Federal appeals court holds excess insurers’ coverage not triggered by settlement for less than underlying limits

On 5 August 2011, the United States Court of Appeals for the Fifth Circuit held that excess coverage was not triggered where the policyholder had settled with the underlying primary insurer for less than the full limits of the primary policies. Associates First Capital Corporation had purchased US$200 million of integrated risk cover consisting of policies issued by Lloyd’s, the primary insurer, and nine excess insurers. The Lloyd’s primary policy provided US$50 million in coverage. Associates was sued in two actions for various violations relating to its lending practices. Citigroup, which had purchased Associates, eventually settled the actions (without the consent of its carriers) for US$240 million plus US$23 million in counsel fees. All of the insurers initially denied coverage, but Lloyd’s then settled with Citigroup, paying US$15 million for a release of its US$50 million in policy limits. The excess carriers continued to deny coverage, contending their coverage was not triggered because the underlying primary limits had not been exhausted.

Citigroup argued, relying on Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928), that the court should find the exhaustion provisions in the excess policies ambiguous and construe them against the insurers so that the primary coverage would be deemed to have been exhausted by settlement and the excess coverage triggered. The Fifth Circuit, applying Texas law, noted that Texas had not adopted the Zeig rule. In any event, the court found that the exhaustion provisions in the policies at issue were not ambiguous: "the plain language of the policies dictate that the primary insurer pays the full amount of its limits of liability before excess coverage is triggered". For example, an excess policy issued by Federal Insurance Company required that "all Underlying Insurance carriers have paid in cash the full amount of their respective liabilities". Thus, having settled with the primary for less than full limits, Citigroup effectively forfeited its claims to coverage from the excess. The court affirmed summary judgment dismissing Citigroup’s coverage claims.

Citigroup Inc v Federal Insurance Company et al United States Court of Appeals for the Fifth Circuit 5 August 2011