California Court Addresses Horizontal Exhaustion Requirement

In the recent decision Kaiser Cement & Gypsum Corp. v. Insurance Company of the State of Pennsylvania 2013 Cal. App. LEXIS 269 (2^nd Dist. April 8, 2013), the California Court of Appeal considered whether horizontal or vertical exhaustion of insurance coverage was required in a continuing damage case.  The case was a follow up to the earlier decision by the court in London Market Insurers v. Superior Court (2007) 146 Cal.App.648, in which it held that “occurrence” in that case meant injurious exposure to asbestos, so there was not a single annual occurrence as was urged by the insurers.  In Kaiser Cement, the court considered how to allocate the coverage for the asbestos bodily injury claims.

In the period 1947 to 1987, four different primary insurers, including Truck Insurance Exchange, insured Kaiser.  Truck covered Kaiser from 1964 to 1983.  Kaiser selected the Truck policy for the year 1974 to be the primary policy which to provide Kaiser with a defense in connection with underlying asbestos bodily injury claims because that policy had no deductible or aggregate limit.  ICSOP was the first level excess insurer over the Truck policy's $500,000 per occurrence policy limit.  The appellate court addressed the issue of which insurer(s) should pay for claims over the $500,000 policy limit.

Significantly, Truck’s other primary policies had deductibles so, as the court noted, Kaiser’s share of any loss potentially increased if there was allocation to other primary policies rather than to the ICSOP excess insurance.  ICSOP nevertheless urged requirement of horizontal exhaustion of all primary policies before its own policy attached, both as a matter of California law and the specific language of the ICSOP policy , pursuant to which the policy limits of all primary policies triggered by an occurrence had to exhaust before coverage was triggered.

The Kaiser Cement court agreed that ICSOP’s policy was excess of all collectible primary insurance based on the policy’s definition of “retained limit” being both the scheduled primary policy and “the applicable limits of any other underlying insurance collectible by the Insured.”  The court nevertheless concluded that Truck's primary policies, other than the 1974 policy, were not collectible because the limits of liability clause in Truck's 1974 policy stated that $500,000 was the limit of the company’s liability for each occurrence and also that “the limit of the Company’s liability as respects any occurrence … shall not exceed the per occurrence limit” set forth in the policy declarations, i.e., $500,000.  The court read this language as an anti-stacking provision, meaning that Truck's 1974 policy was the sole policy that could be triggered by the underlying suits.

The appellate court stated that its holding was consistent with the California Supreme Court’s recent “all-sums-with-stacking” decision in  State of California v. Continental Ins. Co. (2012) 55 Cal.4^th 186, because that decision specified that insurers could avoid stacking of limits by including “’antistacking’” provisions in their policies.  The court held that Truck’s limit of liability language was just such an antistacking provision.  The court remanded the matter to the trial court to determine if there were remaining limits in the other primary carriers’ policies for the injury claims which exceeded Truck’s $500,000 policy limit.

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.

Delaware Supreme Court Considers Exhaustion of Underlying Coverage

In its recent decision in Intel Corp. v. American Guarantee & Liability Insurance Co., 2012 Del. LEXIS 480 (Del. Sept. 7, 2012), the Supreme Court of Delaware, in a case involving application of California law, had occasion to consider whether an insured’s out-of-pocket payment of defense costs count toward exhaustion of policy limits for the purpose of triggering an excess policy.

The Intel decision is yet the latest decision in a complicated coverage case that has proceeded in both Delaware state court and California federal court.  The coverage litigation arises out of several class action antitrust lawsuits filed against Intel.  In the relevant policy year, Intel had a primary general liability policy issued by Old Republic with limits of liability of $5 million, and an excess policy issued by XL Insurance Company with limits of liability of $50 million.  Immediately excess to the XL policy was a follow form excess liability policy issued by American Guarantee & Liability Insurance Co. (“AGLI”).  As a result of coverage litigation between XL and Intel, XL paid to Intel $27.5 million of its $50 million policy limits.  Intel continued to pay defense costs out-of-pocket following this settlement. Intel claimed that AGLI’s policy was triggered as a result of its payment of sufficient defense costs.  AGLI, however, contended that the XL policy could only be exhausted as a result of payments made by XL.

Complicating the court’s analysis was the fact that the AGLI policy contained two provisions concerning when AGLI’s coverage obligations were triggered.  After determining which provision controlled, the court considered the intent of that provision’s language, which stated:

C.  Nothing contained in this Endorsement shall obligate us to provide a duty to defend any claim or suit before the Underlying Insurance Limits shown in Item 6 of the Declarations are exhausted by payment of judgments or settlements.  (Emphasis supplied.)

The court concluded that under California law, the phrase “payments of judgments or settlements” could not be interpreted to include payments by the insured.  “Judgments,” the court explained, refers to a decision by an adjudicative body, whereas “settlements” refers to agreements between parties to a dispute.  Intel’s payment of its own defense costs, reasoned the court, were payment of neither judgments nor settlements.  As the court explained:

California law does not provide a definitive interpretation of the phrase “payment of judgments or settlements.”  Although not dispositive of our holding, we note that California courts general have construed the phrase to exclude cases where the insured “credits” the underlying insurance carrier with the remaining policy limits.  That is, courts have required the actual payment of the full underlying limits.  The requirement of actual payment supports our plain meaning interpretation of “judgments or settlements” to exclude Intel’s direct payment of defense costs, and require actual payment by the insurer.

In reaching this holding, the Delaware Supreme Court relied on the California Court of Appeals decision in Qualcomm, Inc. v. Certain Underwriters At Lloyd’s London, 73 Cal.Rptr.3d 770 (Cal. Ct. App. 2008).  The Qualcomm court held that an insured could not trigger its excess policy by paying the gap created when it settled with its primary insurer for less than full policy limits. The Delaware Supreme Court acknowledged that the exhaustion language in the policy in Qualcomm was slightly different than that contained in the AGLI policy, but it nevertheless found a general rule that “[p]lain policy language on exhaustion, such as that contained in Paragraph C [of the AGLI policy], will control despite competing public policy concerns.”  Moreover, the court rejected Intel’s reliance on the Second Circuit decision in Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928), which held that an insured can properly exhaust a policy by out-of-pocket payments.  Zeig, noted the Delaware court, had been rejected by the Qualcomm court and courts in other jurisdictions as well.

Fifth Circuit Holds Settlement With Primary Insurer Did Not Result In Exhaustion

In Citigroup Inc. v. Federal Ins. Co., 2011 U.S. App. LEXIS 16316 (5^th Cir. Aug. 8, 2011), the United States Court of Appeals for the Fifth Circuit, applying Texas law, considered whether a settlement between an insured and a primary layer insurer for an amount less than the policy’s limits could be considered exhaustion of that policy for the purpose of triggering excess policies in the insured’s tower of coverage.

Citigroup, as successor to Associates First Capital Corporation, sought coverage under a $200 million tower of directors and officers coverage for underlying consumer lending practices claims.  While Citigroup provided timely notice of the claims, it later settled the matters without the consent of its insurers, prompting an initial denial of coverage from each of the insurers in the tower.  Citigroup’s primary insurer, Lloyd’s, later changed its coverage determination and agreed to a $15 million settlement with Citigroup, notwithstanding the fact that the policy had a $50 million limit of liability.  The remaining insurers maintained their denial of coverage, resulting in coverage litigation.

The Fifth Circuit considered whether the lower court properly granted summary judgment to the insurers on the basis that there was no exhaustion of the primary Lloyd’s policy.  Citing to New York law, Citigroup argued that if an excess policy ambiguously defines “exhaustion,” then settlement with an underlying insurer, even if for an amount less than full policy limits, necessarily constitutes exhaustion for the purpose of determining excess layer attachment.  The court disagreed that there was any ambiguity, holding that each excess policy plainly defined when and under what circumstances underlying insurance would be considered exhausted.  Specifically, each policy required payment of the “full” or “total” amount of underlying limits.  As such, the court held that Citigroup’s settlement with Lloyd’s, for an amount less than the full policy limits of that policy, could not be considered exhaustion for the purpose of triggering Citigroup’s excess insurance policies.