Court Holds Insurer Can Allocate Settlements

A federal district court in Pennsylvania has upheld an insurer’s right to allocate settlements between covered and non-covered amounts and affirmed the insurer’s substantive allocation of two settlements. United Nat’l Ins. Co. v. Indian Harbor Ins. Co., No. 14-6425 (E.D. Pa.). Wiley Rein represented the insurer.

The insured, an insurance company, purchased an E&O policy that contained a provision for allocating between “Loss covered by this Policy and Loss not covered by this Policy.” The insured sought coverage from its E&O carrier for two underlying claims, both of which the insured settled without admitting any liability. In one of the two underlying claims, the E&O carrier contributed $1.5 million to the insured’s settlement but declined to cover the entire settlement, allocating a portion of the settlement to non-covered contractual liability. In the other claim, the E&O carrier declined to contribute to the settlement because, subtracting amounts allocated to non-covered punitive damages, the covered portion of the settlement did not exceed the retention. The insured brought the present coverage action against the E&O carrier, seeking to recover the entire amount of the two settlements and asserting a bad faith claim.

On the parties’ cross-motions for summary judgment, the court granted summary judgment in favor of the E&O carrier, holding that the carrier had the right to allocate the settlements between covered and non-covered amounts pursuant to the unambiguous allocation provision in the E&O policy. The court held that, under Pennsylvania law, the insured has the burden to prove what portion of each settlement is covered under the policy. According to the court, the insured had not carried its summary judgment burden to put forth evidence supporting its position that the entire amount of each settlement should be covered. The court also granted summary judgment to the E&O carrier on the insured’s bad faith claims, holding that the insured had not identified acts constituting bad faith and that the applicable statutes of limitation precluded the claims.

Finally, the court rejected the insured’s argument that the E&O carrier breached the policy’s insuring agreement, which stated that the carrier would pay amounts “on behalf of” the insured, when the E&O carrier paid covered settlement amounts to the insured rather than the claimant. The insured had directed the carrier where to pay its $1.5 million settlement contribution and had therefore waived any argument that the carrier should have paid the settlement to another party.

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