The state Superior Court has ruled Cigna Corp.'s excess insurer is not obligated to indemnify the company for any of the $140 million it paid to settle class action claims for breach of contract and violations of the Racketeer Influenced and Corrupt Organizations Act.

The court also ruled that, in general, it's the insured, not the insurer, who bears the burden of proving the apportionment of settlement funds to claims.

Reviewing the case on its second appeal in less than two years, a three-judge panel ruled 2-1 in Executive Risk Indemnity v. Cigna that Cigna failed to show that at least 75 percent of the settlement in In re Managed Care Litigation — comprising what are known as the Shane and Kaiser suits — was attributable to RICO-related claims.

The court had previously ruled that RICO claim settlements were covered under Cigna's policy with excess insurer Executive Risk Indemnity Inc., but breach of contract claim settlements were excluded from coverage.

The court had remanded the case to Philadelphia Court of Common Pleas Judge Mark I. Bernstein to determine how much of the total settlement represented RICO claims versus breach of contract claims.

On remand, following an apportionment hearing, Bernstein denied Cigna's request for either judgment notwithstanding the verdict or a new trial, finding the company failed to show that 75 percent of the settlement funds were earmarked to settle RICO claims, meaning the covered claims did not reach the $65 million threshold necessary to trigger its excess policy with Executive Risk.

Writing for the Superior Court in a July 18 opinion, Judge Anne E. Lazarus said the court's narrow scope of review on appeal from a motion for JNOV limited it to determining whether Bernstein abused his discretion in reaching that credibility determination.

Lazarus, agreeing that it's "not only reasonable, but logical" that the insured bear the burden to allocate because it's the insured who has access to evidence and familiarity with the settlement negotiations, said Bernstein did not abuse his discretion in finding that Cigna failed to meet that burden.

"Cigna asserts that it presented substantial evidence at the apportionment hearing to show that the parties intended the settlement to represent a 75 percent/25 percent ratio of RICO versus breach of contract claims," Lazarus said. "Essentially, Cigna supports this ratio with the claim that the RICO claims dominated the breach of contract claims in the settlement process and that the former were the driving force and focus of the settlement negotiations in the underlying case. The trial judge, however, found as facts that: (1) Cigna's counsel, John Harkins, stated (contemporaneously with the Shane/Kaiser settlement) that the RICO claims were weak; (2) Cigna failed to meaningfully assess its RICO exposure in any memoranda or other litigation correspondence; (3) Cigna had only performed assessments for contract exposure and represented to the court that these claims were at the heart of the case; and (4) that Cigna's settlement was contract-focused."

Lazarus was joined by Judge Paula Francisco Ott.

Senior Judge Eugene B. Strassburger III penned a dissenting opinion, however, saying the question Bernstein considered on remand was "exactly the wrong one."

Whereas Bernstein said the main issue was how the settlement funds actually were allocated by Cigna and plaintiffs counsel at the time the settlement was reached, Strassburger said the more important issue was how the funds should have been allocated, a matter that was likely given little consideration at the time of settlement.

"The plaintiffs in the underlying action simply wanted to recover from Cigna," Strassburger said. "Whether and how those funds were allocated later was of no matter. Cigna could have inserted a provision in the settlement agreement that the entire payment was on the RICO claims. The doctors would not have cared. But guaranteed, Executive Risk would be here arguing that the appropriate question is how the settlement funds should have been allocated."

According to court documents, the insurance dispute in Executive Risk arose from a series of federal class action lawsuits litigated between 1999 and 2002 that named Cigna as a defendant.

In those cases, plaintiffs alleged that Cigna, along with a number of other managed care organizations, systematically underpaid medical providers' claims, court documents said.

The complaints alleged Cigna had breached its contract as well as committed RICO violations by conspiring with other insurance companies to keep payments down, according to court documents.

In 2003, court documents said, Cigna settled all of the cases with no admission of wrongdoing for $140 million.

When Cigna sought indemnity from Executive Risk, the insurer denied the claims on the grounds that Cigna's losses were the direct result of the company's contractual duty to reimburse medical providers' claims, court documents said.

The language of the policy said losses resulting from "criminal or civil fines and penalties imposed by law" were not covered, but losses incurred through "punitive or exemplary damages, treble damages and multiple damages" are covered, according to court documents.

In March 2008, Bernstein ruled that Executive Risk had no duty to provide coverage to Cigna because the settlement payments fell within the policy's breach of contract exclusion.

But in June 2009, a 2-1 Superior Court panel led by Judge Richard B. Klein and joined by Judge Jacqueline O. Shogan said the policy did cover settlement payments for the RICO claims against its insured.

Klein wrote that even though the language of the policy clearly excluded breach of contract claims from coverage, it did not bar coverage of RICO claims.

The court remanded the case to the trial court to determine through expert testimony the apportionment of the settlement between the RICO and breach of contract claims.

Bernstein said only two experts testified during the allocation proceedings on remand, neither of whom specifically addressed the issue of allocation.

Cigna and Executive Risk disagreed as to who bore the burden of proof on the issue of allocation, but Bernstein said both the U.S. District Court for the Eastern District of Pennsylvania and the U.S. District Court for the Western District of Pennsylvania have ruled that the burden falls to the insured.

Bernstein said these rulings "reflect the virtually uniform opinion throughout the United States."

Cigna, Bernstein said, could not prove it had allocated the funds at all, despite the fact that it controlled its own defense and conducted its own settlement negotiations without its insurers present.

"Only Cigna had the authority to allocate the settlement funds when it settled and it knowingly chose not to do so," Bernstein said.

Lazarus agreed, saying apportionment is "best proven by the insured, the party that has access to the evidence and the parties' intent behind the settlement process."

"This is especially true where the final settlement is based upon the claim forms which detail the individual contract breaches and resultant damages," Lazarus said. "In the instant case, the parties were equally sophisticated entities, Cigna drafted the settlement agreement, chose counsel to participate in the settlement negotiations, controlled the underlying litigation and defense and had better access to the relevant information and intentions of the parties in the deliberative settlement process."

Counsel for Executive Risk, Ronald P. Schiller of Hangley Aronchick Segal Pudlin & Schiller in Philadelphia, deferred comment to his client, who could not be reached at press time.

Counsel for Cigna, Maureen M. McBride of Lamb McErlane in West Chester, Pa., declined comment.

Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI.

(Copies of the 12-page opinion in Executive Risk Indemnity v. Cigna, PICS No. 13-2184, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •