Second Circuit Upholds Burden of Insured to Prove Covered Damages | Practical Law

Second Circuit Upholds Burden of Insured to Prove Covered Damages | Practical Law

The United States Court of Appeals for the Second Circuit recently upheld New York law that, when attempting to collect damages under an insurance policy, the burden is on the insured to allocate damages between covered and uncovered claims. The insured's failure to do so may forfeit insurance coverage completely.

Second Circuit Upholds Burden of Insured to Prove Covered Damages

Practical Law Legal Update w-011-5394 (Approx. 3 pages)

Second Circuit Upholds Burden of Insured to Prove Covered Damages

by Practical Law Real Estate
The United States Court of Appeals for the Second Circuit recently upheld New York law that, when attempting to collect damages under an insurance policy, the burden is on the insured to allocate damages between covered and uncovered claims. The insured's failure to do so may forfeit insurance coverage completely.
On September 19, 2017, in Uvino v. Harleysville Worcester Ins. Co., the United States Court of Appeals for the Second Circuit affirmed a district court holding that the burden is on the insured to prove the amount of covered damages when attempting to recover under an insurance policy. The insured's failure to prove the amount of covered damages completely relieved the insurer from coverage ().

Background

Joseph and Wendy Uvino (the Uvinos) hired J. Barrows Inc. (JBI) to renovate their home. The Uvinos later fired JBI and sued them for damages caused by faulty work. At trial:
  • JBI's insurance provider, Harleysville Worcester Insurance Company (Harleysville), defended the action under a reservation of rights.
  • Harleysville attempted to intervene in the action to submit special interrogatories for an allocated verdict, requiring the jury to assign damages between claims Harleysville insured, and those it did not.
  • JBI filed a motion opposing Harleysville's intervention, which was granted. The Uvinos took no position on the motion.
  • The jury awarded the Uvinos over $400,000 in damages which were not allocated between, nor corresponded to, their multiple claims.
The Uvinos brought an action against Harleysville for a declaratory judgment, claiming that the damages were covered by JBI's insurance policy. The court granted Harleysville's motion for summary judgment dismissing the action, holding that the Uvinos failed to prove what portion of the damages were covered by Harleysville. Harleysville was, therefore, not obligated to pay any portion of the judgment.
On appeal, the Uvinos argued that:
  • Harleysville failed to advise JBI of the use of specialized interrogatories to receive an allocated verdict in the underlying action.
  • Therefore, the burden of allocating the damages between covered claims and non-covered claims should have been shifted to Harleysville.
To support their argument, the Uvinos cited cases from Florida and Idaho where courts shift the burden of proof to the insurer when the insurer fails to inform the insured about obtaining an allocated verdict at trial.

Outcome

The Second Circuit affirmed, concluding that the burden of proof did not shift to Harleysville. The court distinguished the Florida and Idaho cases and held that:
  • Harleysville informed all parties about the option to receive an allocated verdict when it attempted to intervene in the underlying action.
  • The burden remained on the Uvinos to prove the allocation of damages, and they had failed to do so.

Practical Implications

New York currently does not have case law shifting the burden of proof to an insurer when it fails to inform the insured about obtaining an allocated verdict. However, the Second Circuit distinguished the Florida and Idaho cases instead of rejecting them as non-binding. Counsel should take note as that suggests the court might shift the burden if presented with facts identical to those cases.
Counsel should also be aware of the need to allocate damages to ensure recovery from a carrier defending under a reservation of rights. Plaintiff's failure to prove the amount of covered damages may entirely forfeit coverage and leave the plaintiff with an uncollectable judgment.
For more information on insurance coverage in construction projects, see Practice Note, Managing Construction Risk Through Commercial General Liability Insurance.