Sixth Circuit Holds Excess Insurer’s Coverage Obligations Not Triggered

In its recent decision in Goodyear Tire & Rubber Co. v. Nat'l Union Fire Insurance Company of Pittsburgh, PA, 2012 FED App. 0337P (6th Cir. Sept. 18, 2012), the United States Court of Appeals for the Sixth Circuit, applying Ohio law, had occasion to consider whether an excess insurer’s coverage obligations were triggered when the primary policy’s limit of liability was not fully exhausted.

Goodyear had a primary layer directors and officers policy with National Union with a limit of liability of $15 million.  It also had an excess policy issued by Federal Insurance Company with a limit of liability of $10 million, excess of the National Union policy.  Notably, Federal’s policy contained an exhaustion provision stating that “[c]overage hereunder shall attach only after [National Union] shall have paid in legal currency the full amount of the Underlying Limit [i.e., National Union's policy limit of $15 million] for such Policy Period.”

Goodyear sought coverage from its insurers for a series of underlying shareholder class actions, and an SEC investigation, arising out of a restatement of Goodyear’s earnings.  While the suits ultimately were dismissed and the investigation terminated, Goodyear’s legal fees amounted to $30 million.  National Union and Federal both disputed coverage for Goodyear’s legal fees, prompting Goodyear to file a declaratory judgment action against both insurers.  After litigating this action for several years, Goodyear entered into a settlement and release with National Union for $10 million.  Federal subsequently argued that as a result of this settlement, its own policy could not be triggered since National Union had not and never would pay “in legal currency the full amount of the Underlying Limit.”  On motion for summary judgment, the United States District Court for the District of Michigan, applying Ohio law, held in Federal’s favor.

In its decision on appeal, the Sixth Circuit telegraphed its decision by characterizing Goodyear’s appeal as being “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.” Goodyear, in fact, conceded that the exhaustion provision in Federal’s  policy was clear and unambiguous.  It nevertheless argued on appeal that the Federal policy should be triggered for two reasons despite the fact that National Union had not paid its full policy limits.

First, argued Goodyear, Ohio strong public policy favoring settlements should trump the exhaustion language in the Federal policy.   In other words, Goodyear should not be penalized for having settled its coverage dispute with National Union.  In support of this argument, Goodyear cited to two cases involving underinsured motorist policies in which the plaintiffs settled with the tortfeasors’ carrier for less than full policy limits and then sought coverage under their own underinsured motorist coverage.  In these cases – Bogan v. Progressive Casualty Ins. Co., 521 N.E.2d 447 (Ohio 1988) and Fulmer v. Insura Prop. & Casualty Co., 760 N.E.2d 392 (Ohio 2002), Ohio’s Supreme Court refused to “strictly enforce” the exhaustion provision in the plaintiff’s underinsured motorist policies.  The Sixth Circuit concluded, however, that the public policy concerns in Bogan and Fulmer were unique to underinsured motorist coverage and were not present in the context of commercial lines coverage:

Underinsured-motorist coverage was mandated under Ohio law at the time of the accidents in Bogan and Fulmer, see Ohio R.C. § 3937.18(A)(2); and the court in Bogan held that the exhaustion provision there was contrary to "the intent of the General Assembly as expressed in" the statute mandating such coverage, 521 N.E.2d at 453. We do not have any such conflict with legislative intent here, which is reason enough not to apply Bogan or Fulmer. Nor do we have any concern about "hasten[ing] the payment to the injured party who obviously needs compensation soon after the injuries when the medical expenses begin to amass and when the anxiety level is probably quite high[,]" id. at 451—which is still more reason not to apply those cases. What we have, instead, is an insurance agreement into which sophisticated parties freely entered.

Goodyear also argued that Federal should not be able to avoid a coverage obligation because it was not prejudiced as a result of its settlement with National Union.  The Sixth Circuit also found this argument unavailing, concluding that prejudice was not a relevant consideration:

But this case does not concern a mere notice or cooperation requirement, which perhaps we could wave off absent any real harm to the insurer. Rather, the provision at issue here is where the rubber hits the road: the agreement's Insuring Clause, under whose terms Federal undisputedly did not agree to provide the coverage that Goodyear now seeks.

Thus, the Sixth Circuit affirmed the lower court’s ruling, concluding that Federal had no coverage obligation to Goodyear as a result of its less than policy limits settlement with National Union.