Why it matters

Taking an opposite approach from a Texas appellate court (see here), New York’s highest court ruled that an excess insurer’s coverage was not triggered because the lower-tier insurers did not pay their full policy limits. The dispute involved funding for a $65 million securities class action settlement. Coverage for the policyholder included a primary layer and seven excess layers, each with a limit of $10 million. After exhausting the primary level and four excess levels, the insured turned to the last three excess carriers. Layers five and six settled for less than their policy limits and the seventh insurer then refused to pay, arguing that its coverage was not triggered even though the insured “filled in the gaps.” A trial court and state appellate court agreed (see here) and the state’s highest court affirmed the rulings without comment.

Detailed Discussion

Forest Laboratories faced multiple lawsuits alleging securities fraud. After the cases were consolidated, Forest paid $65 million to settle the litigation. With defense costs, the total cost was roughly $84 million.

Forest had an eight-level tower of insurance coverage. A primary layer was followed by seven excess layers, each with a limit of $10 million. Exhausting the primary level and four excess layers to pay defense costs and part of the settlement, Forest then 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 their $10 million policy limits. Arguing that it “filled in the gaps” to reach RSUI’s coverage, Forest filed an amended complaint seeking contribution. Taking the position that the “attachment point” was not reached because neither Arch nor Old Republic paid for the entirety of their policy limits, RSUI refused to pay.

The trial court agreed. RSUI’s policy provided that it “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.’ ”

Ruling that the policy language was not ambiguous, the court stated that it “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,” the trial court wrote. “Thus, RSUI pays only after the underlying insurers pay up to their policy limits.”

Forest appealed but an appellate panel affirmed, stating “[t]he 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.”

Again Forest appealed and again the court sided with the insurer, affirming the lower court rulings without comment.

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

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

To read the New York Court of Appeal’s order, click here.