A recurring insurance coverage issue is the question of excess insurers’ obligations when the underlying insurers have paid less than their full policy limits as a result of a compromise between the underlying insurers and the policyholder.


In the latest of a growing list of recent cases examining these issues, on August 5, 2011, the Fifth Circuit, applying Texas law held, based on the language of the excess policies at issue, that where a policyholder has accepted a compromise payment from a primary carrier of less than the limit of liability of the primary policy, the excess carrier’s payment obligations were not triggered and they have no obligation to pay the policyholders ‘ loss. The Fifth Circuit’s August 5 opinion can be found here.



In July 1999, Associates First Capital Corporation purchased $200 million of integrated risk insurance coverage, arranged in three layers. The primary $50 million was provided by Lloyd’s. In addition, there was a layer of $50 excess of the primary $50 million in the “Secondary Layer,” and a third layer, called the “Quota Share Layer,” provided $100 million excess of the primary and Secondary layers.


In November 2000, Citigroup purchased Associates and later sought insurance coverage from the insurers in connection with its settlement of two matters that had been pending against Associates. The settlement in the actions totaled $240 million plus $23 million in class counsels’ fees and costs. The Fifth Circuit opinion states that Citigroup entered the settlement “without the consent of the carriers.”


Each of the insurers initially denied coverage, but Citigroup ultimately entered a settlement with Lloyd’s by which Lloyd’s paid $15 million of its $50 million layer. The excess carriers continued to refuse coverage, and Citigroup filed suit. Citigroup later settled with the insurers in the Secondary layer, but the coverage litigation continued as to the insurers in the Quota Share Layer. The remaining parties moved for summary judgment.


The District Court granted summary judgment in favor of the excess insurers, holding that under each of the excess insurers’ respective policies, their liability did not attach until the primary insurer had paid its full $50 million limit of liability. Citigroup appealed.


The August 5 Opinion

On appeal, Citigroup attempted to rely on the holding of Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 225 (2d Cir. 1928), arguing that where an excess insurance policy ambiguously defines “exhaustion,” settlement with an underlying insurer constitutes exhaustion of the underlying policy, for purposes of determining when the excess coverage attaches.


The Fifth Circuit, applying Texas law, declined to follow the “Zeig rule,” stating that “we conclude that the plain language of the policies dictate that primary insurer pays the full amount of its limits of liability before the excess coverage is triggered.”


The Fifth Circuit examined the exhaustion trigger language of each of the excess policies and concluded that the “plain language” of each of them “requires that Lloyd’s pay Citigroup the total limits of Lloyd’s liability before excess coverage attaches,” adding that “Citigroup’s settlement with Lloyd’s for $15 million of its $50 million limits of liability in exchange for a release from coverage for [the underlying claims], did not satisfy the requirements necessary to trigger the excess insurers’ coverage.” 


The Fifth Circuit affirmed the District Court’s entry of summary judgment in favor of the excess insurers.



The Fifth Circuit’s decision in the Citigroup case joins a growing list of recent judicial decisions rejecting the Zeig rule and requiring as a trigger of coverage for excess insurance coverage that the limit of liability of the underlying insurance be exhausted by payment of loss. Indeed, the Fifth Circuit cited with approval the March 2008 California Intermediate appellate court opinion in the  Qualcomm case (about which refer here) and also cited the July 2007 Eastern District of Michigan opinion in the Comerica case (about which refer here), noting that “while not binding,” the Comerica case is “persuasive.” Another recent case reaching the same conclusion was the Bally case (about which refer here), although the Fifth Circuit did not refer to the Bally decision.  As first federal circuit court decision, the Citigroup case could prove to be the most significant in this line of cases.


While this list of case authority is growing longer, it is important to keep in mind that the outcome of each of these cases was a direct reflection of the specific language of the exhaustion trigger in the excess policies at issue. In each case, the courts concluded that the excess policies required complete exhaustion of the underlying limit of liability by payment of loss.


These cases underscore the critical importance of the language describing the payment trigger in the excess policy. In recent months, and in large part as a reaction to these cases, excess carriers increasingly have been willing to provide language that allows the excess carriers’ payment obligations to be triggered regardless whether the underlying amounts were paid by the underlying insurer or by the insured. This language was not generally available in 1999 when Associates First purchased its integrated risk insurance.


Increasingly larger settlement amounts and increasingly higher defense expenses are increasingly driving claims losses into the excess layers, and as a result these issues pertaining to the excess policies’ coverage triggers are also increasingly important. These cases underscore the critical importance of the specific wording used in the excess policies, which in turn highlights the need to have an experienced, knowledgeable insurance professional involved in the insurance placement process.


One interesting final note about the Fifth Circuit’s opinion is that it represents the unusual resolution of a case “by quorum.” Due to the July 14, 2011 death of Judge William Garwood, the opinion was issued by the remaining two judges of the three judge panel that heard the case.


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