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(Article from Insurance Law Alert, October 2017)

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The Second Circuit ruled that although a liability policy covered a portion of losses arising from faulty construction claims, the insurer had no duty to indemnify based on the policyholder’s inability to allocate the underlying jury verdict between covered and non-covered losses.  Univo v. Harleysville Worcester Ins. Co., 2017 WL 4127538 (2d Cir. Sept. 19, 2017).

The dispute arose out of faulty construction claims against a general contractor.  In the underlying suit, a jury awarded the homeowners approximately $317,000 in general damages and $83,000 in consequential damages.  In a subsequent coverage action, a New York district court ruled that at least some of the underlying claims were covered by the contractor’s general liability policy.  In particular, the court concluded that losses arising from damage to others’ work or property was covered but that claims based on the contractor’s own defective work were not covered.  Notwithstanding this finding, the court held that the insurer had no indemnity obligation because the homeowners were unable to establish a reliable method for allocating between covered and non-covered losses.  The Second Circuit affirmed.

The Second Circuit ruled that the burden of allocating damages rests with the policyholder, not the insurer.  Additionally, the court rejected the notion that the insurer should bear the burden in this case, based on its alleged failure to advise the contractor to use special interrogatories in the underlying action that would have established allocation.  The court explained that New York law does not support this type of burden shift, and that in any event, the insurer made it clear in a motion to intervene in the underlying case that it believed most, if not all, of the damages were not covered.  Finally, the court held that the homeowners failed to meet their burden, explaining that the damages awarded did not correspond with any of the evidence submitted in the underlying case and that the homeowners failed to suggest any alternative method for allocating damages.