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A recent decision by the West Virginia Supreme Court of Appeals could affect cases that an insurance company may be defending subject to a reservation of rights. Insurers must now be pro-active to raise and preserve potential coverage defenses. Failing to ensure that essential interrogatories are posed to the jury could foreclose the insurer from later contesting its coverage obligations.
In Camden-Clark Memorial Hospital Association v. St. Paul Fire & Marine Insurance Co., 682 S.E.2d 566 (W.Va. 2009), the insured had a policy of professional liability coverage, but the policy had a large self-insured retention and it also required the insured to defend the claims. The jury found against the hospital and it awarded in excess of $6,500,000. Unfortunately, the jury verdict did not differentiate whether the verdict rested upon negligent or intentional conduct, or both. The court held that an insured that defended itself in the medical malpractice case had the burden of demonstrating the allocation of a verdict between covered and non-covered claims, and it required the insured to pose a special interrogatory to the jury in order to seek that apportionment. In reaching that conclusion, the court cited with approval a case decided under Oklahoma law, wherein the court imposed the duty to ask a special interrogatory upon an insurer that defended a case under a reservation of rights. Id. at 575-76, citing Magnum Foods, Inc. v. Continental Casualty Co., 36 F.3d 1491, 1498-99 (10th Cir. 1994). The upshot of Camden-Clark was that the insured could not obtain an allocation of the verdict between covered and non-covered claims after the fact because it controlled its own defense in the medical malpractice case and it failed to avail itself of the opportunity to have the jury make the required allocation in the first instance.
The discussion by the Supreme Court in Camden-Clark appears also to encompass situations in which the issue is not the allocation of damages between covered and non-covered claims, but also the imposition of liability on covered or non-covered theories. For example, a simple case involving issues of whether the insured acted intentionally (which would be excluded) or negligently (which would be covered) would seem to fall within the same paradigm.
The critical factor that animated the court’s decision in Camden-Clark was the identity of the party controlling the defense. In that case, it was the insured that controlled the defense and, accordingly, it had the burden to request special verdict findings. However, the court relied on authority that involved a defense provided by the insurer. To paraphrase the Oklahoma decision cited in Camden-Clark: the right to control the litigation carries with it the duty to ensure that the jury answers all necessary questions to determine, after the verdict is returned, whether the claim is covered or not; or whether the damages awarded are covered or not.
Insurers are now subject to some risk that they will not be able to obtain determinations, after a general verdict is rendered, that the liability was imposed upon the insured for some reason that would be excluded from coverage. Similarly, if there is a general verdict for damages, some elements of which may be covered and some not, the insurer is at risk if it fails to request the allocation between covered and non-covered items of damage. To be able to identify the basis for liability or the nature of the damages, it is now incumbent to ask for a special interrogatory in the trial of the underlying action. Failing to ask for such an interrogatory, when in control of the defense, could be fatal to a subsequent coverage action.
Although the West Virginia Supreme Court alluded to the potential for conflict of interest, it seems that the court lost sight of another important issue. When the insurer is providing a defense to an insured under a reservation of rights, it is the responsibility of the defense counsel to protect the insured’s interests, not the interests of the insurance company. Thus, defense counsel would not normally be in a position to posit the special interrogatories that Camden-Clark now requires. For defense counsel to pose the interrogatory could jeopardize the insured’s rights to coverage and, thus, the defense counsel could not ask the special interrogatory due to the duty of care owed to the insured.
How, then, is the insurer to protect itself? It seems that the only way that the insurer can obtain the special interrogatory under such circumstances would be to hire separate counsel to represent the company as an intervenor to request the special interrogatory. That would avoid the conflict of interest that would otherwise confront the defense counsel when the case is proceeding subject to a reservation of rights.
In light of this recent case, it may be advisable for insurers to take stock of what cases are being defended in West Virginia under reservations of right; to consider whether special interrogatories will be necessary to allocate the verdict or to identify the theory of liability, or to address any other potential question that may affect a subsequent coverage determination; and to be ready to undertake a more pro-active approach to the jury instructions and special verdict forms.