On July 18, 2013, a Pennsylvania appellate court held that class action defendant Cigna Corporation (Cigna) was not entitled to insurance coverage for any part of a settlement it paid to plaintiffs because Cigna did not allocate the settlement between covered and excluded claims. Executive Risk Indemnity Inc. v. Cigna Corp., case no. 1117 EDA 2012 (Pa. Superior Ct. July 18, 2013) Cigna, along with other HMOs, had been sued by doctors who claimed that the HMOs systematically underpaid claims by billions of dollars for more than a decade. Cigna settled the plaintiffs’ claims for breach of contract and for violations of the Racketeer Influenced and Corrupt Organization Act (RICO) for approximately $170 million. The settlement agreement did not allocate the settlement payments between the breach of contract and RICO claims.
Cigna submitted a claim for the settlement to its excess insurer, Executive Risk Indemnity, Inc. (ERI), which denied the claim and filed a declaratory judgment action. On cross motions for summary judgment, the trial court granted ERI’s motion on the ground that the settlement of the breach of contract and RICO claims fell with the ERI policy’s breach of contract exclusion. On appeal, an appellate court reversed, finding that although the breach of contract claims were excluded under the ERI policy, the RICO claims were covered. Consequently, the court remanded the case for a hearing so that the settlement could be allocated between the covered and excluded claims.
At that hearing, the trial court ruled that Cigna had the burden to prove the allocation of settlement funds between the breach of contract and RICO claims. Cigna presented evidence that the parties intended the RICO claims to constitute 75% of the settlement. Neither party produced expert testimony on the issue of what allocation of funds should have been when the case was settled. The trial court ultimately ruled that Cigna had not met its burden, and a second appeal followed.
On that appeal, Cigna asserted that the trial court improperly placed the burden on Cigna to prove the allocation between covered and uncovered claims because of the fundamental precept that ERI, as the insurer, had the burden to establish that any policy exclusion applied. The appellate court disagreed, stating that “proof of a policy exclusion and proof of allocation of excluded policy claims are distinctly different inquiries.” Therefore, the court “agree[d] with the trial court that the insured is the party that should bear the burden of proof for apportionment of claims in this case.” In coming to that conclusion, the court noted that the insured was the party that had access to the evidence and the parties’ intent behind the settlement process, particularly because the settlement was based on claim forms detailing the individual contract breaches and resultant damages. The court also highlighted the facts that Cigna drafted the settlement agreement, chose counsel to negotiate the settlement, and controlled the underlying litigation, all while it was fully aware that allocation between the breach of contract and RICO claims would become an insurance coverage issue. Cigna also told ERI not to attend or participate in the mediation with the plaintiffs for fear that ERI’s presence would drive the settlement demand higher because the plaintiffs would infer that the claims were covered. The court further noted that ERI, “a third party that was not privy to the settlement process,” was not in a position to determine what portion of the settlement was for the covered claims. Accordingly, the court held that the trial court properly put the burden on Cigna to prove allocation.
With regard to Cigna’s argument in the underlying hearing that 75% of the settlement was for the RICO claims, the appellate court refused to reverse the trial court’s ruling that Cigna’s evidence in that regard was insufficient, especially since Cigna previously had stated that the RICO claims were weak and Cigna never meaningfully assessed its RICO exposure in any document. The trial court’s ruling of no coverage therefore was affirmed.
In a short but pointed dissent, one appellate judge said that the trial court tried the wrong issue. The real issue, according to the dissenter, was how should the settlement have been allocated between covered and excluded claims, and not how was it allocated.
Regardless of who was right on that point, this case provides a good example of why insurance coverage issues should be considered carefully throughout the defense and settlement of class action lawsuits. Failure to do so can result in a finding of no coverage.