Exhaustion Means Exhaustion: Courts Require Complete Exhaustion for Excess Coverage: The idea behind excess insurance is easy to understand—an excess policy provides additional coverage above the limits of the underlying, or primary policy. While excess policies generally require primary coverage to be fully exhausted before any claim can be made, insureds and third-party claimants often attempt to access excess coverage prematurely, either through settlements with primary (or lower-tier excess) carriers, or through other creative strategies. In 2012, courts have continued to reject those strategies as disregarding the plain language of the excess policies, finding the requirement of underlying exhaustion to be a condition precedent to coverage.
In Goodyear Tire & Rubber Co. v. Nat’l Union Fire Insurance Company of Pittsburgh, PA, 694 F.3d 781 (6th Cir. 2012), the Sixth Circuit held that Goodyear’s excess insurer (Federal) did not owe Goodyear any coverage under an excess policy because the primary insurer (National Union) had settled for less than its full limits—even though the total loss was greater than the full amount of the underlying limits. Goodyear incurred $30 million in costs it claimed were covered, and had a $15 million policy from National Union and a $10 million policy from Federal, with a single, $5 million deductible. Id. Although National Union disputed that the losses were covered, it settled for $10 million. Id. The district court granted summary judgment to Federal, and the Sixth Circuit affirmed on the plain language of the policy that provided “[c]overage hereunder shall attach only after [National Union] shall have paid in legal currency the full amount of the Underlying Limit.” Id. The Sixth Circuit refused to accept any “public policy favoring settlement” as abrogating the policy language, id. at 783, having already noted its view that the appeal was “the latest in a series of recent cases in which one corporation asks us to disregard the plain terms of its insurance agreement with another corporation.” Id. at 782.
Likewise in JP Morgan Chase & Co. v. Indian Harbor Ins. Co., 98 A.D. 3d 18 (1st Dep’t 2012), New York’s Appellate Division, 1st Department (applying Illinois law), held that where the insured had a multi-layer excess insurance structure, the carriers in the higher layers had no duty to indemnify the insured because of the mechanics of the insured’s settlement with other, lower layer carriers. Finding a condition precedent to payment similar to the one in Goodyear, the First Department held that no liability could attach to the fourth excess policy because the third excess layer carrier “did not admit liability when it settled with plaintiff” and in fact had also settled an unrelated claim made by the same insured against another insurer affiliated with the third excess layer carrier, with no allocation to the specific claim at issue. Id. at 20-21. Since the insured could not demonstrate that the underlying insurers had “duly admitted liability and [had] paid the full amount of their respective liability,” it could not recover. Id. Making similar findings for higher-tier carriers, the First Department expressly rejected the notion that a lower layer policy can be deemed exhausted if the insured is willing to absorb the difference in settlement. Id. at 22-23.
Lastly, in Preferred Construction, Inc., v. Illinois Nat. Ins. Co, No. 11-4339-cv, 2012 WL 3735056 (2d. Cir. Aug. 30, 2012), the Second Circuit held that an excess carrier could not be called to defend an insured where the primary carrier’s policy had not exhausted, even though the underlying claim only sought “any recovery that [the underlying plaintiff] may obtain in excess of the primary policy limits.” In Preferred Construction, the excess policy contained a requirement that it did not attach until “the total applicable limits of Scheduled Underlying Insurance have been exhausted.” Id. at *2. The Second Circuit rejected plaintiff’s argument that the policy was triggered because the “complaint seeks only damages above the ‘applicable limits’ of the underlying coverage” as “miss[ing] the mark, however, because even if … the claim is one for damages above the ‘applicable limits,’ exhaustion is still a condition precedent to triggering [the excess policy], and that condition has not been met.” Id. at *3.