Home Page The Publication The Editor Contact Information Insurance Key issues Book Subscribe


Vol. 10 - Issue 1

January 11, 2021


QBE v. Scrap, Inc. (11th Circuit Court of Appeals)

Allocation Between Covered And Uncovered Claims


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 and take a deep breath of satisfaction for a job well done.  

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. 

One of the most interesting things about this issue is that, despite its importance, there is not an abundance of decisions addressing it.  Not to say there are none.  Not at all.  But I have always found it unusual that there are not more.

This is why it is surprising that, between early-March and mid-May, there were at least three decisions addressing the issue.

Of the three, I believe that the most important is the Eleventh Circuit’s in QBE v. Scrap, Inc., No. 18-13926 (11th Cir. Mar. 13, 2020).  It stands as a superb example of an insurer taking the necessary steps to prevent being saddled with an obligation to provide coverage for a general verdict that may include uncovered claims.  While the insurer was stymied in its efforts, it was still rewarded for them.  As a playbook for insurers, on a hugely important issue, QBE v. Scrap is one of the ten most significant coverage decision of 2020.

The allocation issue in the case arose out of the following scenario.  Scrap, a scrap metal company, was sued for nuisance stemming from its operation of a metal shredding facility.  It was alleged that  Scrap’s shredding operation “create[d] loud noises, offensive odors, fumes, and other emissions of undisclosed content ..., frequent vibrations to these homes, and periodic explosions.”

QBE, Scrap’s general liability insurer, retained counsel and defended Scrap under a reservation of rights.  Here’s the key, as the court put it:

“Numerous times throughout the proceeding, QBE advised Scrap of the availability of and need for special jury instructions and special-interrogatory verdict forms. Additionally, QBE sought leave to intervene on two occasions for the limited purpose of requesting special jury instructions and special-interrogatory verdict forms. The court, however, denied QBE’s motion, stating: ‘QBE has informed [Scrap’s trial counsel] as well as the Defendants’ private counsel that this case requires a special interrogatory verdict form. There will be adequate lawyers at the table to make sure this Court provides a proper verdict form.’”

The coverage issues that concerned QBE were the pollution exclusion and whether damages at issue were for sickness versus annoyance/inconvenience.

A jury found Scrap liable for nuisance damages and awarded $750,000 to the plaintiffs.  QBE filed an action seeking a declaratory judgment that it was not obligated to indemnify Scrap for the judgment.  The District Court found for QBE.  Scrap appealed to the Eleventh Circuit.

The roadmap to the decision is the court’s explanation of who has the burden to prove coverage:

“Under Florida law, the party claiming insurance coverage has the initial burden to show that a settlement or judgment represents damages that fall within the coverage provisions of the insurance policy.   An insured’s inability to allocate the amount of a judgment between covered and uncovered damages is therefore generally fatal to its indemnification claim.”

So the burden to prove coverage starts with the insured.  But, the court noted that “the burden of apportioning or allocating between covered and uncovered damages in a general jury verdict may be shifted to the insurer if the insurer did not adequately make known to the insured the availability and advisability of a special verdict.” So, if the insurer does not take steps to achieve such allocation, the burden may shift to the insurer.

QBE took steps.  A lot.  Over the period of a year and a half, QBE wrote to Scrap’s attorneys four times advising Scrap of the need for allocation. “In these letters, QBE told Scrap explicitly that Scrap would have to request a special verdict, differentiating covered damages from uncovered damages, and that if it did not, the failure to seek allocation could result in forfeiture of coverage for all damages.”

QBE’s efforts went further: “QBE also twice attempted to intervene in the underlying suit for the purpose of assisting with the preparation of special-interrogatory verdict forms, on both January 30, 2015, and April 15, 2016. Though Scrap protests at length that QBE’s attempted interventions were procedurally defective, the standard is notice, not successful intervention.  That standard was certainly met here.”  (emphasis added).

The court also noted that, in “the absence of an allocated verdict in the underlying trial, Scrap never provided the district court with a plausible method for separating those damages awarded by the jury that are covered by QBE’s policies from those that are not.”  This, the court stated, left Scrap with an “impossible” burden to overcome.

Scrap made the point that the allocation issue is a trap for the insured: “The coverage issues claimed by [the insurer] exist[] from the start of the case, yet [insurer-]appointed defense counsel conduct[s] no discovery which would . . . allow[] the special verdict form to be usable by the jury. . . . As the case progresse[s], [insurer-]appointed defense counsel, relying on the issue of conflict, ma[k]e[s] no effort to develop a case which would allow the special verdict forms to be used. As a result, the insured had lost the issue of coverage long before the trial court rejected the intervention or the use of the special verdict form. Conversely, [the insurer] prevail[s] on the issue of its alleged coverage exclusions without the risk of a separate declaratory action.”

The Eleventh Circuit was not dismissive of Scrap’s concern.  But it concluded that it was factually inapplicable:  “Far from sitting back and letting Scrap develop its discovery plans in ignorance, QBE warned Scrap for the first time sixteen months before trial began, and reiterated this warning four more times before trial started. Thus, instead of being blindsided by late notice that it had to present a special-verdict form for which it had not prepared, Scrap was given ample time to prepare a strategy to accommodate this need.”

[Takeaway – The insurer should make allocation efforts early and often.] 

The court’s conclusion was clear: “QBE had a duty to inform Scrap of the availability and advisability of a special verdict, lest the burden shift; QBE did so; the burden thus did not shift, but remained on Scrap, which is unable to meet it.”

The most significant line in Scrap is this: “the standard is notice, not successful intervention.”  In other words, the insurer that files an intervention motion may not need to be successful.  Rather, it may simply be the effort by the insurer, to achieve an allocation between covered and uncovered claims, that serves to prevent the allocation burden – and, perhaps one that cannot be meet – from falling on the insurer.  I have been saying this to clients for years.  We may not get our motion to intervene granted.  But, even if denied, it will have served a purpose.


Website by Balderrama Design Copyright Randy Maniloff All Rights Reserved