Two more courts have joined the growing line of cases holding that excess insurer’s payment obligations were not triggered where the policyholder funded part of the loss below the excess insurer’s limit.
First, on September 12, 2012, New York (New York County) Supreme Court Judge Melvin Schweitzer, applying New York law, ruled in favor of a top level excess insurer where the two underlying excess insurers had paid less then their full policy limits and Forest Laboratories, the policyholder, had funded the gap. A copy of Judge Schweitzer’s opinion can be found here.
Second, on September 17, 2012, the Sixth Circuit, applying Ohio law, affirmed the district court’s entry of summary judgment in favor of the excess insurer, holding that the excess insurer’s policy limit had not been triggered when the insured, Goodyear Tire and Rubber Company, had reached a compromise with the primary carrier in which the primary carrier had paid less than its full policy limit. The Sixth Circuit’s opinion can be found here.
The Forest Labs Case
Forest Laboratories had a $70 million D&O insurance tower, consisting of a primary $10 million layer and six excess layers of $10 million each. Forest Labs became involved in securities class action litigation, which it ultimately settled for $65 million. Defense and claims expense added several million dollars more of cost. Forest Labs’ primary insurer and the first three excess carriers paid their full policy limits. However the fourth and fifth level excess insurers reached compromises with the policyholder in which each paid only a part of its limit and Forest Labs “filled in the gaps.” Forest Labs then sought payment from the top level excess insurer.
The top level excess insurer contended that because of Forest Labs’ compromise with the underlying excess insurers, the payment obligations under its excess policy had not been triggered. In making this argument, the top level excess insurer relied on language in its policy specifying that it is obligated to pay only when the underlying coverage has been exhausted “solely as a result of actual payment of a Covered Claim pursuant to the terms conditions of the underlying insurance.” The top level excess insurer also sought to rely on exhaustion trigger language in one of the underlying excess policies, which the top level excess insurer argued was incorporated by reference into its excess policy.
Forest Labs relied on the venerable Second Circuit decision in Zeig v. Massachusetts Bonding & Insurance Company, arguing that the top level excess insurer’s policy language was ambiguous and therefore should not be interpreted to preclude coverage. In response to Forest Labs’ reliance on Zeig, the top level excess insurer relied on the growing list of cases in which courts had found that excess insurer’s payment obligations had not been triggered where, like here, the policyholder had funded part of the underlying loss amounts out of pocket. Among other cases, the top level excess insurer relied on the Comerica case (about which refer here), the Qualcomm case (refer here), the Bally Total Fitness Case (here), and the J.P.Morgan case (refer here).
Judge Schweitzer said, referring to the many cases on which the top level insurer sought to rely, that “these examples,” along with the more specific trigger language in the underlying excess policies, “evince a clarity unfortunately missing from the [top level excess insurer’] policy language.” He added, however, that this “does not render [the top level excess insurer’s] policy ambiguous, as in Zeig.”
Citing the top level excess insurer’s policy language providing that its payment obligations are triggered only when the underlying insurance is exhausted “solely as a result of actual payment of a Covered Claim pursuant to the terms and conditions of the Underlying Insurance,” which Judge Schweitzer found is “not ambiguous,” Judge Schweitzer concluded that the top level excess insurer was obligated to pay “only after the insurance has been paid under the provisions of the underlying policies … which provisions necessarily include their term limits.” Thus, Judge Schweitzer added, the top level excess insurer “pays only after the underlying insurers pay up to their policy limits.”
Judge Schweitzer commented that while the top level excess insurer “certainly could have done a better job of drafting its policy, and has many examples of better language to refer to [sic] accomplish that, the language it chose still protects [the top level excess insurer] in the situation, as here where the underlying insurers never paid their full policy amounts, due to settlements with plaintiff.”
The Goodyear Case
In 2003, Goodyear, following a restatement of its previously released financial statements, became involved in securities class action litigation and related SEC investigation. The lawsuits ultimately were dismissed and the SEC terminated its investigation. Goodyear incurred about $30 million in legal and accounting costs in connection with these matters.
Goodyear carried $25 million in D&O insurance, consisting of a primary layer of $15 million and an excess layer of $10 million. The insurers disputed coverage for Goodyear’s $30 million in expenses, particularly the costs associated with the SEC investigation. Goodyear ultimately reached a compromise with the primary carrier, in which the primary carrier paid only $10 million of its $15 million limit. The excess carrier then contended that its payment obligations had not been triggered, relying on the language in its excess policy providing that “Coverage hereunder shall attach only after [the Underlying Insurer] shall have paid in legal currency the full amount of the [Underlying limit].”
The dispute over the excess insurer’s payment obligation ultimately wound up in litigation. The district court entered summary judgment in the excess insurer’s favor.
On September 17, 2012, in an opinion applying Ohio law and written by Judge Raymond Kethledge for a three-judge panel of the Sixth Circuit, affirmed the district court’s summary judgment grant. The Sixth Circuit’s opinion opens by observing that the parties’ dispute represents the “latest in a series of recent cases in which one corporation asks us to disregard the plain terms of an insurance agreement with another corporation.” (The Sixth Circuit opinion does not identify the other cases in the recent series to which it was referring.) The appellate court said that relevant provision in the excess carrier’s policy is “undisputedly clear and unambiguous.”
Goodyear had argued that, notwithstanding the provision, that the Court should enforce the excess insurer’s payment obligation, because of public policy favoring settlements and because the excess insurer had not been prejudiced by Goodyear’s compromise with the underlying insurer. The Sixth Circuit rejected both of these arguments.
In rejecting the public policy argument, the Sixth Circuit said that, by contrast to the uninsured motorist cases on which Goodyear relied, “what we have here, instead, is an insurance agreement into which sophisticated parties have freely entered,” adding that the Court “will enforce the agreement according to its terms.”
In rejecting Goodyear’s argument that the excess insurer’s payment obligations should be enforced because Goodyear’s deal with the primary carrier had not prejudiced the excess carrier, the appellate court said that “this case does not concern a mere notice or cooperation requirement, which perhaps we could waive off without any harm to the insurer.” Rather, the court said, adding a note of supposed humor that I am sure Goodyear did not appreciate, “the provision at issue here is where the rubber hits the road,” adding that “the agreement’s Insuring Clause, under whose terms [the excess carrier] undisputedly did not agree to provide coverage that Goodyear now seeks.” Goodyear’s arguments, the Court concluded, are “meritless.”
As I noted at the outset, and as the citations on which Forest Labs’ top level excess insurer relied demonstrate, there is a growing list of cases reaching the same conclusion that an excess D&O insurers payment obligations are not triggered where as here the underlying insurers paid less than their full policy limits and the policyholder funded the gap. The latest case in this line of cases can be found here.
There is a troubling aspect of this growing line of cases. If you take this line of cases as a whole, what you have are an awful lot of excess insurers walking away from their payment obligations. They agreed to take on the risk and they collected their premiums and in a disputed claims situation where losses clearly pierced their layer, they are successfully fighting off their payment obligations. This effort now apparently includes the possibility that an excess insurer can bootstrap the trigger language from an underlying insurance policy to avert its payment obligation.
To be sure, now that this growing line of cases has highlighted the issue, many insurance buyers are seeking, and many excess insurers are now granting, excess coverage trigger language that allows the amounts below the excess insurer’s attachment point to be funded by payment either by the underlying insurers or by the policyholder. With this type of alternative payment trigger language in place, excess insurers are much less likely to be able to avoid payment. However, the Forest Labs case underscores the fact that the language needs to be cleaned up all the way up the tower, to guard against the possibility that an upper level excess insurer might, like the top level excess insurer here, try to bootstrap trigger language from an underlying policy in order to try to avoid its payment obligation.
Nate Raymond has a good article on the On the Case blog, here, discussing the two decisions. Special thanks to a loyal reader for providing me with a copy of the Sizth Circuit opinion.