For one of its last decisions for the January Term, the Supreme Court of Appeals of West Virginia answered certified questions from a federal court attempting to determine insurance coverage for a substantial medical malpractice verdict.

In Camden-Clark Memorial Hosp. Ass’n v. St. Paul Fire and Marine Ins. Co., 2009 WL 1835016 (W.Va. 2009), the Supreme Court answered two certified questions from the United States District Court for the Southern District of West Virginia in a declaratory judgment action filed by Camden-Clark

Camden-Clark’s insurance policy with St. Paul provided $1,000,000 in coverage for bodily injury and medical negligence claims, $2,000,000 in self-insured retention, and $15,000,00 in excess liability coverage. The policy did not contain an exclusion for punitive damages, nor did it require St. Paul to defend Camden-Clark, although St. Paul had the option to join in the defense for claims that could exceed the self-insured retention. 

The jury’s verdict against Camden-Clark awarded compensatory and punitive damages of $6.5 million for claims of fraudulent concealment, negligence, and vicarious liability. But the verdict form did not require an allocation of liability between negligent and intentional conduct. 

Camden-Clark claimed that coverage existed for the judgment against it of $4,834,380.00, which was the amount of the verdict remaining less punitive damages against co-defendants and offsets for settlements with co-defendants after their punitive damages awards were satisfied.

St. Paul claimed that the burden for proving that coverage existed for the intentional torts and punitive damages rested with Camden-Clark, even though St .Paul did not exercise its right under the policy to submit special interrogatories to the jury that would differentiate between damages for intentional conduct versus damages for negligence.

The district court determined that West Virginia law was unclear as to who had the burden for proving coverage, and certified two questions to the Supreme Court of Appeals:

Under West Virginia law, when an insured is found liable for a tort, and the complaint indicates that the tort could be based on conduct that the insurance policy covers, on conduct that the insurance policy does not cover, or both, and when the jury verdict does not specify which conduct gave rise to the insured’s liability, does the insured bear the burden of proving that the liability was based on covered conduct, or does the insurer bear the burden of proving that the liability was based on non-covered conduct?

Under West Virginia law, when a jury awards punitive damages against an insured, and the punitive damages could be based on a claim covered by the insurance policy, on a claim not covered by an insurance policy, or both, does the insured bear the burden of proving that the punitive damages were based upon a covered claim, or does the insurer bear the burden of proving that the punitive damages were based on a non-covered claim?

The Supreme Court determined that West Virginia law adhered to the majority view regarding shifting burdens of proof in insurance coverage disputes, which is that an insured bears the burden of first demonstrating the existence of coverage, after which the burden shifts to the insurer to prove that an exclusion applies.

Important to the court’s reasoning was that the policy’s self-insured retention provision, which meant that  St. Paul did not have to defend, gave Camden-Clark significant control over its defense of the action.  If St. Paul is not defending the action, does it have an obligation to allocate the verdict between covered and non-covered claims? After reviewing decisions from several jurisdictions, the court concluded that "the insured’s ordinary burden to allocate a verdict between covered and non-covered claims does not shift to an insurer unless the insurer has an affirmative duty to defend the insured under the policy terms."

The Supreme Court answered the certified question regarding allocation of an insured’s liability between covered and non-covered conduct as follows:

When a policy of insurance does not impose a duty to defend upon the insurer and the insured has controlled the defense of the underlying claims, if a court determination regarding allocation of a jury verdict between the claims covered by the terms of the policy and the claims not covered by the the terms of the policy is sought, the insured has the burden of proof to establish proper allocation.

And the Court answered the certified question regarding allocation of punitive damages between covered and non-covered conduct as follows:

In order to obtain indemnification under a policy of insurance which does not exclude punitive damages and under which there is no duty to defend, an insured who has controlled the defense in a case resulting in a punitive damage award and who seeks a court determination regarding allocation of the award has the burden of proving that the claim or claims on which the punitive damage award is based is covered by the terms of the policy.

The holding of this case may have a lot of insureds reviewing their insurance policy language, particularly where they have self-insured retentions, such as Camden-Clark. If the retention relieves the insurer of its duty to defend the insured, and the insured experiences an adverse verdict, then the insured must prove that damages are attributable to covered, as opposed to non-covered, claims.