Insured’s Failure to Allocate Settlement Between Covered and Uncovered Claims Precludes Recovery

The United States District Court for the Southern District of Florida, applying Florida law, has held that an insurer had no obligation to provide any coverage for its insured’s unallocated, lump-sum settlement payment made in exchange for global resolution of a lawsuit because the insured failed to meet its burden of allocating the payment between covered and uncovered claims. Around the Clock A/C Serv., LLC v. Travelers Cas. & Surety Co. of Am., 2022 WL 678799 (S.D. Fla. Jan. 31, 2022)

In the underlying action, a former manager of an air conditioning sales and service company sued the company and several of its members following his termination.  The lawsuit asserted fifteen causes of action, including for alleged breach of the company’s operating agreement, pursuant to which the former manager claimed he had a membership interest in the company. 

The company reported the underlying action to its employment practices liability insurer.  The insurer acknowledged potential coverage for some causes of action and agreed to provide defense coverage but asserted numerous defenses to indemnity coverage.  When the company agreed to settle the underlying action, the insurer agreed to contribute only that portion of the settlement amount that constituted avoided costs of defense.  The insurer declined to contribute anything further because the only potentially covered causes of action had no value.  With knowledge of this position, the company agreed to a settlement providing for a global release of all claims in exchange for a lump-sum payment. 

The company then filed a coverage action against its insurer, seeking to recover the full amount of the settlement.  On cross-motions for summary judgment, the court ruled in the insurer’s favor.  Under Florida law, the party seeking coverage for a settlement has the burden of proving the settlement is covered under the appliable policy, which requires allocation between covered and uncovered claims.  The court held that the causes of action in the underlying action for breach of the operating agreement were not covered because the operating agreement was not an “employment agreement.”  Because the settlement agreement resolved the underlying action in its entirety, including these uncovered claims, and did not allocate the settlement payment, the insured failed to satisfy its burden of proving coverage for the settlement and therefore was not entitled to any recovery from its insurer.