The United States Court of Appeals for the Second Circuit recently ruled that several excess directors and officers (D&O) insurance policies were not triggered until there had been payment of losses amounting to the attachment point of each excess policy. In Ali v. Federal Insurance Co., No. 11-5000 (2d Cir. June 4, 2013), the former D&Os of bankrupt Commodore International Limited were insured by a $50 million tower of insurance coverage made up of a primary D&O policy and eight excess policies. Insurers of four the excess policies, including the excess policy attaching directly above the primary policy, were insolvent and unable to pay losses. The former D&Os sought a ruling that the excess policies of the solvent excess insurers were triggered once the D&Os had incurred obligations exceeding the amount of insurance underlying each excess policy of the remaining solvent excess insurers, even though the insolvent insurers were unable to pay losses. The district court and the Second Circuit rejected this argument, ruling that under either New York or Pennsylvania law the excess policies’ plain language permitted coverage to be triggered through exhaustion of underlying insurance limits “solely as a result of payment of losses thereunder.” The Second Circuit reasoned that the D&Os incurring or accruing obligations in excess of underlying insurance limits was not enough to meet this requirement – instead losses in excess of the underlying limits had to actually have been paid. Importantly, the Second Circuit expressly did not determine who had to pay such losses, and appeared to endorse an approach that would permit an insolvent insurer’s loss obligation to be paid by someone else, such as the D&Os, in order to trigger further excess coverage. Many excess D&O insurance policies written today specifically permit underlying limits to be paid not only by underlying insurers, but also insured D&Os. In addition, certain excess D&O policies (known as Difference in Conditions policies) are available to drop down and provide coverage when an underlying insurer becomes insolvent.