Three Courts Rule That a Below Limits Settlement With a Primary Insurer Precludes Coverage Under Excess Policy

Previous Alerts have discussed the frequentlylitigated issue of whether a policyholder can access excess coverage when it has entered into a settlement with its primary insurer for an amount that is less than primary policy limits. See September, October 2011 Alerts. In deciding this issue, courts consider a number of factors, including applicable jurisdictional law, the language of exhaustion provisions in the relevant policies and settlement agreements, and whether the policyholder’s total loss exceeded the limits of the primary policy. Last month, three additional courts weighed in on the issue, all ruling that applicable policy language unambiguously required the actual payment of full policy limits by a primary (or lowerlevel) insurer in order for the policyholder to access benefits under an excess policy.

In Goodyear Tire & Rubber Co. v. Nat’l Union Fire Ins. Co., 2012 WL 4054122 (6th Cir. Sept. 17, 2012), the Sixth Circuit affirmed an Ohio district court ruling that an excess insurer had no indemnity obligation where the policyholder had settled with the primary carrier for less than policy limits. The court reasoned that applicable policy language—requiring the primary insurer to “have paid in legal currency the full amount of the Underlying Limit”—unambiguously required actual payment of full policy limits in order to access excess coverage. In so ruling, the court rejected Goodyear’s reliance on underinsured-motorist coverage cases, in which Ohio courts have declined to strictly enforce exhaustion provisions that conditioned a driver’s coverage under his own policy on payment of the other driver’s policy limits. The court reasoned that public policy concerns at issue in the underinsuredmotorist cases were inapplicable to the commercial general liability policies at issue in Goodyear. The court also rejected the argument that the exhaustion requirement should be disregarded because the below limits policy settlement did not prejudice the excess carrier. The court stated that unlike a notice provision or cooperation clause, the exhaustion requirement can preclude coverage regardless of prejudice to the insurer.

Similarly, in Intel Corp. v. Am. Guarantee & Liab. Ins. Co., 2012 WL 3889138 (Del. Sept. 7, 2012), the Delaware Supreme Court held that a fourth-level excess insurer had no duty to contribute to the policyholder’s defense costs where the policyholder had entered into a below limits settlement with a lower-level carrier. The fourth-level excess policy contained an endorsement creating a duty to defend that was conditioned upon exhaustion of the underlying limits “by payment of judgments or settlements.” The policyholder argued that the exhaustion provision was satisfied because the below limits settlement, in combination with its own out-of-pocket defense costs, exceeded the limits of the third-tier excess policy. The court rejected this argument, holding that the exhaustion clause required full payment of underlying limits by judgment or settlement alone, and could not be construed “to encompass an insured’s own payment of defense costs.” In so ruling, the court relied on California precedent holding that an exhaustion requirement is not satisfied by a below limits settlement by virtue of the insured “crediting” the underlying insurer with the remaining policy limits. See Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 161 Cal. App. 4th 184 (2008).

Finally, in Forest Labs., Inc. v. Arch Ins. Co., No. 600219/10 (N.Y. Sup. Ct. N.Y. Cnty. Sept. 12, 2012), a New York court held that the highest-level excess insurer in a $70 million tower of insurance had no defense or indemnity obligations where the policyholder had settled with lower-level excess insurers for amounts below each insurer’s respective policy limits. The applicable policy language required exhaustion of underlying limits “solely as a result of actual payment of a Covered Claim.” The policyholder argued that this language was ambiguous as to who was to “actually pay” the limits of the underlying policy and thus could encompass a “combination of payments made by the insurers [in settlement] and by [the policyholder itself].” The court rejected this argument, reasoning that the provision required the underlying insurers to pay their full policy limits. In so ruling, the court distinguished Zeig v. Mass. Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928), in which the Second Circuit found a different exhaustion provision to be ambiguous.