Minnesota Federal Court Clarifies Evidence Necessary To Maintain Indemnity Allocation Action.

U.S. District Court Judge Patrick Schlitz, recently issued an Order in a complex case clarifying the evidence necessary to bring an action to allocate covered and uncovered portions of a settlement.  In UnitedHealth Group, Inc. v. Lexington Insurance Co., 05-01289 (D. Minn. Sept. 25, 2014), UnitedHealth Group (“United”) brought a coverage action against its primary and nine excess insurers seeking a determination of which of the insurers must indemnify or pay its defense costs.

The underlying suits arise out of a series of class action settlements.  In 2009, United executed a $350 million settlement of two putative class actions: the AMA claim and a closely related Malchow claim.  United brought a separate coverage action for the Malchow claim because it arose under a different tower of insurance from the AMA claim.  The Court dismissed United’s Malchow claim action, finding the insurers were not obligated to indemnify United for defense and settlement costs.

The nub of this case is that the settlement of the class actions did not apportion the AMA and Malchow claims.  Because the court previously there was no insurance coverage for the Malchow claim, United sought indemnification for the portion of the settlement attributable to the AMA claim.  Thus, United’s indemnity claim would require a jury to allocate the settlement between the uncovered Malchow claim and the potentially covered AMA claim.

While the case was quite complicated in some respects, the insurers’ argument was simple: United failed to cite any specific evidence to support its allocation arguments.  Thus, it failed to meet its burden to survive summary judgment.

The Court agreed with United’s general argument that allocation requires a jury only to determine how much a reasonable person in United’s position would have allocated the $350 million between the AMA and Malchow claims at the time the settlement was reached.  But the Court disagreed on what constitutes “the time of the settlement.”  The Court found its inquiry was limited to the facts known to United at the time the preliminary settlement was reached with class counsel, not evidence presented between that preliminary settlement and when the court ultimately approved the class settlement.

In previous orders, the Court held United’s burden is two-fold: United must show how much of the $350 million should be allocated to the AMA claim and how much of that allocation should be allocated to the insurance claims covered by the insurers.  The Court previously held United’s expert could not testify to as to how the settlement should be allocated between the covered claims in the AMA suit and the uncovered claims.

The insurers argued that because the expert could not testify to allocation, United is left without sufficient evidence for which a jury could apportion the settlement.  Notably, United aggressively asserted privilege on its adjusters and trial counsels’ pre-settlement evaluations of the case.  That privileged information likely would have been sufficient to survive summary judgment.  United argued that the court should permit its expert to testify on the percentage of allocation.  United argued it could prove its covered damages exceed the remaining amount of available insurance.

The Court disagreed.  First, the court noted the expert was only qualified to testify as to the value of the covered counts in the AMA claim, not the uncovered counts in the Malchow claim.  As such, the expert’s absolute value analysis on AMA claim, but failure to even consider the Malchow claim, precludes him from apportioning the $350 million dollar settlement between the claims.

Next, the Court rejected United’s claim it could simply prove that it was more likely than not the covered AMA claims exceed the insurers’ combined coverage limits.  It reasoned it is pointless what the absolute value of the covered AMA claims are when there is no evidence to show the value of the uncovered Malchow claims within the settlement.

Last, the Court rejected United’s attempt to have the jury consider the judges’ order in the AMA and Malchow claims to apportion the settlement.  It found expert testimony was required because lay jurors could not analyze legal opinions to form a basis to apportion damages.  Thus, the Court held in complex cases involving difficult legal questions, expert testimony is required to defeat a sufficiency-of-the-evidence challenge.  As a result, the Court dismissed United’s indemnity claims against the insurers.

This decision is significant for its treatment of post-settlement allocation of uncovered and covered claims.  For complex cases, the decision requires expert testimony, or waiver of attorney-client privilege on the underlying case, to overcome a sufficiency-of-the-evidence challenge.  For experts to testify on apportionment in a complex case, all the underlying cases and counts must be considered.

We will continue to monitor this on appeal and other decisions involving allocation of indemnity.  If you have any questions about this or any other matter please contact Bob Kuderer or Tom Brock.