Louisiana Court Dismisses Excess Insurer’s Claim Against Primary Insurer

In its recent decision in RSUI Indem. Co. v. American States Ins. Co., 2013 U.S. Dist. LEXIS 161805 (E.D. La. Nov. 13, 2013), the United States District Court for the Eastern District of Louisiana had occasion to consider the duties owed by a primary insurer to an excess insurer.

Ameraseal was insured under a $1 million primary commercial auto policy issued by American States Insurance Company (“ASIS”) and a $5 million excess policy issued by RSUI.  Following an auto accident involving a vehicle owned by ASIS and being operated by an Ameraseal employee, a personal injury suit was filed against Ameraseal, the employee and ASIS.  RSUI was not named as a defendant.  Plaintiff settled with ASIS for the policy’s $1 million limit of liability, and a week later RSUI settled on behalf of its insureds, and itself, for $2 million.  As a result of the settlements, the matter never had to go to trial.

RSUI later brought suit against ASIS alleging bad faith failure to properly defend Ameraseal and the employee in the underlying matter.  RSUI claimed that had ASIS properly defended the case, then the loss would have remained in the primary insurance layer and RSUI would not have been required to pay $2 million.  ASIS countered that RSUI’s lawsuit was an impermissible means of stating legal malpractice claim against ASIS’ defense counsel.  ASIS further argued that it could not be liable in excess of its policy’s $1 million limit of liability since there was never an opportunity to settle the underlying matter within the policy’s limit of liability and since there was no excess verdict.  The court only considered ASIS’ latter argument.

Citing to Great Southwest Fire Insurance Co. v. CNA Insurance Companies, 557 So. 2d 966, 967 (La. 1990), the court acknowledged that under Louisiana law, a primary insurer owes a duty to an excess carrier to defend and to conduct settlement negotiations in good faith.  The court further noted, that while there was no controlling case law from Louisiana’s highest court as to whether such a claim can exist in the absence of a jury verdict, case law from the federal court level, including the Fifth Circuit, has consistently held that a verdict is a predicate for such a claim. RSUI argued that this case law was distinguishable, since its bad faith theory was not premised on a failure to settle, but instead was based on ASIS’ failure to properly defense the underlying suit, which resulted in a settlement value higher than necessary.  The court rejected RSUI’s theory, holding that even if such a distinction was relevant, RSUI would still be required to demonstrate an excess judgment as a necessary element of a bad faith claim against the primary insurer.

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.

Second Circuit Considers Excess Insurer’s Duty to Defend

In its recent decision in Preferred Constr., Inc. v. Ill. Nat'l Ins. Co., 2012 U.S. App. LEXIS 18395 (2d Cir. Aug. 30, 2012), the United States Court of Appeals for the Second Circuit, applying New York law, had occasion to consider when an excess insurer’s duty to defend is triggered, particularly in the context of New York’s anti-subrogation rule.

Preferred Construction was a subcontractor on a construction project involving a cemetery owned by the Diocese of Rockville Center.  One of Preferred Construction’s employees was injured while on the job, and brought suit against the cemetery, the Diocese, and the project’s general contractor.  Each of these entities tendered their defense to Preferred Construction, which was insured under a primary general liability policy issued by Nova Casualty Company and an excess liability policy issued by Illinois National.  Nova undertook a defense of each of these entities.

Each of these three parties subsequently asserted third-party claims for contribution and indemnification against Preferred Construction, but only for “any recovery that plaintiff may obtain in excess of the primary policy limits of [Preferred Construction].”  Presumably, the third-party complaint was alleged in such a fashion so as to circumvent New York’s anti-subrogation rule, which prohibits one insured from suing another insured under the same policy for amounts within the policy limits.  Nova tendered the third-party complaint directly to Illinois National, asserting that Illinois National had a duty to defend Preferred Construction because the third-party complaint sought amounts only in excess of the Nova policy, i.e., amounts that only could be paid under the Illinois National policy.

In considering Illinois National’s duties to Preferred Construction, the Second Circuit observed the general rule that an excess insurer’s obligations are not triggered until exhaustion of underlying limits, and that while an excess insurer may elect to participate in the defense of its insured, it generally has no obligation to do so.  Such duties were clearly stated in the language of Illinois National’s excess policy.  Thus, the court concluded, Illinois National’s obligations under its policy, including its duty to defend, could only be triggered upon full exhaustion of the Nova policy.  That the third-party complaint sought amounts only in excess of the Nova policy’s limits was irrelevant, as the court explained:

The fact that the third-party complaint seeks indemnification only for "any recovery that plaintiff may obtain in excess of the primary policy limits" does not change this result. Requiring Illinois National to defend in these circumstances would effectively permit any claim of excess damages to preemptively trigger the excess insurer's duty to defend—regardless of when (or whether) the limits of the primary policy are exhausted. Such a result would appear to eviscerate the general rule that the excess insurer "may elect to participate in an insured's defense to protect its interest, [but] . . . has no obligation to do so."

In reaching its holding, the court considered Nova’s and Preferred Construction’s argument concerning New York’s anti-subrogation rule, which states that “[a]n insurer… has no right of subrogation against its own insured for a claim arising from the very risk for which the insured was covered.”  N. Star Reins. Corp. v. Cont'l Ins. Co., 604 N.Y.S.2d 510 (1993).  The Second Circuit acknowledged that pursuant to the anti-subrogation rule, Preferred Construction could only be sued by the additional insureds under the Nova policy for amounts in excess of that policy’s $1 million limits.  The court nevertheless concluded that this rule did not trump the more basic rule of underlying exhaustion:

Whatever effect the anti-subrogation rule might have on Nova's duty to defend (an issue on which we express no opinion), it is clear enough for our purposes that the rule cannot operate to defeat the reasonable expectations of Preferred Construction and Illinois National. We find no authority permitting us to depart from New York's well-settled rule that an excess carrier has a right, not an obligation, to assist in the defense of its insured when the primary insurance has not yet been exhausted.

Fifth Circuit Holds Excess Insurer Prejudiced By Late Notice

In its recent decision in Berkley Regional Ins. Co. v. Philadelphia Indemnity Ins. Co., 2012 U.S. App. LEXIS 15998 (5^th Cir. Aug. 2, 2012), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider how and under what circumstances an excess/umbrella insurer is prejudiced as a result of an insured’s failure to provide timely notice of occurrence or suit.

The insured, Towers of Town Lake Condominiums (“Tower”), had a $1 million primary policy with Nautilus and a $20 million excess/umbrella policy with Philadelphia.  Towers was sued when a dentist slipped and fell on its premises.  It placed Nautilus on notice of the suit, but did not give immediate notice to Philadelphia.  At a mediation held prior to trial, the plaintiff’s “bottom” demand was $215,000 and Nautilus’ “top” offer was $150,000.  The parties reached an impasse and the case, therefore, proceeded to trial.  A jury subsequently rendered a verdict in favor of the plaintiff in the amount of just under $1.7 million.  On the day of the verdict, Towers finally gave notice to Philadelphia.  Philadelphia thereafter denied coverage based on late notice.

The Philadelphia policy required prompt notice of any occurrence involving permanent disabilities, or otherwise involving a coverage issue that could result in a reservation of rights or disclaimer of coverage.  Additionally, the Philadelphia policy had a provision allowing it to associate in the defense, settlement and investigation of any underlying claim, at the discretion of Philadelphia.  Nautilus, suing on behalf of Towers, argued that Philadelphia’s late notice disclaimer was not valid as Philadelphia was not prejudiced by Towers’ untimely notice. The lower court held in Nautilus’ favor.  On appeal, the Fifth Circuit was asked whether as a matter of law “[d]oes the failure to give notice to an excess carrier until after an adverse jury verdict constitute evidence of prejudice that forfeits coverage?”    

Looking to Texas case law on late notice, the Fifth Circuit observed that the purpose of notice provisions are to protect the insurer’s right and ability to participate in the underlying suit and to minimize its potential loss.  While these cases generally involved primary insurers, the court could find no basis for drawing a distinction between the interests of primary insurers and excess insurers, explaining:

While their responsibilities are different and, thus, they may not suffer prejudice in all circumstances where a primary carrier would, [excess insurers] nonetheless have a contract with the insured and are entitled to rely upon the same contract principles [as do primary insurers].

The court noted that while it is not always easy to determine prejudice, certain bright lines can be drawn.  For instance, prejudice will be presumed where notice is first given after a default judgment.  The court further observed that notice given once the case is “over” is too late, citing to the Texas Supreme Court decision in National Union Fire Ins. Co. v. Crocker, 246 S.W.3d 603 (Tex. 2008).  Nautilus nevertheless argued that Crocker was inapplicable because the case was defended by Nautilus.  In other words, a distinction should be drawn between a situation where a primary insurer does not have a chance to defend and where an excess insurer does not receive notice until after verdict.  The Fifth Circuit rejected this distinction, explaining:

[Nautilus] argues that this case is more like the “better late than never” cases and not like Crocker because no default was entered; rather, the case was litigated by competent counsel to a jury verdict.  We disagree … Philadelphia was not just notified “late,” it was notified after all material aspects of the trial process had concluded and an adverse jury verdict was entered.  It lost the ability to do any investigation or conduct its own analysis of the case, as well as the ability to “join in” Nautilus’ evaluation of the case.

Just as important for the court was that Philadelphia lost its opportunity to participate in the pretrial mediation: 

Mediation, by nature, is a dynamic process, and for that very reason, parties are expected (and usually ordered) to appear ready to negotiate and with “full” settlement authority … Thus, we cannot fully know what effect, if any, Philadelphia’s participation would have had on this process – e.g., convincing Nautilus to take [plaintiff’s] offer of $215,000, convincing [plaintiff] to come down further or accept Nautilus’ offer of $150,000, or even “dropping down” to pay the $65,000 difference between the parties’ offers (with or without a side agreement between itself and Nautilus to litigate who must ultimately pay that amount).  All of these rights were lost, leaving Philadelphia holding the bag for more than $700,000 in excess liability …

Finally, the court rejected Nautilus’ argument that Philadelphia’s rights were protected since it had an opportunity to participate in the appeal of the underlying verdict.  Given the posture of an appeal and the standard of review applicable to the appellate issues, the court observed that the “cows had long since left the barn when Philadelphia was invited to close the barn door.”