HB Allocation oct2013 Excess and Primary Rights and Obligations


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HB Allocation oct2013 Excess and Primary Rights and Obligations

  1. 1. final October 28-29, 2013
  2. 2. Jennifer Mathis Troutman Sanders LLP Jerold Oshinsky Kasowitz Benson Torres &Friedman LLP
  3. 3.     Exhaustion 101: Who pays what, and why, to trigger excess coverage Effect of occurrence v. aggregate limit of liability on trigger of excess coverage Duties relevant to excess issues: notification, reporting, settlement and defense Vertical v. horizontal exhaustion
  4. 4. When is excess coverage triggered?
  5. 5.  The underlying insurer(s)  “[Excess insurer] shall be liable only after the insurers under each of the Underlying Policies have paid or have been held liable to pay the full amount of the Underlying Limit of Liability.”  The insured  “shall not attach unless and until the insured, or the insured’s underlying insurer, has paid the amount of Underlying Insurance”  Someone else  “underlying policies will be reduced or exhausted only by payment made on behalf of the insured”  Bankrupt and insolvent underlying insurers  Policy language may address – maintenance clause?  Ali v. Federal Ins. Co., 719 F.3d 83 (2d Cir. 2013) (excess insurer not required to drop down to fill gap in coverage created by insolvent underlying insurers where policy language required “payment” of underlying insurance rather than just accrual of losses).
  6. 6.  Actual payment  “Coverage hereunder shall attach only after the insurers of the Underlying Insurance shall have paid in legal currency the full amount of the Underlying Limit”  Covered loss only?  Underlying insurer “held liable” to pay  “liability does not attach until the underlying insurers have paid or have been held liable to pay”
  7. 7.  Gap-filling not allowed: ◦ See, e.g., Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 161 Cal. App. 4th 184 (2008) (excess policy required actual payment of entire limit by primary insurer); Goodyear Tire & Rubber Co. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 694 F.3d 781 (6th Cir. 2012); Comerica Inc. v. Zurich American Ins. Co., 498 F. Supp. 2d 1019, 1028 (E.D. Mich. 2007) (excess policy required primary insurer to exhaust entire limit of liability by actual payment).  Gap-filling allowed: ◦ See, e.g., Zeig v. Massachusetts Bonding & Sur. Ins. Co., 23 F.2d 665 (2d Cir. 1928) (insured may fill in gap to trigger excess coverage; holding has since been limited); Schmitz v. Great Amer. Assurance Co., 337 S.W.3d 700 (Mo. 2011) (per policy language, excess policy was triggered when insured or underlying insurer became “obligated to pay” underlying limits, despite primary insurer’s below limits settlement); Maximus Inc. v. Twin City Fire Ins. Co., 2012 WL 848039 (E.D. Va. March 12, 2012) (excess policy requiring “actual payment under such underlying insurance” allows insured to fill the gap).  Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d 1116 (N.J. 1988) (provides allocation formula to determine whether excess might be triggered)
  8. 8.     Avoids problem of primary insurers prematurely shifting obligations to excess Premiums: significant difference between excess and primary due to attachment points Point at which excess defense obligation might be triggered is important Avoids settlement manipulation -See Ali v. Federal Ins. Co., 719 F.3d 83, 94 (2d Cir. 2013)
  9. 9.  Policy language is key  Know your jurisdiction  Carefully consider effects of settlements with underlying insurer if loss may reach into excess layer(s)
  10. 10.  Difference between per occurrence and aggregate limit of liability ◦ Examples of policy language ◦ Per perpetrator example (sexual abuse cases)  Why does it matter? ◦ Excess may attach earlier ◦ Insured may end up with less coverage ◦ Insurer may end up with less reinsurance  Review/understand policy language in the application process
  11. 11.  Timely tender to all layers: excess may raise late notice defense ◦ Policy may address this; e.g., notification or consent required only for claims that are likely to exceed a certain percentage of underlying limits  Duty to keep excess informed of developments?
  12. 12.  Generally, “an excess carrier has no duty to contribute to a settlement or to the defense of the insured until the primary carrier’s policy limits have been exhausted.” -Continental Cas. Co. v. Royal Ins. Co., 219 Cal. App. 3d 111, 118 (1990)  Even if liability is likely to invade excess layer, primary carrier has exclusive duty to defend -Signal Cos., Inc. v. Harbor Ins. Co., 27 Cal. 3d 359, 380 (1980)  Primary insurer may not tender its limits to trigger excess defense obligation. -Douglas v. Allied American Ins. Co., 727 N.E.2d 376 (Ill. App. Ct. 2000)  Primary insurer retains right to control settlement -Diamond Heights Homeowners Ass’n v. Nat’l Am. Ins. Co., 227 Cal. App. 3d 563, 577-78 (1991)
  13. 13.  What if primary refuses to defend? ◦ Depends on language of excess policy as well as jurisdiction. See, e.g., Nat’l Union Fire Ins. Co. of Pittsburgh v. Seagate Techs, Inc., 2012 WL 169703 (9th Cir. Jan. 20, 2012) (no duty to drop down and defend absent exhaustion); Johnson Controls, Inc. v. London Market, 784 N.W.2d 579 (Wis. 2010) (because primary denied coverage, no other insurance was “available” and excess must defend).
  14. 14.  Primary generally owes no contractual duty to protect excess insurer’s interests -See Commercial Union Assur. Cos. v. Safeway Stores, Inc., 26 Cal. 3d 912, 918 (1980) -But seeFederal Ins. Co. v. North Am. Spec. Ins. Co., 921 N.Y.S.2d 28 (N.Y.App Div. 2011)  Claim for equitable subrogation may exist  -See Commercial Union Assur. Cos. v. Safeway Stores, Inc., 26 Cal. 3d 912, 918 (1980) ◦ Derivative of insured’s rights -American Guar. & Liab. Ins. Co. v. USF&G, 668 F.3d 991 (8th Cir. 2012) (excess insurer’s bad faith claim against primary failed where insured never made demand that primary settle within limits)
  15. 15.  Keep excess informed  Be proactive  Broker input/assistance in dealing with multiple layers?
  16. 16. Up and down and side to side
  17. 17.     Long tail claims – multiple policy years triggered All primary insurance must be exhausted Benefits excess insurer Examples: ◦ State of California v. Continental Ins. Co. 55 Cal.4th 186 (2012) (adopted an “all sums with stacking” rule)  Addressed again in Kaiser Cement & Gypsum Corporation v. Insurance Company of the State of Pennsylvania, 215 Cal.App.4th 210 (2013) (all primary insurance must be exhausted to trigger excess); opinion later depublished ◦ United States Gypsum Co. v. Admiral Ins. Co., 643 N.E.2d 1226, 1261 (Ill. App. Ct. 1994) (all triggered primary policies must be exhausted)
  18. 18.    Excess triggered where specific underlying primary policy exhausted, even if other primary insurance is available Benefits primary insurers and insureds Examples: ◦ Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d 1116 (N.J. 1998) ◦ Westport Ins. Corp. v. Appleton Papers Inc., 787 N.W.2d 894, 918-19 (Wisc. Ct. App. 2010)
  19. 19.  Excess over specific underlying or all underlying?  Anti-stacking provision?  Other insurance provision?
  20. 20.       Jennifer Mathis Troutman Sanders LLP Phone: 949.622.2721; Email: jennifer.mathis@troutmansanders.com Jerold Oshinsky Kasowitz Benson Torres &Friedman LLP Phone: 424.288.7903; Email: JOshinsky@kasowitz.com