The 11th Circuit Court of Appeals granted summary judgment in favor of an insurer in a suit filed by a judgment creditor under Alabama’s direct action statute because the judgment creditor was unable to show the verdict was covered by the defendant’s policy. This resulted from a series of events, each serving as a warning to plaintiff and defense counsel alike.
A Bad House Case
It started as a “bad house” case filed by homeowners Robert and Mindy Barton against their builder, Alliston. The Bartons alleged Alliston negligently and wantonly damaged their home by violating building codes, industry standards, and mismanaging the subcontractors. Right away, those of you familiar with commercial general liability policies will think about the difference between damage a builder may cause by negligence as opposed to “’property damage’ to ‘your work’ arising out of it or any part of it” provided that the damage was “included in the ‘products-completed operations hazard.’” Barton v. Nationwide Mut. Fir Ins. Co., 2023 U.S. App. LEXIS 433 at *5. Nationwide had the same thoughts, eventually denying coverage and withdrawing the defense it had been providing. Alliston did not hire replacement counsel.
A General Verdict
Sensing an opportunity, the Bartons filed for summary judgment for negligence and wantonness and were successful on both. The Bartons argued Alliston failed to use reasonable care building their home and deliberately violated building codes, thus knowing damage would result. The Bartons claimed $450,000.00 in property damage and the same amount in mental anguish. In granting the motion, the trial court entered a very brief order, consisting of four sentences, and awarding $900,000.00 “based on evidence submitted by [the Bartons] regarding damages sustained to their home and emotional distress.” Id at *4. In other words, the verdict was essentially a general verdict including two claims and combined damages for the alleged misconduct. With scant resistance from the unrepresented defendant, Plaintiffs had the chance to present testimony and arguments that would fall squarely within the coverage provided by the CGL. However, they aimed too broadly, asking for and receiving a verdict on all claims and damages – despite knowing the claims and damages they pled had led to the denial of coverage.
This became a problem when the Bartons sued Nationwide in the USDC to collect the verdict. Nationwide argued the Bartons sought compensation for defective work – which is not covered by the CGL policy – instead of for damages resulting from that work – which may have been covered. The Order offered no help, as it contained indistinct damages for wantonness (not covered), negligence (may be covered), defective work (not covered), damages resulting from that work (again, maybe covered), emotional distress (not covered), or for “other concerns” (potentially covered). The Bartons presented their case in chief and Nationwide called no witnesses, instead moving for a judgment as a matter of law. The trial court allowed the parties to submit proposed findings of facts and conclusions of law, and ultimately ruled the verdict was not covered.
Importantly, there was no underlying record from which the USDC could determine how much of the award was covered, and the Bartons had the burden of proof. The Court relied on Pa. Nat’l Mut. Cas. Ins. Co. v. St. Catherine of Siena Par., 790 F.3d 1173, 1180 (11th Cir. 2015), itself an Erie guess, for the proposition “[T]he party seeking coverage under [an insurance policy] bears the burden of proving that coverage exists. When an insured causes multiple injuries, coverage is determined on an injury-by-injury basis, and the insurer is obligated only to indemnify for damages arising out of the covered injuries.” Id. The court could not discern what damages may have been covered, since the plaintiffs had asked for a variety of different damages from the trial court, without care as to which were outside the policy. Even had plaintiffs been more cautious about which claim(s) were included in the order, it may have made no difference. The damages themselves – even if awarded only for the potentially covered negligence claim – were a lump sum, incapable of discernment between covered losses and uncovered losses. This left the USDC with an indecipherable mess: – a general verdict for both covered and uncovered claims, and damages unattributable with specificity to either count, themselves a mix of dollars awarded for covered and uncovered losses.
The Bartons argued such discernment was needless, contending Nationwide was estopped from denying coverage based on its conduct in the underlying case. Specifically, the Bartons argued Nationwide did not prove to the USDC that it reserved its rights to dispute coverage. If true, this failure was a violation of Alabama’s enhanced duty of good faith to the insured, and estoppel can create coverage under Alabama law when such violations occur. In other words, the Bartons argued Nationwide offered no proof in the direct-action suit, and thus could not prove what steps it did, or did not, take to reserve its rights in the underlying state court trial. Consequently, it had no basis to dispute coverage after the fact.
A Legal Knot
The Court of Appeals disagreed. The party seeking estoppel, reasoned the court, has the burden of proof. Gen. Am. Life Ins. Co. v. AmSouth Bank, 100 F3d 893, 899 (11th Cir. 1996)(another Erie guess). Therefore, the Bartons had to prove affirmatively that Nationwide never issued a reservation of rights. This was a high bar for the Bartons as they had already told the USDC it was undisputed that Nationwide reserved its rights against Alliston.
Undeterred, the Bartons next argued their verdict did not contain an award for wantonness and, as such, the entire award was for the potentially covered negligence claim. In support, they noted there was zero evidence, either before the state court or the district court – showing Alliston acted intentionally or deliberately when the subcontractors improperly installed flashing. The problem with this argument was obvious. At the state court, the Bartons moved for summary judgment on wantonness, and it was granted, complete with cites to Alliston’s corporate representative testimony in support of its knowing violations. To the extent the Bartons could spit this bit, the USDC further reminded them that the absence of evidence is not evidence. If it were true that the record lacked evidence that Alliston acted intentionally, the record also lacked evidence of the opposite, again leaving the court with a general verdict blending uncovered claims and damages.
The Court of Appeals tried to find a way to untie the knot, examining the summary judgment motions from the trial court and the underlying record. However, it ultimately found it could not determine how much the state court awarded for negligence (potentially covered, depending on the facts) or wantonness (not covered at all).
What went wrong for The Bartons?
To begin with, they were obviously aware of the coverage issues when Nationwide withdrew the defense of Alliston. They would have been better off seeking damages in their summary judgment only for covered counts, or else asking the trial court to enter a reasoned order distributing damages to each claim. This may be hard to do when the defendant is represented – and in fact, defense counsel may be ethically prohibited from agreeing to a specific verdict if there is the chance it will leave the defendant exposed to an uncovered count – but here Alliston was unrepresented. Though exciting to get a big award on each count, it would have been more prudent to make sure the verdict was collectible rather than simply large. A fine understanding of what claims are covered, what damages are covered, and why, would have allowed the Plaintiffs a far better chance to get a verdict falling squarely within coverage.
Secondly, Plaintiffs would have been better off presenting more, or different, evidence to the USDC to give it a fighting chance to find coverage. This could be expert testimony or simply more detailed and specific testimony from the Bartons, but either way, the focus should have been proving the underlying verdict was covered – at least in some degree – rather than arguing for estoppel (there is no indication Plaintiffs argued waiver) or arguing the verdict was not for wantonness when it plainly was. Plaintiffs evidence could still be rebutted by Nationwide, but in this case the carrier did not even have to call a witness. Defense counsel have a lesson here as well:
General verdicts are usually the best way to make sure your client does not end up with a verdict for uncovered claims or damages, but in this case the general verdict was still outside coverage because of the detail it lacked.
For more information about this case and the important issues it raises, please contact the authors or any of the litigators at Christian and Small.
Neal D. Moore has spent his career defending and trying cases involving personal injury and death. He specializes in complex product liability matters, working closely with professionals in industrial and commercial enterprises to defend claims of allegedly defective devices and equipment. He has defended hotels and restaurants from Mobile to Huntsville involved in personal injury and food poisoning cases. In addition to his personal injury work, Neal specializes in the financial regulations governing lenders and debt collectors. A popular speaker, Neal has written and lectured on a variety of topics, including legal ethics and training for young lawyers. He was honored to serve on the Board of Directors for the Alabama Defense Lawyers Association and as a repeat instructor at the Young Lawyers Deposition Boot Camp.
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