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UnitedHealth Group, Inc. v. Columbia Cas. Co.

United States District Court, D. Minnesota

April 25, 2013

UNITEDHEALTH GROUP INCORPORATED, a Minnesota corporation, Plaintiff,
v.
COLUMBIA CASUALTY COMPANY, an Illinois corporation; FIREMAN'S FUND INSURANCE COMPANY; AMERICAN ALTERNATIVE INSURANCE CORPORATION; EXECUTIVE RISK SPECIALTY INSURANCE COMPANY; FIRST SPECIALTY INSURANCE CORPORATION; STARR EXCESS LIABILITY INSURANCE INTERNATIONAL LIMITED; LIBERTY MUTUAL INSURANCE COMPANY; STEADFAST INSURANCE COMPANY; and NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA; Defendants

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David B. Goodwin and Michael S. Greenberg, COVINGTON & BURLING, LLP; Jeffrey J. Bouslog and Christine N. Lindblad, OPPENHEIMER WOLFF & DONNELLY LLP, for plaintiff.

Ronald P. Schiller, Daniel J. Layden, Robert L. Ebby, and Jacqueline R. Dungee, HANGLEY ARONCHICK SEGAL & PUDLIN, for defendants Executive Risk Specialty Insurance Company and First Specialty Insurance Corporation.

David P. Pearson, Thomas H. Boyd, and Sofia A. Estrellado, WINTHROP & WEINSTINE, PA, for defendants Starr Excess Liability Insurance International Limited and National Union Fire Insurance Company of Pittsburgh, PA.

OPINION

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ORDER

Patrick J. Schiltz, United States District Judge.

Plaintiff UnitedHealth Group Inc. (" United" ) brought this coverage action against ten insurance companies -- United's primary insurer (Lexington Insurance Company or " Lexington" ) and nine of United's excess insurers -- asking this Court to determine, with respect to each of

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several dozen claims that were brought against United during the period December 1, 1998, through December 1, 2000, which of the ten insurers must indemnify United or pay United's defense costs. With the assistance of a mediator, the parties and the Court have been breaking this unwieldy litigation into manageable pieces. The Court has ruled on numerous dispositive motions, and certain issues were tried to a jury in May 2012. At this point, Lexington's policy limits have been exhausted, and United has settled with five of its excess insurers. That leaves four insurers as defendants: Executive Risk Specialty Insurance Company (" Executive Risk" ); First Specialty Insurance Corporation (" First Specialty" ); Starr Excess Liability Insurance International Limited (" Starr" ); and National Union Fire Insurance Company of Pittsburgh, PA (" National Union" ).

This matter is before the Court on several summary-judgment motions:

First, Executive Risk and First Specialty move for summary judgment on a number of issues, including (a) whether United's failure to allocate the $350 million AMA / Malchow settlement between covered and uncovered claims precludes United from seeking coverage for any part of that settlement; (b) whether Items 1 to 9 in the definition of " Ultimate Net Loss" in the Executive Risk policy are conditions of coverage on which United bears the burden of proof or exclusions from coverage on which Executive Risk bears the burden of proof; and (c) whether the First Specialty policy incorporates the definition of Ultimate Net Loss in the Executive Risk policy.[1]

Second, National Union moves for summary judgment as to the AMA claim on the ground that United failed to provide timely notice of that claim.

Finally, United (on the one hand) and Executive Risk and First Specialty (on the other hand) cross-move for summary judgment on the issue of whether and to what extent the Antitrust Endorsement in the Lexington primary policy is incorporated into the Executive Risk and First Specialty excess policies.

The Court addresses each motion in turn and assumes familiarity with the underlying facts and procedural posture of this case.

I. EXECUTIVE RISK AND FIRST SPECIALTY'S MOTION [ECF NO. 1331]

Executive Risk and First Specialty move for summary judgment on the following issues:

First, Executive Risk and First Specialty seek summary judgment that they owe nothing with respect to the AMA claim because United did not allocate the $350 million AMA / Malchow settlement between covered and uncovered claims -- either at the time that the settlement was reached or at any time thereafter. The parties also ask the Court to resolve disputes over certain burden-of-proof issues related to allocation, and the insurers ask the Court to exclude the testimony of United's expert on allocation.

Second, Executive Risk and First Specialty seek summary judgment that Items 1 to 9 in the definition of Ultimate Net Loss in Executive Risk's policy are conditions of coverage on which United bears the burden of proof, and not exclusions from coverage on which Executive Risk bears the burden of proof.

Finally, First Specialty seeks summary judgment that its policy incorporates the definition of Ultimate Net Loss in the Executive Risk policy -- i.e., that a loss that is

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not covered under the Executive Risk policy because it falls outside of that policy's definition of Ultimate Net Loss is also not covered under the First Specialty policy.

The Court addresses these issues in reverse order.

A. Ultimate Net Loss

With respect to questions concerning Ultimate Net Loss: For the reasons stated on the record at the February 20, 2013 hearing, the Court finds both (1) that the First Specialty policy is, at best, ambiguous about whether it incorporates the Executive Risk policy's definition of Ultimate Net Loss,[2] and (2) that Items 1 to 9 in the definition of Ultimate Net Loss are exclusions from coverage on which Executive Risk bears the burden of proof rather than conditions of coverage on which United bears the burden of proof. Cf. Auto-Owners Ins. Co. v. Jensen, 667 F.2d 714, 720 (8th Cir. 1981) (applying Minnesota law and finding that the phrase " neither expected nor intended from the standpoint of the insured" was an exclusion even though it was embedded in the same sentence granting coverage). The Court therefore denies Executive Risk and First Specialty's motion with respect to issues concerning Ultimate Net Loss.

B. Allocation

1. United's Failure to Contemporaneously Allocate

With respect to questions concerning allocation: As discussed at the February 2013 hearing, the Court is not aware of -- and the insurers have not cited -- any Minnesota case holding that an insured must, at the time of settlement, allocate the settlement between covered and uncovered claims or risk losing insurance coverage for any covered claim.[3] The closest the insurers come is Bor-Son Building Corp. v. Employers Commercial Union Insurance Co. of America, 323 N.W.2d 58 (Minn. 1982). In Bor-Son, however, the Minnesota Supreme Court faulted the insured both for failing to contemporaneously allocate and for later failing to offer proof that it had paid money to settle a covered claim. Id. at 64. Bor-Son thus implies that a contemporaneous allocation is not the only method by which an insured

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can establish that it incurred a covered loss.

Other Minnesota cases quite clearly allow an insured to seek indemnity for covered claims despite the settling parties' failure to allocate between covered and uncovered claims at the time of settlement.[4] Indeed, even when the parties have allocated -- in writing -- at the time of settlement, Minnesota courts have allowed the insured to later argue for an allocation that differs from the settling parties' contemporaneous allocation. See Gulf Ins. Co. v. Skyline Displays, Inc., 361 F.Supp.2d 986, 991-92 (D. Minn. 2005) (denying summary judgment in light of evidence that the settling parties' written allocation was solely for tax purposes and did not represent the true allocation of the settlement proceeds).

Even the non-Minnesota authority on which the insurers mainly rely -- Clackamas County v. Midwest Employers Casualty Co., No. 07-780, 2010 WL 5391577 (D. Or. Dec. 22, 2010), aff'd, 473 Fed.Appx. 782 (9th Cir. 2012) -- does not provide much support for their position. True, the district-court opinion in Clackamas County contains broad language that could be read to require contemporaneous allocation, but the Ninth Circuit expressly rejected such a reading of the district court's opinion:

The County frames the issue on appeal as whether the Magistrate Judge erred in requiring contemporaneous allocation of the settlement proceeds. However, that was not the basis of the Magistrate Judge's ruling. Instead, the Magistrate Judge found that no probative evidence of damages was presented . . . .

Clackamas Cnty., 473 Fed.Appx. at 783.

Likewise, the other cases on which the insurers rely do not hold that contemporaneous allocation is required on pain of forfeiture. See, e.g., Cont'l Cas. Co. v. Sycamore Springs Homeowners Ass'n, Inc., 652 F.3d 804, 805-06 (7th Cir. 2011) (" But neither the parties to the settlement nor the state judge tried to apportion the recovery. The Association might have asked the federal district judge to do this but it did not. Its request that we remand for this purpose comes too late." ); Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F.Supp. 324, 334-35 (E.D. Pa. 1991) (holding that the insured failed to offer evidence from which the court could determine allocation between covered and uncovered claims), aff'd in part and rev'd in part on other grounds, 961 F.2d 209, Nos. 91-1480, 91-1527, (3d Cir. Mar. 19, 1992) (unpublished table disposition).

In sum, United's failure to allocate at the time of settlement does not bar United from recovering from the insurers. United may allocate now -- in this litigation -- through expert testimony and other evidence, as it proposes to do.

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2. Burdens of Proof

The parties next dispute who bears the burden of proof as to allocation. It is important to identify exactly what the parties do and do not dispute, and that takes a bit of explaining.

As to United: The parties agree that, because United is the insured, it bears the initial burden of proving that a claim is within a policy's grant of coverage. Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819 N.W.2d 602, 617 (Minn. 2012). The parties also agree that the AMA / Malchow settlement encompassed at least some claims that are not within any grant of coverage. See ECF No. 1377 at 185-86. Specifically, the AMA / Malchow settlement included claims -- most significantly, the Malchow claim -- for which United has not sought coverage in its pleadings and that United has not contended are within any grant of coverage.[5] See ECF No. 556 ¶ 3 (" Defendants are obligated to indemnify UHG for the portion of the $350 million settlement attributable to resolving the AMA Claim, as well as defense fees and costs incurred in defending the AMA Claim." (emphasis added)). Finally, the parties agree that United has the burden to prove not only what claims are within a grant of coverage, but also what portion of the AMA / Malchow settlement should be allocated to those claims. See Bor-Son Bldg. Corp., 323 N.W.2d at 64; ECF No. 1377 at 215, 245.

As to the insurers: The parties agree that the insurers bear the burden to prove that a claim falls within a policy exclusion. Remodeling Dimensions, 819 N.W.2d at 617. Suppose, then, that the AMA / Malchow settlement encompassed ten claims -- Claim Nos. 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10 -- and United succeeded in proving that Claim Nos. 1, 2, 4, 5, 6, 8, 9, and 10 were within a grant of coverage. The parties agree that each insurer would have the burden of proving -- with respect to each of the eight claims that were within a grant of coverage -- that the claim fell within a policy exclusion.

Suppose that the insurers succeed in proving that Claim Nos. 2, 5, 8, and 9 fell within a policy exclusion. At that point, we would know that: (1) the AMA / Malchow settlement encompassed ten claims; (2) four of those claims -- Claim Nos. 1, 4, 6, and 10 -- were covered; (3) two of those claims -- Claim Nos. 3 and 7 -- were not covered because they were not within a grant of coverage; and (4) four of those claims -- Claim Nos. 2, 5, 8, and 9 -- were not covered because, although within a grant of coverage, they fell within a policy exclusion.

Here is what the parties dispute: The insurers argue that United bears the burden of proving how the $350 million AMA / Malchow settlement should be allocated between the covered claims (Claim Nos. 1, 4, 6, and 10) and all of the uncovered

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claims (Claim Nos. 2, 3, 5, 7, 8, and 9). United disagrees. It concedes that United has the burden of proving how the AMA / Malchow settlement should be allocated between claims that are within a grant of coverage (Claim Nos. 1, 2, 4, 5, 6, 8, 9, and 10) and claims that are not within a grant of coverage (Claim Nos. 3 and 7). But, United argues, the insurers have the burden of proving how the AMA / Malchow settlement should be allocated between, on the one hand, claims that are within a grant of coverage and not within an exclusion (Claim Nos. 1, 4, 6, and 10) and, on the other hand, claims that are within a grant of coverage and within an exclusion (Claim Nos. 2, 5, 8, and 9).

In support of their position, the insurers point out that the question of whether an exclusion applies to one or more claims is separate and distinct from the question of how a settlement should be allocated between covered and excluded claims. The fact that the insurers bear the burden on the former question does not mean that they must bear the burden on the latter question. The insurers argue that, if they prove that the AMA / Malchow settlement encompassed one or more claims that fell within a policy exclusion, United should then bear the burden of proving how the settlement should be allocated between covered and excluded claims. See Exec. Risk Indem., Inc. v. CIGNA Corp., Nov. Term, 2004 No. 01495, slip op. at 20-25 (Phila. Cty. C.C.P. Mar. 23, 2012) (holding that insured bore the burden to prove allocation between covered and excluded claims).[6]

The Court finds the insurers' argument persuasive. To begin with, an insured (like any plaintiff) bears the burden of proving its damages. Cf. Bor-Son Bldg. Corp., 323 N.W.2d at 64 (insured's failure to establish the amount that it paid to settle a covered claim precluded recovery); N. States Power Co. v. Fid. & Cas. Co. of N.Y., 523 N.W.2d 657, 664 (Minn. 1994) (when allocating damages between insurers for environmental liability, insured bears the burden of proving the total amount of damages for which coverage may exist); Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724, 738 (Minn. 1997) (" It is axiomatic that in order to establish its right to defense costs, an insured must first meet its burden of establishing that the costs sought were in fact reasonable and necessary to its defense of the action." ). Requiring United to allocate between covered and excluded claims can be understood as a specific application of this general principle. In requiring United to allocate, the Court is simply requiring United to prove how it was harmed by the insurers' breach of their policies.

Setting that aside, there are compelling reasons to impose the allocation burden on United in this case. United controlled the underlying litigation, and it negotiated the AMA / Malchow settlement. The insurers did not play a meaningful role in those settlement negotiations. For that reason, United is not only in a better position to know how the settling parties valued the claims,[7] but United was able to shape the record on that issue -- and to do so at a time when United knew that allocation

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would almost certainly become a crucial issue in coverage litigation. See Schiller Decl., Jan. 9, 2013 [ECF No. 1338] Ex. 12 (letter from insurer explicitly requesting that United allocate the settlement). Despite all of this, United chose not to allocate the settlement. Under these circumstances, it hardly seems fair to force the insurers to bear the burden of proof on allocation.

In addition, United concedes that it bears the burden of allocating between claims that fall within a grant of coverage and claims that do not. Imposing that burden on United, while imposing on the insurers the burden of allocating between claims that fall within an exclusion and claims that do not, would require the Court (or a jury) to perform an almost impossibly complex task.

Finally, although this is not a Miller-Shugart case, it is instructive that, in the Miller-Shugart context, Minnesota courts not only impose the burden of allocation on the insured, but they require that the allocation be contemporaneous, as well as non-collusive and reasonable.[8] This demonstrates that, when circumstances warrant, Minnesota courts will impose a burden on an insured with respect to allocation that is even heavier than the burden that the insurers seek to impose on United here. The Court agrees with the insurers that, under the circumstances of this case, United should bear the burden of proof on allocation.

United has not offered any reason to impose the burden of allocation on the insurers beyond the general rule that insurers bear the burden of proving that a policy exclusion applies. The Court agrees with the insurers, however, that coverage questions -- such as whether a claim falls within a policy exclusion -- are distinct from allocation questions. Thus, the fact that the insurers bear the burden to prove that a claim is within a policy exclusion does not dictate that the insurers must also bear the burden to prove how much of the settlement should be allocated to that claim.

United also contends that, whatever logical force the insurers' arguments may have, Minnesota law precludes placing the burden on the insured to allocate a settlement between covered and excluded claims. United cites SCSC Corp. v. Allied Mutual Insurance Co., 515 N.W.2d 588 (Minn. Ct. App. 1994), aff'd in part, rev'd in part, 536 N.W.2d 305 (Minn. 1995), overruled by Bahr v. Boise Cascade Corp., 766 N.W.2d 910 (Minn. 2009), as a " prominent example" of this rule. ECF No. 1359 at 34. But United reads far too much into SCSC Corp.

In SCSC Corp., an insured that had been ordered to clean up soil and groundwater contamination sought coverage from its insurers. The insured's site had been contaminated many times over many years, and thus the insurers argued that the loss suffered by the insured would have to be allocated between insured and uninsured time periods. SCSC Corp., 515 N.W.2d at 597. The Court of Appeals held that the insurers bore the burden of proving that the damage to the insured's site was capable of being allocated in this manner. Id.

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The holding in SCSC Corp. has little relevance to this case. To begin with, SCSC Corp. was addressing one of the " special problems associated with environmental liability insurance cases, where damages are continuous and where for all practical purposes the bodily injury or property damage suffered during different policy periods is indivisible." In re Silicone Implant Ins. Coverage Litig., 667 N.W.2d 405, 418 (Minn. 2003) (citation and quotations omitted). The special problem of divisibility of damages in environmental-cleanup cases -- a problem that is inherent in the continuous nature of most environmental contamination -- has little to do with this case, which (despite its immense scale and complexity) is at bottom a traditional coverage action regarding insurers' obligations with respect to an insured's settlement of covered and uncovered claims.

Setting that aside, SCSC Corp. also has little relevance here because it has nothing to do with the rule on which United relies -- namely, the rule that an insurer has the burden of proving that a policy exclusion applies. SCSC Corp. was not addressing a policy exclusion; [9] rather, it was addressing whether and how to allocate damages between insured and uninsured time periods. To resolve that issue, SCSC Corp. relied on a different principle that applies as a general matter in all civil litigation -- namely, the principle that a party who must plead a fact, or who would benefit from establishing a fact, should bear the burden of proving that fact. SCSC Corp., 515 N.W.2d at 597. Notably, this principle may be altered as justice requires. See Holman v. All Nation Ins. Co., 288 N.W.2d 244, 248 (Minn. 1980) (" [c]onsiderations of fairness," including that the relevant evidence was within the defendant's control, dictated that burden should be imposed on the defendant despite the general rule); Tex. Commerce Bank v. Olson, 416 N.W.2d 456, 461 (Minn. Ct. App. 1987) (stating that " [g]enerally" the burden of ...


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