A QBE unit is not obligated to pay any part of a $750,000 jury award to a scrap metal company because of the firm’s failure to present the jury with special-interrogatory verdict forms so it could determine what part of the award was insurable, a federal appeals court ruled in affirming a lower court decision

However, the attorney for the policyholder in the case, Pensacola, Florida-based Scrap Inc., said the company fell into a “trap” set by the insurer, New York-based QBE Specialty Insurance Co., a unit of Australian insurer QBE Insurance Group Ltd.

Pensacola, Florida-based Scrap Inc. was insured under commercial general liability policies issued by QBE Specialty Insurance Co. from about 2010 to 2012, according to Friday’s ruling by the 11th U.S. Circuit Court of Appeals in Atlanta in QBE Specialty Insurance Co. v. Scrap Inc.

The company was sued by two families in state court in March 2012 for nuisance stemming from its metal shredding facility operation, with the plaintiffs alleging the operation created loud noises, offensive odors and fumes, frequent vibrations to their homes and periodic explosions.

QBE agreed to defend Scrap in the underlying lawsuit, but under a reservation of rights. The insurer reminded Scrap numerous times throughout the proceeding about the availability of, and need for, special jury instructions and special-interrogatory verdict forms that would identify which of the claims in the case were insurable, but the company did not comply.

On two occasions, the insurer also sought leave with the court to intervene on this issue, but the court denied QBE’s motion, holding there would be “adequate lawyers at the table” to address this issue.

In April 2017, the jury found Scrap liable for nuisance damages and awarded $750,000 to the families. QBE then filed suit in U.S. District Court in Pensacola seeking a declaratory judgment that it was not obligated to indemnify the company for the verdict. The district court ruled in the insurers favor, which was affirmed Friday by a three-judge appeals court panel.

In five letters, “QBE told Scrap explicitly that Scrap would have to request a special verdict, differentiating covered damages from uncovered damages, and that if it did not, the failure to seek allocation could result in forfeiture of coverage for all damages,” the ruling said.

“Furthermore, in the absence of an allocated verdict in the underlying trial, Scrap never provided the district court with a plausible method for separating those damages awarded by the jury that are covered by QBE’s policies from those that are not.”

Scrap was “given ample time to prepare a strategy to accommodate this need,” the appeals court panel said in affirming the lower court’s judgment.

Scrap attorney Robert O. Beasley, managing partner with Litvak Beasley Wilson & Ball, LLP in Pensacola, said in a statement,  “Businesses need to study the facts in our case related to the allocation trap set by this insurer.

“The insurance industry and their lawyers have figured out a way to get out of coverage entirely by asserting a list of coverage issues then putting the burden on the insured, represented by insurance appointed counsel, to either accomplish an allocation or lose coverage. 

“It is a near perfect trap. The policy is not worth anything in terms of real and actual coverage. If the particular industry does not require insurance a business should consider self-insuring.”

Mr. Beazley pointed to a reply brief filed by Scrap Inc. in the district court that states, “Scrap was required under the terms of the policy to accept the coverage counsel reported by QBE, and QBE required that its appointed defense counsel replace counsel hired by Scrap.

“QBE continually refers to a ‘general counsel’ for Scrap, but the record provides no evidence that such a position existed. The label is supplied by QBE to bolster their notice argument and further their attempt to shift that defense responsibility.”

QBE’s attorneys did not respond to a request for comment.

In December, a federal appeals court ruled against a QBE Insurance Group Ltd. unit in a coverage dispute over arson at a hotel construction project, reversing a lower court ruling in the insurer’s favor.