End of Term Report - Insurance Coverage Case

Catching up after a busy June with a couple of posts on opinions issued by the WV Supremes.

Boggs v. Camden Clark, an opinion by Justice Benjamin, answers certified questions from the United States District Court regarding insurance coverage for a verdict in a medical negligence case of $6.5 million, including $3 million in punitive damages. The defendant hospital had an insurance policy with St. Paul which provided $1M coverage for medical negligence claims, with a $2M self insured retention (SIR), and excess coverage of $15M. St. Paul had issued a reservation of rights, and contested payment of the verdict because the findings of the jury included intentional conduct not covered under the policy , as well as conduct excluded under these provisions. The hospital filed a declaratory judgment action, and the US District Court certified two questions to the Supreme Court of Appeals of West Virginia. The Court's answers are in bold, and are the two new syllabus points in the decision.

1. Under West Virginia law, when an insured is found liable for a tort, and the complaint indicates that the tort could be based on conduct that the insurance policy covers, on conduct that the insurance policy does not cover, or both, and when the jury verdict does not specify which conduct gave rise to the insured's liability, does the insured bear the burden of proving that the liability was based on covered conduct, or does the insurer bear the burden of proving that the liability was based upon non-covered conduct?

Answer: Where a policy of insurance does not impose a duty to defend upon the insurer and the insured has controlled the defense of the underlying claims, if a court determination regarding allocation of a jury verdict between the claims covered by the terms of the policy and the claims not covered by the terms of the policy is sought, the insured has the burden of proof to establish proper allocation.

2. Under West Virginia law, when a jury awards punitive damages against an insured, and the punitive damages could be based on a claim covered by the insurance policy, on a claim not covered by an insurance policy, or both, does the insured bear the burden of proving that the punitive damages were based upon a covered claim, or does the insurer bear the burden of proving that the punitive damages were based on a non-covered claim?

Answer: In order to obtain indemnification under a policy of insurance which does not exclude punitive damages and under which there is no duty to defend, an insured who has controlled the defense in a case resulting in a punitive damage award and who seeks a court determination regarding allocation of the award has the burden of proving that the claim or claims on which the punitive damage award is based is covered by the terms of the policy.

The court's also discusses the need to submit special interrogatories to the jury in the underlying tort litigation to clarify which claims are covered and which are not.

As an initial matter, we note that an insurer who undertakes the defense of a suit against its insured must meet a high standard of conduct. Duke v. Hoch, 468 F.2d 973, 978 (5th Cir.1972); Gay & Taylor, Inc. v. St. Paul Fire & Marine Ins. Co., 550 F.Supp. 710, 714-16 (W.D.Okla.1981). The right to control the litigation carries with it certain duties. Traders & Gen. Ins. Co. v. Rudco Oil & Gas Co., 129 F.2d 621, 627 (10th Cir.1942). One of these is the duty not to prejudice the insured's rights by failing to request special interrogatories or a special verdict in order to clarify coverage of damages. See Gay & Taylor, 550 F.Supp. at 716. The reason for this is that when grounds of liability are asserted, some of which are covered by insurance and some of which are not, a conflict of interest arises between the insurer and the insured. If the burden of apportioning damages between covered and non-covered were to rest on the insured, who is not in control of the defense, the insurer could obtain for itself an escape from responsibility merely by failing to request a special verdict or special interrogatories. Duke, 468 F.2d at 979. The insurer is in the best position to see to it that the damages are allocated; therefore, it should be given the incentive to do so.

The opinion makes clear that its holding is limited to cases where the insured, with a large SIR, hires counsel and controls the defense. Where the carrier has the duty to defend, retains counsel and controls the defense, the answers may well be different. The case now goes back to the District Court for the ultimate determination of coverage.