The United States District Court for the Eastern District of Michigan, applying Michigan law, has held that a policyholder that settled with its primary insurer for less than the limits of the primary D&O policy was not entitled to recover part of the cost of its settlement with the underlying plaintiffs and its defense costs from the excess insurer where the excess policy stated that it was triggered only when the underlying insurance was "reduced or exhausted by payments for losses." Comerica, Inc. v. Zurich Am. Ins. Co., 2007 WL 2178392 (E.D. Mich. July 27, 2007).

The policyholder company was insured under primary and excess directors and officers liability insurance policies. The defendant insurer issued an excess policy that required the company to maintain the primary insurance policy and stated that "[c]overage hereunder shall attach only after all such 'Underlying Insurance' has been reduced or exhausted by payments for losses." The excess policy provided that coverage was available only if the primary policy were exhausted "solely as a result of actual payment of loss thereunder by the applicable insurers," and that the policy "does not provide coverage for any loss not covered by the 'Underlying Insurance' except and to the extent that such loss is not paid under the 'Underlying Insurance' solely by reason of the reduction or exhaustion of the available 'Underlying Insurance' through payments of loss thereunder."

The company was the subject of two sets of securities class actions. Over the objection of the primary insurer, the company ultimately settled the underlying actions for $21 million. The primary insurer disputed coverage for the settlement, but ultimately contributed $14 million of its $20 million limit of liability toward the settlement. The insured company then contributed $6 million to the settlement and sought $1 million of the settlement as well as $2.6 million in defense costs from the excess insurer. The excess carrier declined to pay on the grounds that the underlying limits had not been exhausted and because $6 million of the settlement represented Section 11 damages that were not covered Loss. The policyholder then sued the excess carrier, and the court granted summary judgment on behalf of the insurer.

The court first rejected the company's contention that the excess insurer's denial of coverage for the Section 11 damages was a repudiation of the excess policy that justified its decision to settle in a manner that did not fulfill the condition precedent of exhausting the underlying limits through payment by the primary insurer. The court stated that "it is not entirely clear that [the excess insurer's] position amounted to a repudiation." It also reasoned that, in any event, repudiation could justify nonoccurrence of a condition precedent only if the repudiation caused or substantially contributed to the nonoccurrence. Here, the alleged repudiation by the excess insurer did not cause the company's failure to exhaust the limits of the primary policy; rather, the primary insurer's refusal to pay $20 million caused the policyholder not to fulfill the condition. The court therefore concluded that "[the company] is not excused from complying with the condition precedent by [the excess insurer's] conduct, however it is characterized."

The court also rejected the company's public policy argument, based on Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928), and its progeny, that the company's contribution of the remainder of the underlying limits should be sufficient to trigger the excess policy. The court explained that the excess insurance policy in Zeig "was silent about whether the full amount of the underlying policy needed to be collected or actually paid out before the excess policy was triggered," and that the Zeig court had stated that "[i]t is doubtless true that the parties could impose such a condition precedent. . . if they chose to do so." Similarly, cases that follow Zeig generally rely on "a lack of specificity in the excess contract as to how the primary insurance is to be discharged." By contrast, the court explained that the excess policy language here imposed a specific exhaustion requirement. The court reasoned that "[p]ayments by the insured to fill the gap, settlements that extinguish liability up to the primary insurer's limits, and agreements to give the excess insurer 'credit' against a judgment or settlement up to the primary insurer's liability limit are not the same as actual payment."

The court then rejected the company's argument that the excess policy was ambiguous, noting that the excess policy "plainly requires the [primary] policy to be exhausted by payment of losses by [the primary insurer]." The court concluded that "[t]o find the [excess] policy ambiguous would essentially require a holding that parties simply cannot contract for an excess policy to be triggered only upon full, actual payment by the underlying insurer." According to the court, the company could have bargained for such a contract, but "the present agreement does not say that, and it cannot be rewritten now."