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February 20, 2018 Practice Points

Inability to Prove Damages Precludes Insurance Coverage for Homeowner Who Prevailed on Defects Claims

The U.S. Court of Appeals for the Second Circuit affirmed a District Court’s ruling that homeowners could not recover from a contractor’s insurer because the verdict had not proven which damages were covered under the insurer’s policy.

by Rebecca Woods

The U.S. Court of Appeals for the Second Circuit affirmed a District Court’s ruling that homeowners who prevailed against a contractor for defective work could not recover from the contractor’s insurer because the verdict had not proven which damages were covered under the insurer’s policy.

In Uvino v. Harleysville Worcester Insurance Company, 708 Fed. Appx. 16 (2017), the homeowners (Uvinos) had hired J. Barrows, Inc. (JBI) to manage the construction of their home. The Univos fired JBI for poor work and sued JBI. JBI’s commercial general liability insurer, Harleysville Worcester Insurance Company provided a defense and, in the course of the litigation, sought to intervene so that it could establish which of the complained-of defective work was covered (damage to other property), and which defective work was not covered (defective work by JBI). JBI opposed the intervention claiming a conflict of interest; the Uvinos took no position. Harleysville’s motion was denied and it reserved its right to contest coverage later in the proceeding.

While the Uvinos presented detailed damages to the jury, the verdict awarded the Univos unallocated general damages and consequential damages. The jury was not asked to, and did not, discern which specific damages it was granting to the Univos, nor was the jury asked to allocate as between insured and uninsured damages. The Univos then sued Harleysville to recover both the direct and consequential damages. On summary judgment, the District Court determined the Univos had not presented an “intelligible method of separating those damages awarded to them by the jury that the Harleysville policy covers and those that it does not.”

On appeal, the Second Circuit affirmed the principle that under New York law (as in most jurisdictions), the insured bears the burden of both establishing coverage under a policy and identifying covered damages in a jury verdict. The Second Circuit then analyzed, in these circumstances, who among the third-party claimant (the Univos), the insured (JBI), and the insurer had an obligation to prove which damages were covered under the policy and which were not. The Second Circuit rejected the Univos’ argument that Harleysville bore the burden because it failed to advise JBI of its interest in using special interrogatories to allocate between covered and uncovered damages. The Second Circuit cited a medley of reasons not to shift the burden to the insurer, including that the insurer had made clear it believed most of the damages were not covered, JBI rejected the use of special interrogatories to allocate damages, the Univos took no position on the motion to intervene by Harleysville, Harleysville had reserved its rights to later contest coverage, and the Univos had several opportunities to present evidence allocating among covered and uncovered damages. The District Court’s grant of summary judgment to the insurer was thus upheld.

Take-aways: From the contractor perspective, it is risky to oppose a request for special interrogatories in a defects case where there is insurance and the insurer has reserved its rights that some of the damages may be covered and some may not be. JBI’s decision here may have cost it the benefit of some insurance coverage to cover the verdict. The third-party claimant is equally at risk for failing to establish, and seek from the jury, clarity among covered and uncovered damages if the contractor is judgment-proof. From the insurance perspective, the Second Circuit’s invocation of factors in its decision both lays out a path for an insurer to avoid paying unallocated uncovered damages and even covered damages, and creates some uncertainty that the determination of whether to shift the burden to the insurer depends on circumstances and not a rule of law.

Rebecca Woods is with Seyfarth Shaw, LLP, Atlanta.

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