The issue of apportionment between covered vs. uncovered claims has long been a complex one.  I address it in Coverage Opinions every time it arises.  The issue arose last week in Barrs v. Auto Owners Ins. Co., No. 22-13649 (11th Cir. Aug. 6, 2024).  The insurer disclaimed a duty to defend.  This led to a consent judgment.   There were clearly uncovered claims – the court said so.  Read on to see what happened after that. 

Earl Barrs contracted with AAA General Contractors to deconstruct a building on Barrs’s property.  AAA hired Z&H Enterprises to oversee it.   Barrs noticed that work was not being completed and materials were missing.  Zachary Hood, of Z&H, had stolen them. Barrs filed suit against AAA, alleging such things as negligent deconstruction and negligent supervision.

Auto-Owners, AAA’s insurer, declined to defend. Barrs and AAA entered into a settlement agreement in which AAA admitted to liability in the amount of $557,500 and a consent judgment was entered.  The consent judgment closely tracked the settlement agreement but did not indicate which portions of the damages were attributed to which claims. 

AAA also assigned its rights, under the Auto-Owners Policy, to Barrs.  Barrs filed suit against Auto-Owners. The case made its way to Georgia federal court, which held that “the unallocated consent judgment consisted of both covered and non-covered claims. It found that Auto-Owners’ policy provided coverage for Barrs’s claims of negligent hiring, retention, and supervision to the extent that he sought damages for stolen lumber and materials. But the district court also concluded that the policy didn’t cover the portion of the consent judgment premised on faulty workmanship or improper deconstruction.”  [How or why the court reached this conclusion on the coverage issues was not addressed.]  The court entered judgment for Barrs. 

On appeal, the Eleventh Circuit now delved into the coverage issues, addressing the “occurrence” question and various of the business risk exclusions.  Putting aside all of that, which is not relevant here, the federal appeals court affirmed.

So it’s a covered vs uncovered damages situation.  And that’s where it went ever further south for insurer.

Auto-Owners had disclaimed any coverage for the consent judgment because it was not allocated between covered and uncovered claims.  The District Court had disagreed with that.  And so did the Eleventh Circuit.  In fact, the appeals court saw it exactly the opposite: coverage was owed for the entirety of the consent judgment -- even the uncovered portion.

I’ll set out a lengthy quote from the Eleventh Circuit explaining its decision.  Doing so provides a full appreciation of the potential significance of the decision:

“The district court held that ‘[w]hen an insurance company refuses to defend its insured, without any reservation of rights, and its insured secures a judgment (without fraud or collusion), an insurance company must pay the entire judgment.’ It determined that the consent judgment here was enforceable because (1) it complied with the procedures established in Coblentz v. American Surety Company of New York, 416 F.2d 1059 (5th Cir. 1969); (2) Georgia common law didn’t appear to allow an insurer a second bite at the apple when it chose not to participate in the underlying lawsuit; and (3) Barrs’s declaration attested that the $557,500 settlement was less than the value of the stolen lumber, so even if the consent judgment wasn’t properly allocated, the recovery was reasonable.

“We agree that the consent judgment was crafted and executed in compliance with Coblentz. To be sure, although Georgia law estops an insurer from contesting its insured’s liability when it refuses to participate in the underlying lawsuit, it doesn’t necessarily prevent an insurer from later contesting coverage. Even so, we affirm because we’ve been pointed to nothing in Georgia law that clearly prevents the enforcement of unallocated consent judgments. To hold that unallocated consent judgments are unenforceable would be to shift the burden to the insured and would require meddling in Georgia law to a degree that we think would be imprudent.” (emphasis mine). 

The court concluded that “a federal court sitting in diversity must proceed with caution in making pronouncements about state law.”  So maybe a Georgia state court will see it differently. 

In any evet, it’s quite a roadmap for policyholders facing denials of the duty to defend.