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Vol. 6, Iss. 9
December 13, 2017

UnitedHealth Group v. Executive Risk Specialty Ins. Co., 870 F.3d 856 (8th Cir. 2017)

Covered vs. Uncovered Claims: Federal Appeals Court’s Primer On Post-Settlement Allocation

The issue of an insurer talking action, pre-trial, to have the trier of fact answer questions that may allow for an allocation, between covered and uncovered clams, is one that sometimes confronts courts. In other words, this is the situation of an insurer, seeking to have the judge or jury make factual determinations, so that a so-called “general verdict” does not result. If a general verdict does happen, the insured may argue that, since there is no way to tell which aspect of the verdict is for covered claims and which is for uncovered claims, the entirety of the verdict must be covered. Or, alternatively, the insured may argue that the insurer bears the burden (and, perhaps, a difficult one at that) to prove which part of the general verdict constitutes uncovered claims. Case law on this issue, while not abundant, goes in various directions.

An insurer taking pre-trial actions, to address covered and uncovered claims, is one type of allocation. The other, its close cousin, is allocation of a settlement between covered and uncovered claims. When you consider that the vast majority of lawsuits settle, this second type of allocation is, at least statistically speaking, more important. But despite the importance of the issue, there is not an overwhelming amount of case law addressing it.

The allocation issue was before the Eight Circuit in UnitedHealth Group v. Executive Risk Specialty Ins. Co. and the court provided an extensive analysis in the context of an agreement to resolve certain lawsuits for a staggering $350 million. And while UnitedHealth involved E&O claims, the court relied on cases addressing CGL policies in reaching its decision. So UnitedHealth’s applicability can be argued to extend beyond the world of E&O (and D&O). Given the extensive nature of the allocation analysis, and less than abundant case law, it is hard to imagine that UnitedHealth will not be the go-to case for courts nationally addressing the issue.

UnitedHealth is a complex case with a protracted history. That’s not surprising for a claim this size. There aren’t too many $350 million settlements that involve slips on wayward banana peels. The court, thankfully, does a good job of keeping it simple.

UnitedHealth settled two lawsuits for a single lump-sum payment of $350 million. In the so-called AMA suit, several group health plans insured or administered by UnitedHealth sued the company, alleging that it conspired with other insurers to reduce payment for out-of-network benefit claims. The plaintiffs brought claims under ERISA, RICO, the Sherman Act and state law. The district court dismissed most of the ERISA and RICO claims and the Sherman antitrust claims proceeded until the case settled. In lawsuit number two, the so-called Malchow suit, a group of plaintiffs sued Oxford Health, a UnitedHealth entity, alleging claims under ERISA and violations of a state regulation, arising from breaches of contract and claims regarding Oxford’s billings and payments. [There was a third suit at issue, but it is not necessary to discuss it here to make the points. KISS.]

Here’s the bottom line -- There was no potential coverage for the Malchow suit (ERISA) but the AMA suit (antitrust) was covered. However, UnitedHealth’s $350 million settlement did not allocate the settlement amount between the two suits. Litigation ensued between UnitedHealth and its excess insurers. After several years, and no doubt a volume of documents that would impress a Redwood, the case, involving Minnesota law, ended up in the Eighth Circuit on the allocation issue. The appeal was from the District Court’s grant of summary judgment that UnitedHealth failed to meet its burden to support an allocation between the potentially covered AMA claims and the non-covered Malchow claims.

After determining that neither policy language, nor case law, supported UnitedHealth’s argument that the entire settlement was covered, so long as any part of it was covered, the appeals court turned to the allocation issue, after having determined that UnitedHealth bore that burden.

So how is that to be done? The court put it in these simple terms: “To prove allocation, parties can present testimony from attorneys involved in the underlying lawsuits, evidence from those lawsuits, expert testimony evaluating the lawsuits, a review of the underlying transcripts, or other admissible evidence. To survive summary judgment, an insured need not prove allocation with precision, but it must present a non-speculative basis to allocate a settlement between covered and non-covered claims.”

Perhaps the best way to explain how to achieve allocation is by how not to do so – which is how the court described UnitedHealth’s efforts. I’ll borrow from the court’s opinion (headings are mine):

What Did UnitedHealth Know And When Did It Know It?

“UnitedHealth complains that the district court excluded evidence that would have supported an allocation of the settlement. The company argues that the district court erroneously excluded both Judge McKenna's rulings and expert testimony in the underlying lawsuits that occurred after the settlement agreement was signed on January 14, 2009. The allocation inquiry examines how a reasonable party in UnitedHealth's position would have valued the covered and non-covered claims. In evaluating the claims, we look to what the parties knew at the time of settlement.” (emphasis added). … “The process that occurred after the settlement on January 14, 2009—including Judge McKenna’s rulings and expert testimony and a report admitted at the settlement hearings—was inadmissible for purposes of allocating the $350 million settlement, because it did not address information that was available to the settling parties in January 2009. A reasonable settling party could not have relied on Judge McKenna’s post-January rulings to inform its allocation of the $350 million settlement in January. a reasonable person would have allocated the settlement at the time it was reached.”

Choosing The Right Expert

“Halverson is an expert on antitrust law, and the district court allowed him to testify about the value of the antitrust claims asserted in the AMA suit. But Halverson admitted that he is not an expert on ERISA, and he testified in his deposition that he did not analyze the Malchow lawsuit. Without analyzing the Malchow suit, Halverson could not provide an expert opinion about its value. And without knowing the value of the Malchow suit, Halverson could not testify as to the relative value of the AMA suit compared to the Malchow suit. Thus, the district court did not abuse its discretion in determining that Halverson was not qualified to testify about the settlement value of the ERISA claims or how the $350 million settlement should be allocated between the AMA and Malchow claims.” (emphasis in original).

The Complaint Is Not Proof of Value

“At oral argument, UnitedHealth suggested that because the Malchow complaint alleged only $160,000 in damages, a jury reasonably could calculate the value of Malchow as no more than $160,000 and allocate the rest of the $350 million settlement to the AMA suit. But UnitedHealth did not present this argument to the district court, and it is forfeited. The amount of damages cited in the complaint, moreover, does not by itself support a finding on how a reasonable party in UnitedHealth’s position would have valued the Malchow suit when it settled the cases. The Malchow suit was a putative class action; the damages enumerated were attributable only to the named individual plaintiffs. The exposure to the defendants in damages, costs of litigation, injury to reputation, and other categories could have been much greater.”

Providing Valuation Information

Lastly, while it is unclear to me what impact this may have had, the court noted that “UnitedHealth made strategic decisions to invoke attorney-client privilege and work-product protection to avoid presenting evidence from its own representatives about contemporaneous valuations of the settlement.”

Based on all this, the court concluded: “It is well settled that a jury may not base its damages award on speculation. The evidence presented by UnitedHealth fails to give a jury more than a speculative basis on which to allocate the $350 million settlement between the AMA and Malchow suits.”

Postscript: For an excellent article on the settlement-allocation issue see “Settlement of Covered and Non-Covered Claims: Assigning and Meeting the Burden of Proof of Allocation,” by Bonnie Hoffman, of Philadelphia’s Hangley Aronchick Segal Pudlin & Schiller, and Jacqueline Robinson (Dungee) (formerly of the Hangley firm) which appeared in Issue 5 (2017) of DRI’s “Covered Events.” The authors – co-counsel for Executive Risk in UnitedHealth – address which party has the burden to prove how much of a settlement was or should be allocated to covered versus non-covered claims.

After citing cases on both sides, the authors conclude that, “[p]ractically speaking, the burden to allocate should fairly lie with the party with control over the settlement and access to the relevant information concerning any potential allocation.” (emphasis in original).

But, more than just an article that tells you how various courts treated the allocation issue, the authors also provide some sage advice for insures to prepare for the impending allocation issue: “One way to persuade the court that the burden should be placed on the insured is to develop a record — early and often. Upon learning of a settlement, when requesting liability and damages analyses, expert reports, mediation briefs and the like, ask for the insured’s allocation analysis too. Ask the insured whether and the extent to which it has allocated the settlement between covered and non-covered claims and/or between the various causes of action in the complaint To the extent the insured does not respond or otherwise refuses to provide this information, make a record. Continue asking and do so in writing.”

Essentially, the authors’ message is that insurers that are proactive in addressing allocation between covered and uncovered claims take away an insured’s ability to argue that the insurer should be penalized for, well, not being proactive in addressing allocation. Early and often – good advice from Ms. Robinson and Ms. Hoffman.


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