United States: Settling With Underlying Insurers For Less Than Policy Limits -- The Good, The Decent And The Ugly

Last Updated: June 16 2015
Article by Miles Karson

When a policyholder resolves or settles an insurance claim that implicates multiple layers of insurance, and not every layer is settled at once, trouble is bound to ensue. Unfortunately, for many policyholders, this issue is first considered on the eve of settling a large claim implicating multiple coverage layers. As a result, policyholder after policyholder has unwittingly forfeited their right to excess insurance coverage, because they failed to understand what the law required of them, and failed to see how to use the law to their advantage in settling with their underlying insurers.

The Problem

This primary-excess settlement issue is almost ubiquitous. It lurks behind settlement of most any claim that triggers more than one layer of coverage. The situation typically arises when a lower-level insurer will settle a claim, but still wants some "credit" – however small – for all of those coverage defenses that its lawyers have raised. That "credit" commonly comes in the form of settling for an amount less than policy limits.

All the while, the excess insurers sit, confidently asserting the same defenses as the primary insurer, hoping that the policyholder makes a mistake in settlement that arms them with an additional coverage defense. Excess insurers have the luxury of sitting on their doubtful defenses, with little-to-no incentive to engage in good faith settlement discussions, because they stand a chance that the policyholder will make a critical mistake and relieve them from liability.

Thus, a question arises – can the policyholder settle with the underlying insurer for less than policy limits, then itself "fill the gap" between the settlement amount and the policy's limits of liability? Perhaps not surprisingly, the answer to that question comes from the excess policies themselves.

The Good, The Decent, and The Ugly

Exhaustion language in excess policies varies but generally falls into one of three categories: (1) the good, (2) the decent, and (3) the ugly.

1. The Good

First, the "good" exhaustion language. A well-negotiated excess policy will clearly and unambiguously state that the policy is triggered after exhaustion of the underlying limits through payments by the underlying insurer, the insured or others on behalf of the insured. For instance, a good example of this exhaustion language reads:

This Policy shall provide insurance excess of the Underlying Insurance. Liability shall attach to the Insurer only after (i) the insurers of the Underlying Insurance, the Insureds or others on behalf of the Insureds shall have paid in legal currency amounts covered under the respective Underlying Insurance equal to the full amount of the Underlying Limit . . . .

See Axis Excess D&O Policy, Form XS 0001 12 10. A different, but also good example of favorable exhaustion language is found (in relevant part) in this AIG excess D&O policy:

The Insurer's coverage obligations under this policy attach to the Insurer only after the Total Underlying Limits have been exhausted through payments by, on behalf of or in the place of the Underlying Insurers of amounts covered under the Underlying Policies. This policy shall recognize erosion of an Underlying Limit of an Underlying Policy through payments by others of covered amounts under that Underlying Policy.

See AIG Excess Edge Policy, Form 103224 (02/10).

A policyholder with excess insurance policies containing these or substantially similar exhaustion provisions should feel confident that it will have access to its excess policy limits should it settle with its underlying insurers for less than underlying policy limits.

2. The Decent

Second is the "decent" exhaustion language. In contrast to the above unambiguous exhaustion language that unquestionably allows a policyholder to "fill the gap" left between a settlement for less-than-policy-limits and the underlying limits of liability, there is exhaustion language that arguably leaves things open to interpretation – at least in the minds of insurers. For example, some excess policies provide that:

[I]t is agreed that in the event and only in the event of a reduction or exhaustion of the Underlying Limits of Liability, solely as the result of actual payment of a Covered Claim pursuant to the terms and conditions of the Underlying Insurance thereunder, this policy shall . . . .

See RSUI Excess D&O Liability Policy, Form RSG 230003 0204.

An important pro-policyholder case interpreting and applying similar exhaustion language comes out of the Eastern District of Virginia. See Maximus, Inc. v. Twin City Fire Ins. Co., 856 F. Supp. 2d 797 (E.D. Va. Mar. 12, 2012). In Maximus, Maximus sought coverage from its primary and excess professional liability insurers for a settlement reached in an underlying lawsuit. Maximus settled with its primary insurer as well as its first and second level excess insurers for amounts less than the limits of coverage under those policies. In each settlement, Maximus "absorbed the difference between what the carrier agreed to pay and the policy limit." Id. at 799. Axis, Maximus' third-level excess insurer, however, refused to indemnify Maximus, arguing that its policy was not triggered because Maximus did not exhaust the underlying policies. Specifically, the Axis policy provided that it "shall apply only after all applicable Underlying Insurance with respect to an Insurance Product has been exhausted by actual payment under such Underlying Insurance . . . ." Id. Axis argued that the term "actual payment" clearly created a condition precedent to coverage, requiring payment by the underlying insurers of the full amount of their respective policy limits before the excess policy coverage attached. Id.

The court in Maximus concluded that the exhaustion language in the Axis policy was ambiguous in that it neither stated that "actual payment" required payment of the full limit by the underlying insurer, nor did it expressly preclude the policyholder from filling the gap to exhaust the underlying policy. Id. at 801-02. Thus, the court found that Maximus' settlements with its underlying insurers for less than the full limits of their respective policies, and agreeing to fill the gap so that the policy limits had been reached, satisfied the Axis policy's exhaustion requirement. Id. at 804.

In contrast to the Maximus decision, however, insurers have argued, with some success, that similar exhaustion language is not ambiguous and that it requires exhaustion of underlying limits through actual payments by the underlying insurers. See, e.g., Great Am. Ins. Co. v. Bally Total Fitness Holding Corp., No. 06-C-4554, 2010 WL 2542191 (N.D. Ill. June 22, 2010); JP Morgan Chase & Co. v. Indian Harbor Ins. Co., 2012 WL 2105915 (N.Y. App. Div. June 12, 2012) (applying Illinois law); Forest Labs., Inc. v. Arch Ins. Co., 953 N.Y.S.2d 460 (N.Y. Sup. Ct. 2012).

While the Maximus decision is an important (and correct) one for policyholders, policyholders must be aware that should their excess policies contain exhaustion language that does not expressly address who must make payments to exhaust underlying limits, excess insurers will undoubtedly argue that their policies are only exhausted through full payment of the underlying limits by the underlying insurers. This uncertainty highlights both the importance of negotiating the most favorable exhaustion language when placing insurance and also in being aware of the applicable exhaustion language and controlling case law when settling a claim with underlying insurers.

3. The Ugly

Finally, there is the "ugly" exhaustion language. In contrast to the examples above, there is exhaustion language that requires exhaustion of underlying limits through full payment by the underlying insurers. For example, some excess policies provide:

The coverage hereunder will attach only after all of the Underlying Insurance has been exhausted by the actual payment of loss by the applicable insurers thereunder and in no event will the coverage under this Policy be broader than the coverage under any Underlying Insurance.

See XL Insurance Excess Coverage Form EX 71 01 09 99. Courts interpreting similar exhaustion language have held that only payments made by the underlying insurers exhaust the underlying policy limits, leaving the policyholders unable to trigger excess policies when settling underlying policies for less than policy limits and then "filling the gap." See, e.g., Citigroup v. Federal Ins. Co., 649 F.3d 367 (5th Cir. 2011) (applying Texas law); Comerica Inc. v. Zurich Am. Ins. Co., 498 F. Supp. 2d 1019 (E.D. Mich. 2007); Qualcomm, Inc. v. Certain Underwriters at Lloyd's, London, 73 Cal. Rptr. 3d 770 (Cal. Ct. App. 2008).

Conclusions

There are a number of ways to deal with this situation, but policyholders must first recognize the problem. Then, they need strategies to solve that problem.

While some excess policy forms contain unfavorable exhaustion language, that language should be negotiated out of the policies on renewal. New language should unambiguously allow for exhaustion through payments by either the underlying insurer or the policyholder. We have successfully negotiated such policy changes on behalf of multiple clients numerous times.

If faced with "decent" or "ugly" exhaustion language and a desire to settle, extreme care must be taken. Policyholders must be cognizant of the risk they run in settling with underlying insurers for less than policy limits. By doing so, when faced with this kind of exhaustion language, the policyholder runs a real risk of forfeiting excess coverage. Under such circumstances, it is best to directly raise this issue with the excess insurers, and bring them to the settlement table along with the underlying insurers. Most excess insurers don't want to litigate a claim against a policyholder on their own. Once they know that you are aware of the issue, and are not going to grant them a get-out-of-jail free pass, they may soften to the idea of agreeing to settlement.

In sum, the variety in types of exhaustion language found in excess insurance policies underscores the importance of policyholders getting out in front of this issue when negotiating and placing their insurance programs. All too often, excess policies are an afterthought in the placement process only to become an issue when it's time to settle a significant claim. By being proactive during the placement and negotiation stage, a policyholder can ensure that it has the insurance it expects when faced with resolving a large claim. What is more, being aware of the type of exhaustion language in your policy and the manner in which courts have applied that language is critical when settling a claim with underlying insurers so as not to unknowingly forfeit otherwise accessible excess coverage.

Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage. Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results. Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.