwise does not exist."  Burdette v. Bell, 2019-Ohio-5035, ¶38, 137 N.E.3d 1236, 1243 (granting protective order to prevent discovery of waiver and estoppel theories of coverage asserted against insurer); Allied World Surplus Lines Ins. Co. v. Richard Goettle, Inc. (S.D. Ohio), 2019 U.S. Dist. LEXIS 88545, *43 (rejecting arguments about waiver or estoppel as to the duty to indemnify in lawsuit involving construction issues, though finding a duty to defend); see also Barton, 524 F. Supp. 3d 433, 2023 U.S. App. Lexis 433, *11-12 (rejecting use of estoppel due to failure to prove a lack of reservation of rights).

However, there is a limited exception to this burden: collateral estoppel.  Collateral estoppel can sometimes arise, precluding an insurer from asserting a coverage defense, due to findings in an underlying case, as discussed below.

A. Collateral estoppel precluding a coverage defense can sometimes arise when an issue of coverage is necessarily addressed as part of the underlying claim

If an insurer waits until an underlying judgment or settlement occurs to determine how to address or allocate coverage for indemnity purposes, some courts may find that “collateral estoppel” precludes the insurer from asserting one or more key coverage defenses.  Hicks v. State Farm Mutual Automobile Ins. Co., 95 N.E.3d 852 (Ohio Ct. App. 2017) (noting that an insurer should have attempted to intervene in litigation; citing Howell v. Richardson (1989), 45 Ohio St. 3d 365, 367-68, 544 N.E.2d 878, syl. corrected; Grange Mut. Cas. Co. v. Uhrin (1990), 49 Ohio St. 3d 162, 550 N.E.2d 950 (minor correction) (where insurer could have intervened, the finding of negligence in the underlying case was binding on insurer, which could not re-litigate the issue of whether the policyholder intentionally caused injury, due to the collateral estoppel effect of the judgment).

A typical case of collateral estoppel (as to a coverage issue) can arise when an underlying case involves both negligence and intentional tort claims.  If the underlying case determines that a policyholder acted negligently, as opposed to intentionally, such finding can sometimes be deemed binding on the insurer.  Howell, 45 Ohio St. 3d 365, 367-68, 544 N.E.2d 878 (intent could not be re-litigated, but other coverage defenses could be and the insurer prevailed whether the damage was related to use of an automobile); see also State Farm Fire & Cas. Co. v. T.B., 762 N.E.2d 1227, 1230-1231 (Ind. 2001) (insurer who did not defend an abuse claim conceded that a negligence finding was binding, but was able to litigate other coverage issues).

Some courts, including Indiana courts, hold that “an insurer may avoid the effects of collateral estoppel by: (1) defending the insured under a reservation of rights in the underlying tort action, or (2) filing a declaratory judgment action for a judicial determination of its obligations under the policy.” 762 N.E.2d at 1230-31 (cited in Am. Family Mut. Ins. Co. v. C.M.A. Mortg., Inc., 682 F. Supp. 2d 879, 894, 2010 U.S. Dist. LEXIS 2379, *42-43 (finding a settlement to be non-binding on the insurer, as it was not approved, where the insurer defended under reservation of rights).  In such jurisdictions, either of these actions can preserve an insurer's right to later challenge a determination made in the prior action.  If an insurer elects not to defend (or possibly to intervene in an underlying case), deeming a claim to be "patently outside the risks covered by the policy," such a course is taken at the insurer's peril because the insurer will be "bound at least to the matters necessarily determined in the lawsuit."762 N.E.2d 1227, 1230-1231 (citing Frankenmuth Mut. Ins. v. Williams, 645 N.E.2d 605, 608 (Ind. 1995)).

B.  Intervention by insurers in an underlying case may be required in some jurisdictions in order to contest some coverage issues (but is not required and even not permitted in other jurisdictions)

Traditionally, intervention by insurers into underlying litigation has not been permitted in most states.  Cromer v. Sefton, 471 N.E.2d 700, 704 (Ind. Ct. App. 1984) (“Clearly the policy of the law is to keep the issue of insurance out of personal injury litigation”); Harbor Specialty Ins. Co. v. Schwartz, 932 So. 2d 383, 388 (Fla.App. 2 Dist. 2006) (insurer “does not have a direct and immediate interest in the cause of action that would justify intervention”), cited in Houston Specialty Ins. Co. v. Vaughn, 261 So. 3d 607, 610-13 (Fla.App. 2 Dist 2018) (same).  But that has been changing in some states. See Mo. Rev. Stat. § 537.065 (2017) (granted liability insurers the right to intervene in any liability suit within thirty days of the insured entering into certain covenant-not-to-collect agreements with the plaintiff).

In Ohio, the insurer must sometimes try to intervene (though the court may deny intervention) if it wishes to preserve certain issues that will be determined in underlying litigation. Gehm v. Timberline Post & Frame, 112 Ohio St.3d 514, 861 N.E.2d 519, 523-24 (2007) (denying insurer’s motion to intervene, but stating that since intervention was attempted and denied, the insurer can litigate the issue later in another case).  A variety of factors can be considered by the court in whether to allow intervention, which varies by state.

C. The extent of collateral estoppel as to coverage issues is limited

Collateral estoppel as to underlying findings only applies where the “identical” issue was litigated and specific elements can be satisfied, including that the insurer must be found to be in “privity” with the policyholder who was involved.  Nat'l Trust Ins. Co. v. Heaven Hill Distilleries, Inc., 2018 U.S. Dist. LEXIS 52569, *23-24 (W.D. Ky 2018) (no collateral estoppel where insurer and policyholder are in “conflict” on the issue and not “in privity”); City of Green v. Clair, 2015-Ohio-662, P17, 2015 Ohio App. LEXIS 635, *9-10 (refusing to apply collateral estoppel; it only applies where “the identical issue was actually litigated, directly determined, and essential to the judgment in the prior action”). 

In numerous insurance cases, courts have rejected arguments of collateral estoppel.  Heaven Hill Distilleries, 2018 U.S. Dist. Lexis., 52569, *23-24; ALD Concrete & Grading Co. v. Chem-Masters Corp. (Ohio App. 10^th Dist. 1996), 111 Ohio App. 3d 759, 766, 677 N.E.2d 362, 366 (declining to apply collateral estoppel to insurer on coverage issue); Paramount Parks, Inc. v. Admiral Ins. Co. (Ohio App. 12th Dist.), 2008-Ohio-1351, ¶ 18 (same, as coverage defense was not addressed in the underlying case); Swicegood v. Medical Protective Co., 2003 U.S. Dist. LEXIS 16556, *27-28 (N.D. Tex. 2003) (rejecting collateral estoppel against insurer).

IV. Preserving Coverage Issues During the Underlying Litigation

A. Reserving the right to deny coverage is an essential requirement

In most states, if an insurer has a duty to defend and wants preserve its right to assert coverage defenses (including an allocation to non-covered claims), it needs to expressly reserve its right to do so.  Otherwise, if an insurer defends a claim without a reservation of rights, courts can find that a waiver of coverage defenses has occurred.  E.g., American States Ins. Co. v. National Cycle, Inc., 260 Ill.App.3d 299, 306, 631 N.E.2d 1292 (1994).  A waiver can occur because the policyholder relies on the insurer’s handling of the case without knowledge of the insurer’s intent to potentially deny coverage. Id. Also, if the insured is prejudiced by the insurer’s failure to reserve rights, the insurer may be estopped from denying coverage. Id., at 308.

To notify a policyholder of the right to deny (or limit) coverage, an insurer’s reservation of rights letter must be specific.  The letter must clearly inform the insured of all of the coverage defenses that the insurers plans to utilize.  E.g., Mobil Oil Corp. v. Maryland Cas. Co., 288 Ill.App.3d 743, 754-755, 681 N.E.2d 552 (1997)(A reservation of rights must make specific reference to the policy defenses to be asserted by the insurer and to the potential conflict of interest. A proper reservation allows the insured to decide intelligently whether to hire independent counsel to avoid the conflict. Reservation must also advise the insured of what right or rights are being reserved.)  The reservation of rights letter can be addressed to the insured that tendered the claim, but if there are other defendants named in the complaint that could potentially be insureds, reservation of rights or denial letters should also be sent to those potential insureds.

An effective reservation of rights letter will set forth every provision in any applicable policies that can effect coverage. Mobil Oil Corp. This likely includes the coverage agreement, any applicable exclusions, as well as any conditions on which the insurer intends to rely. The letter must also explain how those coverage provisions impact the coverage provided in view of the complaint against the insured. If the insurer is relying on any facts uncovered in its investigation that are not set forth in the complaint, it should specify those facts and their impact on coverage.

Additionally, an effective reservation of rights letter should explain the decisions made by the insurer, including whether the insurer is denying any duty to defend or whether it will defend under a reservation of rights. If it is defending, the letter should state whether the insurer intends to appoint defense counsel and control the defense. Also, if the insurer is in a state that allows insurers to recoup uncovered defense costs for uncovered claims, the reservation of rights letter must set forth the insurer’s intent to do so. The failure to clearly convey the insurer’s decisions, and the reasons for its reservation can lead to a waiver or estoppel from denying coverage at the conclusion of the suit.

B. Considering whether independent counsel is necessary due to reservation of rights

One issue that arises when an insurer reserves the right to deny coverage is whether the reservation of rights creates a conflict of interest with the insured such that it requires the insurer to allow the insured to select its own counsel to control the defense. The law differs in each state, and courts in some states have ruled that any reservation of the right to deny coverage mandates independent counsel selected by the insured. E.g., Nationwide Affinity Ins. Co. v. Laderoute, 293 F.Supp.3d 870, 877 (W.D. Mo. 2017)(Under Missouri law, if insurer decides to defend subject to reservation of rights, insured may refuse to allow the insurer to defend and retain its own attorney to defend it.)  In most states, however, independent counsel selected by the insured is only required when the reservation of rights creates a conflict between the insurer and the insured. E.g., Nandorf, Inc. v. CNA Ins. Cos., 134 Ill.App.3d 134, 137-138, 479 N.E.2d 988 (Ill. Ct. App. 1985).

1. Does the reservation of rights create a conflict between the insurer and the         insured, necessitating the assignment of independent counsel?

As one court explained, a conflict exists that requires independent counsel when, “in comparing the allegations of the complaint to the policy terms, the interest of the insurer would be furthered by providing a less than vigorous defense to those allegations…. An insurer’s interest in negating policy coverage does not, in and of itself, create sufficient conflict to preclude the insurer from assuming the defense of its insured. … However, conflict of interest has been found where the underlying action asserts claims that are covered by the insurance policy and other causes which the insured is required to defend but asserts are not covered by the policy.” Nandorf, Inc. v. CNA Ins. Cos., 134 Ill.App.3d 134, 137-138, 479 N.E.2d 988 (Ill. Ct. App. 1985). Another court explained, a “conflict exists when the outcome of [the] coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim. . . . This usually occurs were the issue creating the conflict is one which must be decided in the underlying action.” Truck Ins. Exchange v. Superior Court, 51 Cal.App.4th 985, 994 (1996). A classic example of this type of conflict is when the complaint asserts both negligent conduct and intentional conduct, where only damages resulting from negligence would be covered.

2. Assuming the insured has independent counsel, the insurer may also lose control over settlement, and the insured may be able to settle without insurer consent.

If there is a right to independent counsel, the insurer must relinquish control over the conduct of the litigation, as well as settlement to the insured. If an insured makes a good faith settlement of the suit in such a case, the insurer will usually be bound by the amount of the settlement, provided the settlement is reasonable and made in good faith. To determine whether the settlement is reasonable, the court will consider whether a reasonably prudent person with no insurance would have settled and whether a reasonably prudent person in the place of the insured would have settled on the merits of the plaintiff’s claim. Central Mut. Ins. Co. v. Tracy’s Treasures, Inc., 2014 IL App (1st) 123339, ¶ 56, 19 N.E.2d 1100 (2014). 

Despite a lack of control over a settlement in some cases, the insurer should still be able to contest whether a settlement is covered -- if the insurer properly defended the insured under a reservation of rights or properly pursued a declaratory judgment action.  Am. Family Mut. Ins. Co. v. C.M.A. Mortg., Inc., 682 F. Supp. 2d 879, 894, 2010 U.S. Dist. LEXIS 2379, *42-43 (finding insurer not bound by an underlying settlement).

C. Using declaratory judgment actions to preserve the right to deny or allocate covered and uncovered losses (and even some defense costs).

As noted above, some courts hold that “An insurer may avoid the effects of collateral estoppel by: (1) defending the insured under a reservation of rights in the underlying tort action, or (2) filing a declaratory judgment action for a judicial determination of its obligations under the policy.” State Farm Fire & Cas. Co. v. T.B., 762 N.E.2d 1227, 1230-1231 (Ind. 2001) (insurer who did not defend an abuse claim conceded that a negligence finding was binding, but was able to litigate other coverage issues).

Thus, one way for the insurer to protect its right to deny coverage for indemnity or defense is to file an action seeking a declaration as to coverage or defense obligations.  A declaratory judgment action based upon the complaint is most likely to be successful when the allegations of the underlying complaint, compared to the policy, reveal no potential for coverage. If there is a potential for coverage, a court will typically find that there is a duty to defend, and as noted above, the duty to defend will typically apply to the whole case.   But see Lionbridge Techs., LLC v. Valley Forge Ins. Co. (D. Mass. Sept. 14, 2023), 2023 U.S. Dist. LEXIS 163133 (discussed below in Part V.C., allocating defense expense).

Where there is a duty to defend, a determination of indemnity will be premature.  That is because the duty to indemnify “depends upon the facts established at trial and the theory under which judgment is actually entered in the case.” Capstone Bldg. Corp., 308 Conn. at 805, 67 A.3d 961.  Sometimes, if there is no duty to defend, a court will also find there is no duty to indemnify.  But not always, unless there is “no conceivable set of facts that could give rise to coverage.” Copart of Conn., Inc., 75 F.4th at 537 (rejecting summary judgment as to indemnity).

Nevertheless, filing a declaratory judgment action may, in some cases, help to preserve the insurer’s right to contest coverage for any settlement or judgment in the underlying case.

V. Allocating Damages for Indemnity after a Settlement or an Unallocated Judgment – via supplemental proceedings, declaratory judgment actions, or contribution actions

A request for a court to allocate damages between coverage and non-covered claims can arise a several ways.  First, as noted above, the insurer could file a declaratory judgment lawsuit as to its obligations to take control of the issue early in the process.  Second, a policyholder could file a complaint seeking defense and indemnity at any time.  Third, a tort plaintiff who receives a judgment against a policyholder could file a direct action after the judgment (in most states) to recover insurance proceeds from the tortfeasor’s insurer.  Fourth, an insurer or settling party could also file a complaint for breach of contribution against other non-settling or non-paying parties.

A. Burdens of proof for allocation of damages for coverage purposes      

The one seeking indemnity generally bears the “burden of proving that coverage exists.” Barton, 524 F.Supp.3d 433, 2023 U.S. App. Lexis 433, *1; Huntington Nat'l Bank, 646 F. Supp. 3d at 957. However, if an exclusion is at issue, “Then the insurer has the burden to prove that an exclusion to coverage applies.” Huntington Nat’l Bank, 646 F.Supp. 3d at 958; Swicegood v. Medical Protective Co. (N.D. Tex. 2003), 2003 U.S. Dist. LEXIS 16556, *47 (requiring coverage trial – after a malpractice verdict citing negligence – on the question of the claim occurred in consequence of sexual acts, an excluded cause, which were at issue).  Further, “Where a settlement has insured and uninsured components, the total of the settlement is allocated among each component to determine the amount of insurance coverage.”  Id. at 960.

In the Barton case, the underlying judgment did not specify the nature of the damages, and the plaintiffs did not otherwise provide whether the judgment was for negligence or wantonness. 524 F.Supp.3d 433, 2023 U.S. App. Lexis 433, *15-16. The Court thus said that the Court “cannot determine how much the state court awarded the Bartons damages for Alliston's negligence (potentially covered) versus its wantonness (not covered).”  It found that “Because the Bartons did not satisfy their burden to establish coverage, the district court did not err when it entered judgment for Nationwide.” Id.

B. A non-waiver agreement as to coverage issues is beneficial if it can be obtained during settlement of an underlying claim

If parties are settling for an agreed amount but have not resolved questions of coverage, it is often useful for the insurer to include a non-waiver agreement in the settlement language.  The insurer may even agree to fund some or all of the settlement if such protective language can be included.  The language should provide that the insurer reserves all rights – settlement and payment notwithstanding -- to contest coverage for the settlement in a separate proceeding, including reserving the right to recover payment from others to the extent that any paid amount is ruled to be non-covered.

C. Policy language may be critical in litigating allocation issues

When a court is determining how to allocate an unallocated judgment or settlement, a key initial question on the merits is whether the policy language addresses how to allocate losses between covered and non-covered losses involved.  Some policies may not expressly discuss how to allocate damages and may provide little or no guidance at all.  However, sometimes the language of exclusions and the intent of the policy will lead to an answer.  Here are four cases with different situations where a court addressed policy language (or the absence of it) to inform its decision on allocation:

1.  Med. Protective Co. v. Duma, 478 F.App'x 977, 982 & 985 (6th Cir. 2012) (applying criminal acts exclusion in medical malpractice case where doctor drank a fifth of vodka before delivering a baby, causing harm in the delivery to the mother and child).  The Court noted that damages were excluded if a “criminal act,” an excluded cause under the policy was “a proximate cause” under the language of the policy.

2.  Swicegood v. Medical Protective Co. (N.D. Tex. 2003), 2003 U.S. Dist. LEXIS 16556 (allowing case to proceed to trial to allocate damages between covered and non-covered damages, despite a verdict which merely specified damages for medical negligence, where a doctor was involved sexually with his patient).   The Court noted that the judgment merely found that negligence was “a proximate cause” but did not answer the question of whether the damages were excluded.  Specifically: (a) “the jury could have found, at least in part, that a family practice physician exercising ordinary care would not have engaged in a romantic/sexual relationship with a patient”; (b) plaintiff “was only required to show that Dr. Swicegood's negligence was a proximate cause of her injuries” (i.e. that there may be more than one proximate cause of an event, including an excluded cause); and (c) plaintiff relied on several events as the legal basis of her lawsuit, some of which were arguably inextricably intertwined with her romantic/sexual relationship with Dr. Swicegood.” Id. *25-27.  For more on the proof permitted in the allocation trial, see below.

3.  Corning v. Nat'l Union Fire Ins. Co., 257 F.3d 484, 491-492 (6^th Cir. 2001) (rejecting insurer’s effort to allocate settlement of asbestos-related misrepresentation claims, and using the “larger settlement rule” where the policy did not “state the method of allocation which should be used).   This “larger settlement” rule allocation of the costs of a settlement to non-covered claims "only where that settlement is larger because of the activities of uninsured persons who were sued or persons who were not sued but whose actions may have contributed to the suit."  In this case, despite claims against the directors (insured) and the company (not insured under this policy), the insurer did not rebut the concurrent liability of all involved. Id.at 493.

  4.  Clifford Chance Ltd. Liab. Partnership v. Indian Harbor Ins. Co., 14 Misc. 3d 1209(A), 1209A, 836 N.Y.S.2d 484, 484 (permitting insurer to allocate 40% of a settlement to covered claims and 60% to non-covered claims, where some defendants were covered and some were not covered, and the policy language specifically permitted allocation).  The policy language provided that if a claim “contains both covered and uncovered matters . . . the insured and insurer will use their best efforts to determine a fair and appropriate allocation… (specifying some of the factors to be considered including “relative legal and financial exposures).”

5.   Huntington Nat'l Bank v. AIG Specialty Ins. Co., 646 F. Supp. 3d 950, 959-960 (S.D. Ohio 2022) (discussing the “larger settlement” rule of allocation and the alternative “relative exposure” rule of allocation, but rejecting any such basis for finding coverage, as noted below, where the facts of the case indicated no covered damage were present).                       

6.   Lionbridge Techs., LLC v. Valley Forge Ins. Co. (D. Mass. Sept. 14, 2023), 2023 U.S. Dist. LEXIS 163133 (adopting insurer’s theory for allocating defense expense in a joint defense relationship).  Specifically, the case involved a covered defendant and non-covered defendant (the corporate parent) being sued for misappropriate of trade secrets and unfair competition.  The insurer sought to avoid having to pay all of both defendants’ defense expenses, and the Court agreed with the insurer’s argument as follows:  The insurer “Valley Forge must pay all of the reasonable costs of Lionbridge's defense, even if they involve a non-insured defendant who also received a benefit from it” but “the question of reasonableness will also include allocation of the cost among the parties to the joint defense for work that benefited them both,” and “The reasonable allocation will be made in light of the surrounding circumstances, including "relative exposure of the parties to liability, the size of the parties, and the parties most benefitting from the joint defense work." Id. at * 17.

7.  State Farm Fire & Cas. Co. v. T.B., 762 N.E.2d 1227, 1230-1231 (Ind. 2002) (binding insurer to a consent judgment but allowed coverage dispute to proceed on issues not necessarily determined, and finding no coverage). 

D. When disputed, allocation should be based upon the underlying pleadings, underlying transcripts, and potentially upon experts – as part of a limited coverage trial (not a re-trial of prior proceedings or alteration of the underlying case)

Sometimes, after an insurer declines to defend or refuses to fund a settlement (citing policy defenses or exclusions), the policyholder disputes the denial and presses its coverage argument in court.   One such instance occurred in the above-cited Huntington Bank case.  As the Court stated there, the underlying settlement resolved a legal proceeding where “the subject of that proceeding was the recovery of illegal transfers -- which is uninsurable.”  Although the policyholder (Huntington) argued that the court should consider its motives in settling, which it claimed included some covered issues, the court found that “Huntington has presented no case law to suggest that any court applying Ohio law would allocate a settlement by motive.”  646 F.Supp.3d at 959-60.  It focused on the “subject” of the proceeding.

At other times, when an insurer denies coverage (ore refuses to consent to a settlement), a policyholder will agree to a consent judgment against it, and may specify that collection must be obtained from the insurer.  This situation occurred in the above-listed case of State Farm v. T.B. The parties and court agreed that because it received notice of the suit and denied coverage, it was bound “at least to the matters necessarily determined in the lawsuit." 762 N.E.2d 1227, 1230-1231.  This included a consent judgment in the amount of $375,000 for negligence as to abuse during child care activity, with specific factual details added to the judgment.  However, the Court ultimately allowed the insurer to contest coverage based upon an exclusion for child care activities and whether the activity fell within an exception stating that “it does not apply to the occasional childcare services provided by any insured." The Court stated that “Estopping an absent party from contesting unnecessary matters settled upon by the consenting parties invites collusive or fraudulent

Determinations.” Id. at 1232-34. Thus, estoppel did not apply to the unnecessary portions of the stated judgment which characterized the nature of the activity on the day in question.  Id. 

The same situation can occur when a judgment is entered which does not necessarily preclude a coverage defense.  For example, in the above-cited Swicegood case, after the jury verdict for malpractice, a court was asked to address coverage and it concluded: “the court is unable to say that the jury charge indubitably excluded the possibility of an award of any compensatory damages for non-covered claims.” Id. *27-28 (rejecting collateral estoppel).  

The Swicegood Court proceeded to discuss the type of evidence that would be admissible in the coverage case.  Dean apparently argued that the coverage case should proceed as it were a trial de novo. Id. *39.  Med Pro argued for a ban on additional evidence, apparently believing that the existing transcript showed significant sexual acts.  Id. The court ruled that: (a) “new evidence is admissible when the coverage question turns on a matter that was not adjudicated in the liability suit.” Id. *39-40 & 44; and (b) the law does not provide for “retrial of all or even substantial parts” of the underlying suit that has already been tried. Id. 44-45.  The reason for no re-trial is that indemnity applies to the actual facts in the underlying suit, not some new trial where the plaintiff is “focusing instead” on covered claims. 

Thus, the Court found that “new evidence can be introduced at a coverage trial when the proof is necessary to resolve a controlling coverage question that was not conclusively decided in the indemnity suit,” (not decided in a way that binds all affected parties “via collateral estoppel”). Id. *46-47. It further stated: “An undecided issue could include one that the parties in the indemnity case had no reason to litigate, e.g., an exclusion from coverage, where the burden of proof would be on a non-party insurer.” Id. It explained that the proof for trial “will consist of historical evidence from the Underlying Lawsuit and expert testimony to assist the jury in allocating or apportioning covered and non-covered damages . . . the pleadings, trial transcript, jury charge, verdict, and judgment in the Underlying Lawsuit, the briefs and opinion in Swicegood II, and expert testimony to help the jury understand this evidence and decide whether the damages in the Underlying Lawsuit should be allocated between covered and non-covered conduct and, if so, how.” Id. *51-52.