Horizontal vs. Vertical Exhaustion of Insurance Evaluating Priority - - PowerPoint PPT Presentation

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Horizontal vs. Vertical Exhaustion of Insurance

Evaluating Priority of Coverage Issues and Resolving Disputes When Primary Carrier Settles for Less Than Policy Limits

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Today’s faculty features: Jeffrey J. Vita, Partner, Saxe Doernberger & Vita, Hamden, Conn. Rebecca DiMasi, Partner, Van Osselaer & Buchanan, Austin, Texas William C. Eustace, S enior Vice President, Marsh USA, Inc., New Y

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Evaluating Priority of Coverage Issues and Resolving g y g g Disputes When Primary Carrier Settles for Less Than Policy Limits

Presented by: Jeffrey J. Vita, Saxe Doernberger & Vita, P.C. William C. Eustace, Marsh USA, Inc. Rebecca DiMasi Van Osselaer & Buchanan LLP Rebecca DiMasi, Van Osselaer & Buchanan, LLP

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November 22, 2011

Priority of Coverage

• Multiple parties
• Multiple layers of coverage in AI context
• Loss exceeds limits of a single primary

policy policy

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Priority of Coverage

2 schools of thought:

• 1. Review language of competing policies’

“ th i ” l “other insurance” clauses;

• 2. Determine intent of parties regarding risk

transfer by reviewing underlying contract

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Priority of Coverage

Horizontal Exhaustion

• All available primary policies must

exhaust first exhaust first

• Focus on policy language not underlying
• Focus on policy language, not underlying

contract

• Excess policy is a payer of last resort

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Priority of Coverage

Vertical Exhaustion

• AI policies (primary & excess) exhaust

before upstream party’s primary policy before upstream party s primary policy

• Focus on underlying contract’s indemnity
• bligation not policy language
• bligation, not policy language
• Reflects intent of parties
• Avoids circuity of litigation

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Priority of Coverage - Example

GC’s Corporate Excess Insurance Sub’s Excess Insurance

(GC’s AI Excess Insurance)

GC’s Corporate Primary Insurance Sub’s Primary

(GC s AI Excess Insurance)

Primary Insurance y Insurance

(GC’s AI Carrier)

General Contractor

(“GC”)

Sub-Contractor

(“Sub”)

Promise to Indemnify

Promise to Procure Promise to Procure Insurance

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Priority of Coverage - Example

Contract requires $5M of primary non-contributory coverage

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q $ p y y g

Horizontal v. Vertical Exhaustion - Views 1) Illinois View

• Focuses upon traditional rules of

p primary v. excess without examining language 2) New York/California View

• Focuses primarily upon the language
• Focuses primarily upon the language

within the policy 3) I d it Vi 3) Indemnity View

• Focuses primarily upon the language of

the subcontractor agreements the subcontractor agreements

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Priority of Coverage

Horizontal Cases Vertical Cases

• Illinois
• 4th Circuit (Virginia)

th

• California
• New York
• 5th Circuit (Texas)
• 8th Circuit
• New York
• 8

Circuit (Arkansas)

• Mi

i

• Missouri
• Kentucky
• Kentucky

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Illinois View

• Kajima Constr. Servs. v. St. Paul Fire and

Marine Ins. Co., 227 Ill. 2d 102 (2007) Marine Ins. Co., 227 Ill. 2d 102 (2007)

• N

th Ri I C G i ll M t

• North River Ins. Co. v. Grinnell Mut.

Reinsurance Co. 369 Ill. App. 3d 563 (2006) (2006)

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New York/California Views

• Bovis v. Great Amer. Ins. Co., 855 N.Y.S.

2d 459 (2008) 2d 459 (2008)

• Ti h

C t C G t A I

• Tishman Constr. Corp. v. Great Am. Ins.

Co., 861 N.Y.S. 2d 38 (2008)

• JPI Westcoast Constr. L.P. v. RJS &

Assoc., Inc. et.al, 156 Cal. App. 4th 1448 (2007) ( )

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Priority of Coverage – Horizontal Exhaustion Example

Owner (DASNY)

• Const. Mgr
• Gen. Ctr.

(BOVIS) Illinois $1M Primary Policy (STONEWALL) Liberty $1M Primary Policy

Steel Ctr (SMI-OWEN)

Westchester $10M Umbrella Elevator Sub. (AJ MCNULTY) Great American Concrete Sub. (J&A)

QBE $1M Primary United $5M Umbrella

DECEDENT

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Bovis

Trial Court Apportionment of AI Coverage for Bovis Trial Court Apportionment of AI Coverage for Bovis

QBE $1,000,000 J&A Primary J&A Primary UNITED $5,000,000 J&A Umbrella J&A Umbrella LIBERTY $1,000,000 WESTCHESTER $10,000,000 Stonewall Primary ILLINOIS $1,000,000 Stonewall Umbrella BOVIS Primary

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Bovis

Appellate Court Apportionment of AI Coverage for Bovis Appellate Court Apportionment of AI Coverage for Bovis

QBE $1,000,000 J&A P i J&A Primary LIBERTY $1 000 000 $1,000,000 Stonewall Primary ILLINOIS $1,000,000 BOVIS Primary UNITED $5,000,000 J&A Umbrella WESTCHESTER $10,000,000 Stonewall Umbrella

Sharing pro rata

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Indemnity View

Vertical Exhaustion/Circuity of Litigation

• Wal-Mart Stores Inc v RLI Ins Co

292

• Wal-Mart Stores, Inc. v RLI Ins. Co., 292

F.3d 583 (8th Cir 2002)

• American Indemnity Lloyds v Travelers

Property Casualty Ins. Co., 335 F.3d 429 (5th Cir 2003)

• Hertz Equip Rental Corp v Ammon
• Hertz Equip. Rental Corp. v. Ammon

Painting Co. 2009 MO. App. LEXIS 1131 (Mo App 2009) (Mo. App. 2009)

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Vertical Exhaustion Example – Wal-Mart

National Union RLI $10M Excess 2 3 $10M Primary $10M Excess 1

• St. Paul

$1M Primar 3 Wal-Mart Retailer Cheyenne - Manuf.

AI Status Indemnity

$1M Primary

Contract – required $2M Primary Obtained - $1M Primary/$10M Excess Settlement - $11M: St. Paul $1M/RLI $10M DJ – Wal-Mart and National Union sought to avoid contributing to $10M paid by RLI Result – St. Paul $1M/RLI $10M

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Horizontal/Vertical Exhaustion Check List

Risk Management/Pre-Litigation

• Check applicable state’s law regarding horizontal/vertical

exhaustion

• If

Additi l I d (“AI”) dd ti l

• If you are an Additional Insured (“AI”), add a vertical

exhaustion endorsement to your corporate policy

• Require vertical exhaustion of all AI policies in contracts
• Require vertical exhaustion of all AI policies in contracts
• Check AI policies’, “other insurance” provisions and

endorsements regarding horizontal exhaustion endorsements regarding horizontal exhaustion

• Ensure that indemnity agreement is broad and enforceable

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Horizontal/Vertical Exhaustion Check List Claims & Litigation Management

• Put your corporate policy and all AI policies (primary +

y p p y p (p y excess) on notice of “occurrence” and “suit”

• Demand that AI policies pay vertically
• Demand indemnification from named insured on the AI policy

to trigger circuity of litigation and ensure indemnity

• Work with your corporate insurer to ensure coverage in the

event horizontal exhaustion applies

• C

id b h f t t l i i t d i d if

• Consider breach of contract claim against named insured if

they fail to obtain AI coverage promised

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What happens when the insured settles What happens when the insured settles with the primary carrier for less than policy limits? policy limits? It depends on your jurisdiction It depends on your jurisdiction and policy language . . .

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Zeig v Massachusetts Bonding & Ins Co Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928)

• Settlement by insured with primary carrier did

not eliminate excess coverage

• Excess carrier – no rational interest in whether

insured collected full primary limits

• P bli

li d l i f li i i

• Public policy:

delay, promotion of litigation, chilling effect on settlements

• B t

ti ld i diti d t if

• But, parties could impose conditions precedent if

they chose to do so . . .

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Cases following the Zeig rationale:

• Koppers Company, Inc. v. Aetna Casualty and Surety Company,

98 F 3d 1440 (3d Ci 1996) (P l i l ) ( t did t 98 F.3d 1440 (3d Cir. 1996) (Pennsylvania law) (court did not focus

• n

policy language; settlement with primary carrier “functionally exhausted” primary policy)

• Trinity Homes LLC v Ohio Casualty Insurance Company 629
• Trinity Homes, LLC v. Ohio Casualty Insurance Company, 629

F.3d 653 (7th Cir. 2010) (Indiana law) (policy was ambiguous; did not clearly require payment of full CGL limit)

• Rummel v Lexington Insurance Company 123 N M 752 945
• Rummel v. Lexington Insurance Company, 123 N.M. 752, 945

P.2d 970 (N.M. 1997) (policy language – “liability of the Company under this policy shall not attach unless and until the Insured’s Underlying insurance has been paid or has been held li bl t th t t l li bl d l i li it ” did t liable to pay the total applicable underlying limits” – did not preclude underlying insurer from settling for less than its limits and being credited for the balance)

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Comercia Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007) pp ( )

• Distinguished Zeig – lack of specificity in excess

li l policy language

• Different result with specific policy language
• P bli

li f l b ’

• Public

policy favors settlements, but can’t supersede unambiguous policy language

• P li

i d “ t l t f l ” b

• Policy required “actual payment of losses” by

the underlying insurer

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C f ll i th C i ti l Cases following the Comercia rationale:

• Citigroup, Inc. v. Federal Insurance Company, 649

F 3d 367 (5th Ci 2011) ( li i t F.3d 367 (5th Cir. 2011) (excess policies not ambiguous; plain language dictated primary carrier pay full limits before excess coverage was p y g triggered)

• Qualcomm, Incorporated v. Certain Underwriters at

Ll d’ 161 C l A 4th 184 73 C l R t 3d 770 Lloyd’s, 161 Cal.App.4th 184, 73 Cal.Rptr.3d 770 (Cal. Ct. App. 2008) (policy language was not ambiguous; did not apply Zeig because it placed g pp y g p policy considerations above plain language, employed a strained interpretation of “payment,” and stated that parties could use express language)

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and stated that parties could use express language)

Policy language supporting no excess coverage: Policy language supporting no excess coverage:

• “(a) all Underlying Insurance carriers have paid in cash the full amount of their respective liabilities,

(b) the full amount of the Underlying Insurance policies have been collected by the plaintiffs, the Insureds or the Insureds’ counsel, and (c) all Underlying Insurance has been exhausted.”

• “The insurer shall only be liable to make payment under this policy after the total amount of the

Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying Insurance.”

• “only after any Insurer subscribing to any Underlying Policy shall have agreed to pay or have been

held liable to pay the full amount of its respective limits ” held liable to pay the full amount of its respective limits . . .

• “in the event of the exhaustion of all of the limit(s) of liability of such ‘Underlying Insurance’ solely as

a result of payment of loss thereunder.” Citigroup, Inc. v. Federal Ins. Co., 649 F.3d 367, 372-73 (5th Cir. 2011) (emphasis added).

• “Underwriters shall be liable only after the insurers under each of the Underlying Policies have paid
• Underwriters shall be liable only after the insurers under each of the Underlying Policies have paid
• r have been held liable to pay the full amount of the Underlying Limit of Liability.”

Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, 161 Cal.App.4th 184, 73 Cal.Rptr.3d 770 (Cal. Ct.

• App. 2008);

but see Rummel v. Lexington Insurance Company, 123 N.M. 752, 945 P.2d 970 (N.M. 1997) (similar language, opposite result). 99 ) (s a a guage, oppos e esu )

• Policy required “actual payment of losses” by underlying insurer, and stated that the “policy does not

provide coverage for any loss not covered by the ‘Underlying Insurance’ solely by reason of the reduction or exhaustion of the available ‘Underlying Insurance’ through payments of loss thereunder.” 28 Comercia Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007).

Thank You!

Jeffrey J. Vita

Saxe Doernberger & Vita, P.C. 203-287-2103

William C Eustace William C. Eustace

Marsh USA, Inc. 212-345-2192

Rebecca DiMasi Rebecca DiMasi

Van Osselaer & Buchanan LLP 512 225 2823 512-225-2823

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