United States: Sometimes You Have To Sweat The Small Stuff: Technicality Renders $10M Excess Policy Valueless (Podcast)

Eric Jesse: In this case, it was the Third Circuit that held that a high-level excess carrier, it was an eighth layer policy issued by Twin Cities, did not have to provide any coverage defense or indemnity for defense costs that were incurred in a class action lawsuit and a settlement that was ultimately reached. And so in this case, there was a $200 million tower of coverage. Twin Cities sat at the eighth layer above $175 million, and you have a $207 million settlement in defense costs. And so Pharmacia, they go through each layer of coverage, the primary and the first seven layers, and each carrier agrees to pay out their full limit. They get to Twin Cities and Twin Cities says, "Nope, we are not paying." And what the court held and what the insurers argued is the builder didn't satisfy these uber technical requirements in the policy that the underlying insurers needed to have dually admitted liability, number one, and number two, to have paid the full amount of their respective liability.

And so the Third Circuit said, "Well, there was no dual admission of liability by the primary first seven carriers, and so you didn't satisfy these technical requirements in the policy and there is no coverage."

Lynda Bennett: Let's unpack that a little bit 'cause this is a very typical scenario where you've got a very large claim, you've got multiple layers of coverage as you said. And we're going to talk about some of our favorite bedrock principles here on Don't Take No For An Answer. We're going to talk about the devil being in the details of the actual policy language. We're going to talk about the importance of being strategic as you're dealing with a very large claim like this and looking around the corner and thinking, "What is the end game here?" Because, in this case, many of our clients think, "Well, I just have to look at the primary policy because the rest of this coverage is going to be 'follow form'," which, Eric, you know, means that the excess policies largely follow the terms and conditions. But what's one takeaway that's really important from this Pharmacia case that our listeners need to know?

Eric Jesse: Well, the words in the excess policy certainly matter, and the triggers of coverage of that excess policy certainly matter. And so I think a lot of times when you have companies that are placing these very large towers, there isn't enough or any focus on the words that are in that eighth, ninth, 10th layer on policy. And we're seeing here, those words matter, according to the Third Circuit.

Lynda Bennett: Let's Monday morning quarterback for a second. Are you saying, Eric, that if the policy holder here had gotten their tower of policies before this claim got presented and they had somebody actually reviewing the terms and conditions of that very top layer policy, that there's something the policy holder could have done before this claim ever got presented to avoid stepping into this bear trap?

Eric Jesse: Yeah, absolutely. And I suspect that this language might have been in the underlying policies, but when we are reviewing excess policy forms, we are very attuned to these types of issues that will trigger the excess carrier's obligation. So we want to see language that says, first of all, that there doesn't need to be any admission of liability by the underlying carriers. That's a very, very unusual language. And then on the requirement that the underlying carriers pay the full amount of their respective liability, we want to strike that language and say that the payment of underlying limits can come from any source, it can come from the insured, it can come from the underlying carriers. It can come from a third party just to give maximum flexibility to the policy holder when they need to hit that excess policy.

Lynda Bennett: And that devil really is in the details and our listeners need to understand this language is negotiable. When you go to that upper layer excess carrier, that's just the standard form that they use, and policy holders need to work carefully with their brokers as well as sophisticated coverage council to take a look at that and push back on that at the time the policy's being placed, 'cause carriers will take that out if you ask.

Eric Jesse: Absolutely. And frankly, if we were in the situation where this excess carrier pushed back and didn't want that language, I would say, let's go find another excess carrier.

Lynda Bennett: Exactly right.

Eric Jesse: I think you can easily swap in a much more commercial carrier for $10 million at the eighth layer or get the existing carriers to each put up a little bit more to fill the $10 million that was provided here. So there's plenty of options because at the end of the day, Pharmacia, they really didn't buy any eighth layer access protection with this type of language because the reality is it's almost an impossibility to satisfy those requirements.

Lynda Bennett: And that's one of the things that I found particularly troubling about the Third Circuit's decision here, because it really does violence to how courts usually approach settlement scenarios here. We can cite to many cases across the country where courts will note that they want to promote parties being reasonable and pursuing settlements, and it's good for public policy and judicial administration and conservation of party resources. And this decision, frankly, encourages carriers not to pay because as you alluded to before, getting an insurer to pay their full policy limit in a settlement agreement, is an absolutely terrific outcome. But any seasoned coverage lawyer knows you're not going to get that insurer to admit in the settlement document that they had to pay that claim. They're simply not going to give you that admission of liability.

And so one of the big takeaways of this Pharmacia decision, is it's really telling both policy holders and insurers, "You're going to have to fight to the death. You're going to have to litigate this all the way to the ends of the earth if you want to preserve that ability to get that top layer excess coverage." And so that's something that probably wasn't top of mind, the Third Circuit, when this decision came down. So if you were to find yourself in this situation, what kind of arguments would you be making to the Third Circuit or other circuits or perhaps the US Supreme Court to undo this very unhelpful outcome as a practical matter to getting claims paid?

Eric Jesse: Two arguments come to mind, and I don't know that these were argued before the Third Circuit, but the Third Circuit characterized this language as "conditioned precedent language." And I didn't see that language condition precedent actually quoted in terms of the policy, but that's how the Third Circuit characterized it. But there's certainly case law in New Jersey in other contexts where the New Jersey Supreme Court, for example, is held that, "Well, we won't necessarily apply a condition precedent unless and until the insurer can show that they've been appreciably prejudiced." So late notice, for example, under an occurrence policy is one area. So I think that's one key argument that, I think, weighs in favor of a different outcome here.

And then I also like the argument based on another New Jersey Supreme Court case, which is the Reasonable Expectations Doctrine that says, "Frankly, essentially, sometimes the words on the page can be clear, but they are so contrary to the reasonable expectations of the insured that we're just not going to enforce those words, like that Borges case." And that's what I would also say, because I bet if you look at the premiums between the seventh layer excess policy and what was paid to Twin Cities for the eighth layer, I bet they're very similar. And I think that when you have eight other insurance carriers, the primary and the seven excess carriers, paying their full policy limits, there's a reasonable expectation that a follow for an eight-layer insurer should fall into line. So I think that's an argument I would be pressing.

Lynda Bennett: Well said. Well, I'm glad that we took a couple of minutes here to shed some light on this very important decision. As we talked about, I think the biggest takeaway from it is the importance of not going through renewals where you're not looking at the terms and conditions of your policies. As we said. This could have been avoided in the first instance by getting this language out of the policy, either this excess carrier agreeing to take it out or as you said before, Eric, shopping in the market to find a policy form that does not require this admission of liability. But another headline, certainly of this decision, is when you have a tower of coverage implicated and you start going down the road of settling with particular carriers, or you start to divide and conquer and settle with small groups of carriers, you really do need to make sure that you're looking all the way up your coverage chart to make sure that when you enter into that settlement at the lower layers, everything has been properly preserved, so you can continue to seamlessly come on up that tower.

And last, but certainly not least, we'll have to hope that there'll be another fact pattern for the Third Circuit to revisit this decision and understand the public policy implications that come from requiring admissions of liability, even in the context of a settlement before coverage can be accessed under upper layer carriers. So great discussion, quick hit, but a really important decision and some important lessons that come out of it. So thanks for sharing your knowledge today, and we'll see everybody next time.

Eric Jesse: Absolutely. Good talk. Take care.

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