Disputes between policyholders and excess insurers often involve events that occurred before the underlying defense costs or indemnity payments reached the excess layer. In Stryker Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 842 F.3d 422 (6th Cir. 2016), reh’g denied (Dec. 13, 2016), the U.S. Court of Appeals for the Sixth Circuit addressed a situation where a policyholder settled a claim without obtaining the excess insurer’s consent to the settlement, although the excess policy required such consent in order to provide coverage. Although at the time the settlement was reached, the amount appeared to be well within the primary layer, due to the order in which the primary insurer paid the policyholder’s claims for several different settlements, the policyholder ultimately had to seek coverage for the settlement from the excess insurer. Despite the policyholder’s attempts to find a latent ambiguity in the consent to settle language based on these unusual facts, the Sixth Circuit found in the excess insurer’s favor based on the plain language of the policy.
In the late 1990s, Stryker Corp. acquired a subsidiary of Pfizer, Inc. that manufactured and sold artificial knee joints, which were later proved defective. Stryker was sued by several recipients of the defective knees, and also faced exposure to Pfizer for indemnification for claims that arose after Stryker purchased the company.
Stryker had two potentially applicable insurance policies: a commercial umbrella policy issued by XL Insurance America, Inc., and an excess liability policy issued by TIG Insurance Co. The umbrella policy had a $15 million limit. The excess policy followed form to the umbrella policy, and applied to Stryker’s “ultimate net loss … in excess of all underlying insurance,” with a limit of $25 million.
Both insurance companies initially declined to defend or indemnify Stryker. XL denied coverage outright, while TIG took the position that its excess layer was not implicated. Stryker filed coverage lawsuits against XL and TIG; during the pendency of that protracted litigation (which lasted over a decade), Stryker unilaterally settled all of its individual product-liability claims for $7.6 million, and was separately adjudicated liable for $17.7 million of Pfizer’s losses. After a court ruling that XL was liable for Stryker’s losses, XL paid them – but not in chronological order. XL first paid the larger Pfizer judgment, which exhausted its limits. Accordingly, Stryker turned to TIG to cover the $7.6 million direct action settlement.
Consent to Settle Requirement
TIG’s policy provided coverage for the “ultimate net loss” in excess of the underlying insurance after all underlying insurance has been exhausted. “Ultimate Net Loss” was defined as:
the amount of the principal sum, award or verdict actually paid or payable in cash in the settlement or satisfaction of claims for which the insured is liable, either by adjudication or compromise with the written consent of [TIG], after making proper deduction for all recoveries and salvages.
Because Stryker had not obtained (or requested) its consent to the $7.6 million settlement, TIG refused to provide coverage. Stryker filed suit.
District Court Finds Latent Ambiguity
In litigation, TIG argued that there was no coverage because the plain language of the policy required that Stryker obtain written consent to the settlement, and Stryker failed to obtain its consent to the direct action settlement. Stryker apparently agreed that the policy was not ambiguous on its face; however, it argued that it was ambiguous as applied to this situation, therefore presenting a “latent ambiguity” that should be resolved in its favor. Specifically, citing testimony by TIG’s employees, Stryker argued that the policy did not require consent to settlements entered into below TIG’s layer.
The district court agreed, finding that the term “claims” in the definition of “ultimate net loss” was “susceptible to more than one interpretation.” In other words, the district court appeared to conclude that it was unclear whether the term “claims” referred only to claims within TIG’s layer, or to any claims offered to TIG for payment. Thus, the district court interpreted the ambiguity in Stryker’s favor and found TIG liable for damages and interest totaling $8.6 million.
Sixth Circuit Reverses
On appeal, the Sixth Circuit reversed the district court. First, the appellate court analyzed the purpose and history of the latent ambiguity doctrine, citing the textbook example of the two ships named Peerless in Raffles v. Wichelhaus, 2 H. & C. 906, 159 Eng. Rep. 375 (Ex. 1864). There, two parties contracted for a shipment of cotton “to arrive ex ‘Peerless’ from Bombay.” Id. The terms were perfectly clear on the surface; but an ambiguity resulted when two ships named Peerless arrived from India, and the parties disputed which ship the contract referred to. As the Sixth Circuit explained, this presented a latent ambiguity because “[t]he ambiguity in that contract arose, not from the words, but from their connection to the real world.” Stryker, 842 F.3d at 427.
This case, according to the appellate court, was not like Raffles because there was no alternate real-world meaning for the plain language. Rather, there was simply no ambiguity in the policy at all:
Stryker insists that the term ‘claims’ actually means liability for settlements made without consent, so long as the compromise originally occurred below TIG’s coverage layer. But the policy itself defines the universe of possible ‘claims’ in two, and only two, ways. Liability must be established either by ‘adjudication’ or by ‘compromise with the written consent of [TIG].’ Stryker’s reading thus goes too far: it seeks to fill a gap that does not exist, and contradicts the fundamental principle that ‘[p]arol evidence under the guise of a claimed latent ambiguity is not permissible to vary, add to, or contradict’ any other ‘plainly expressed terms of [the] writing.’
Id. at 428.
The court also rejected Stryker’s attempt to create a latent ambiguity using opinion testimony of TIG’s employees, because such subjective testimony (which the court found did not even support Stryker’s interpretation unequivocally) cannot create a latent ambiguity: “But in the ordinary course, a latent ambiguity must be revealed by objective means—for instance, an admission, uncontested evidence, or the testimony of a disinterested third party. As we have said, interpreting Michigan law, one party’s ‘subjective understanding’ of what the contract meant is plainly ‘insufficient to create a latent ambiguity.’” Id.
Overall, Stryker’s facts are probably unusual, and the unique situation that resulted was based largely on the timing of the claims and the primary insurer’s payment of them, which was itself driven by protracted coverage litigation. However, the Sixth Circuit’s decision is an example of a court reading clear policy terms based on their plain meaning, and not stretching the doctrine of latent ambiguity beyond its particular limits even in an unusual factual scenario. In addition, this case demonstrates that even where excess policies follow form, they still may have provisions (particularly related to consent and payment) that are specific to them and should not be overlooked.