In JP Morgan Chase & Co. v Indian Harbor Ins. Co., 2012 NY Slip Op 4702 (N.Y. App. Div. 1st Dep't June 12, 2012), the New York Appellate Division, applying Illinois law, held that an insured was unable to access numerous excess layers due to its failure to show that the exhaustion provisions in the excess policies had been satisfied.

The insured, JP Morgan (as successor to Bank One), had a $175 million E&O tower, consisting of a primary layer and seven excess layers.  Bank One was sued for professional negligence, and JP Morgan settled the underlying suit for an amount that far exceeded the tower limits.  It then sought coverage from all of the E&O carriers on the tower, in an effort to recover a portion of the underlying settlement payment.

JP Morgan subsequently entered into settlement agreements with the third- and sixth-level excess carriers.  While the settlement amounts both exceeded the respective carriers’ limits, the settlements also covered those carriers’ liabilities for separate claims under separate policies the carriers had issued to the insured.  Notably, the settlement agreements between JP Morgan and the third/sixth excess carriers made no allocation between the two policies that were each at issue in the settlement agreements.  That is, as between Policy A issued by the third excess carrier under the E&O program and Policy B issued by the third excess carrier under a different insurance program, the settlement agreement did not specify what amount of the settlement was allocated to Policy A versus Policy B.

The fourth-, fifth-, and seventh-level excess carriers subsequently refused to tender their limits to JP Morgan, arguing that the underlying insurance had not been exhausted.  The trial court granted summary judgment in favor of the excess carriers. The Appellate Division affirmed.

The Appellate Division first found that the language of the fourth-layer excess policy imposed two conditions precedent on exhaustion: the primary and underlying excess insurers must have (i) “duly admitted liability,” and (ii) “paid the full amount of their respective liability.”  The court determined that neither of these conditions had been satisfied. Specifically, the settlement agreement between JP Morgan and the third-level excess carrier stated that “the negotiation, execution and performance of this Agreement shall not constitute, or be construed as, an admission of liability or infirmity of any defense or claim whatsoever by any Party.”  Moreover, because the settlement agreement made no allocation as between the two policies issued by the third-level excess carrier, “there is no way to determine that [the carrier] paid the full amount of its liability under its Bank One tower policy.”

The court reached similar conclusions with respect to the fifth- and seventh-level excess policies. Those policies provided that exhaustion must occur by “actual payment under such Underlying Insurance,” “after the total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying Insurance as covered loss thereunder,” and “only when the Underlying Insurer(s) shall have paid or have been held liable to pay, the full amount of the Underlying Limit(s).”  The Appellate Division viewed these provisions as “unambiguously requir[ing] the insured to collect the full limits of the underlying policies before resorting to excess insurance.”

This case is notable because it demonstrates a court’s fidelity to an excess policy’s exhaustion language where that language is clear, notwithstanding an insured’s protestations to the contrary.  Indeed, the Appellate Division expressly rejected JP Morgan’s reliance on the oft-cited Zeig case, holding that the exhaustion provision in Zeig was ambiguous, whereas the exhaustion provisions in the excess policies at issue “stand…apart from the one before the court in Zeig because of [their] exacting requirement[s] that the underlying carriers shall have…paid the full amounts of their respective liabilities.”

A copy of the decision is available here.