In Maximus, Inc. v. Twin City Fire Insurance Co., No. 11-cv-1231 (E.D. Va. Mar. 12, 2012), the court held that the policyholder’s below-limits settlements with the underlying insurers in its insurance tower were sufficient to exhaust those underlying policies for the purposes of obtaining excess insurance coverage. The plaintiff had entered into below-limits settlements with its primary insurer and two excess insurers, and sought insurance coverage from its third excess insurer. The third excess insurance policy included a provision stating that it “shall apply only after all applicable Underlying Insurance with respect to an Insurance Product has been exhausted by actual payment under such Underlying Insurance.” Based on that provision, the excess insurer argued that the policyholder was required to obtain full payment of the underlying limits of liability in each of the underlying insurance policies in order to exhaust those policies, and that below-limits settlements with the underlying insurers were insufficient for exhaustion. Applying Virginia law, the court rejected the insurer’s contention and held that the policyholder had exhausted the underlying policies. Finding that the excess policy was ambiguous because it did not define “actual payment” and did not expressly preclude the policyholder from entering into below-limits settlements, the court applied the canon that ambiguous insurance policies must be construed in favor of the policyholder. The court also relied on Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928), in which the Second Circuit held that below-limits settlements were sufficient for exhaustion.
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Below-limits settlements with underlying insurers are sufficient for obtaining excess insurance coverage
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