Why it matters

A New York appellate court has ruled that a policyholder that settled with two insurers for less than policy limits forfeited coverage from an insurer on the top of a policy tower. The policyholder was covered under an $80 million insurance tower, consisting of eight separate $10 million layers, with insurance company RSUI providing the “top” layer of coverage. RSUI’s policy did not attach until the underlying limits of coverage had been fully exhausted. The policyholder incurred more than $80 million in resolving the securities action but then settled with some insurers for less than their respective full $10 million policy limits. The decision to settle with the lower levels in the policy tower for less than the policy limits came back to haunt the policyholder. The court held that RSUI’s coverage was not triggered by the settlements, resulting in the policyholder’s forfeiture of the final layer of coverage. RSUI’s policy expressly stated that it would attach “solely as a result of actual payment of a covered claim” [emphasis added]. The court held that such language “unambiguously” required actual full payment by each underlying insurer.

Detailed Discussion

Several actions were filed in New York federal court against Forest Laboratories alleging securities fraud. After the cases were consolidated, Forest paid $65 million to settle the litigation. With defense costs, the total cost was about $84 million.

Forest had constructed an eight-level tower of insurance coverage. A primary layer was followed by seven excess layers, each with a limit of $10 million. After exhausting the primary level and four excess levels to pay defense costs and a portion of the settlement, Forest filed suit against the three remaining excess carriers: Arch Insurance Company (level five), Old Republic Insurance Company (level six), and RSUI (the seventh and final layer).

Arch and Old Republic settled for less than the $10 million policy limits, but Forest said it “filled in the gaps” to reach the mark for each policy. The insured filed an amended complaint against RSUI seeking contribution.

RSUI refused to pay – taking the position that because neither Arch nor Old Republic paid the entirety of their policy limits, the “attachment point” was not reached for RSUI’s policy and it owed nothing to Forest.

The trial court agreed with RSUI. The policy specifically provides that “RSUI will pay upon the exhaustion of the underlying policies ‘solely as a result of actual payment of a Covered Claim pursuant to the terms and conditions of the Underlying Insurance thereunder.’” The court held that such language was not ambiguous, and the policy “requires RSUI to pay only after the insurance has been paid under the provisions of the underlying policies (‘terms and conditions of the Underlying Insurance thereunder’), which provisions necessarily include their term limits. Thus, RSUI pays only after the underlying insurers pay up to their policy limits.”

Forest appealed, but to no avail. In a terse order, an appellate panel unanimously affirmed dismissal of its complaint against RSUI, with costs.

“The motion court properly determined that the express terms of RSUI’s policy providing excess coverage to plaintiff required the previous layer of excess coverage to be exhausted through actual payment of that policy’s limit prior to RSUI being required to pay,” the panel wrote.

To read the trial court’s decision in Forest Laboratories, Inc. v. Arch Insurance Co., click here

To read the New York Appellate Division’s order, click here.