Why it matters

A Pennsylvania trial court judge decided that the insolvency of an underlying excess insurer did not trigger coverage from an insurer providing a second layer of excess coverage. The case began with a qui tam action that ultimately settled. The insured had three layers of coverage: $5 million primary, $5 million first layer of excess, and a $10 million second layer of excess. After the carrier for the first excess policy was declared insolvent, the second excess carrier refused to pick up the slack, arguing that the underlying limits had not been exhausted because of the insolvency. The court agreed. The court also held that amounts paid in settlement of qui tam actions are uninsurable as a matter of law and thus not covered under D&O policies.

Detailed Discussion

In 1996 a qui tam action was filed against EquiMed, a management company that provided services to specialty medical providers through its subsidiaries, accusing the company of overbilling. The action was ultimately settled for $10 million.

The company had three layers of coverage in place, beginning with $5 million in primary coverage, followed by a $5 million excess policy and a second layer of excess coverage for $10 million. In addition to payment by the primary insurer, the directors and officers and some subsidiary medical offices chipped in to the qui tam settlement.

Reliance National, which provided the first layer of excess, was declared insolvent in 2001. EquiMed and its officers turned to American Dynasty Surplus Lines, the carrier for the second excess layer, for payment. But American refused, arguing that the underlying limits were not exhausted by Reliance’s insolvency. Despite the various contributions of the directors and officers, the insured was unable to show that the actual loss reached $10 million.

The court agreed. American’s policy stated that “[c]overage shall attach only after all such Underlying insurance has been exhausted solely as a result of actual payment or payment in fact of losses of all applicable Underlying Insurance limits.”

The court ruled that “the plain language of the policy . . . establishes that Plaintiffs must have actual payment totaling the required $10 million before Defendants would have a duty to any indemnification under the Policy.”

EquiMed alternatively argued that the $10 million actual loss was satisfied by a combination of the primary insurer’s payment as well as contributions from the officers and subsidiary medical practices. But the court was unmoved.

First, the money paid by the plaintiffs was due to fraudulent billing, the court said, and “disgorgement of ill-gotten gain” was expressly excluded under the policy. Second, the court noted that the directors and officers and their individual medical practices were all named as defendants in the qui tam action. Although their payments totaled $3.36 million, those contributions “are rightly attributed to the entities themselves,” not EquiMed, the court said.

The court further stated, “[t]o do otherwise is nothing more than an irrational shell game, designed to unjustly force [American] to cover entities for which they did not bargain to cover, and for which they have received no consideration in the form of premiums.”

To read the decision in Mountainside Holdings LLC v. American Dynasty Surplus Lines Inc., click here.