Court Holds Insurer Cannot Allocate Settlement Between Covered and Non-Covered Claims

Applying Maryland law, the Court of Special Appeals of Maryland has held that an insurer had no right to allocate a global settlement of two underlying lawsuits between covered and non-covered claims, where the damages sought in each action were identical and based on the same misconduct.  Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. The Fund for Animals, Inc., 2019 WL 7369221 (Md. Ct. Spec. App. Dec. 30, 2019).

The insured, a national non-profit organization, operates animal sanctuaries and wildlife centers.  In 2000, the organization and other parties sued the owner of Ringling Brothers, Feld Entertainment, Inc. (Feld), for alleged violations of the Endangered Species Act (the ESA case).  After nearly a decade of litigation, the court ultimately found that plaintiffs lacked standing to bring the case, and Feld, as the prevailing party, moved to recover its attorneys’ fees.  While the ESA case was pending, in 2007, Feld sued the ESA plaintiffs for violations of the Racketeer Influenced and Corrupt Organizations Act (the RICO case), asserting that the ESA plaintiffs had engaged in illegal conduct in their prosecution of the ESA case.  Specifically, Feld alleged that the ESA plaintiffs bribed a Ringling Brothers’ employee to testify falsely about the alleged mistreatment of animals.  In the RICO case, among other amounts, Feld sought attorneys’ fees, costs, and other expenses it had incurred in defending the ESA case.

In 2010, the organization provided notice of the RICO case to its specialty insurance carrier, which denied coverage based on late notice.  While the ensuing coverage action challenging the late notice defense was pending, the insured entered into a global settlement of the ESA case and the RICO case, pursuant to which the insured agreed to pay Feld over $6 million.

In the coverage action, the court first rejected the insurer’s late notice defense for failure to establish prejudice.  The court then considered the parties’ competing arguments concerning allocation of the settlement amount between the (covered) RICO case and the (indisputably non-covered) ESA case.  The insurer argued that the insured should not recover any portion of its settlement payment because it had not produced evidence showing how it had allocated the payment between the covered and non-covered claims.  The insured argued that no allocation was necessary – so the entire settlement amount should be covered – because the damages sought in the ESA case (i.e., the prevailing party’s attorney’s fees) were subsumed within the potentially recoverable damages in the RICO case.

The court ruled in favor of the insured, holding that the entire settlement amount was covered even though the settlement resolved both covered and non-covered claims.  In reaching this conclusion, the court found persuasive the fact that “all damages potentially recoverable in the ESA Case were potentially recoverable in the RICO Case” and that the underlying wrongs giving rise to the damages “were based on the same operative set of facts, i.e., [the insured]’s fraudulent attempt to establish standing in the ESA Case.”

Although the court found that the entire settlement was covered, the court determined that it was appropriate to offset the insurer’s obligation by amounts that the insured had obtained from other insurers.  The court also refused to reduce such offsets by the litigation expenses the insured had incurred to recover the other insurance, noting that “[the insurer] played no role in the coverage dispute between [the insured] and its other insurers … and did not contribute to [the insured]’s costs in recovering under” those policies.