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Horizontal vs. Vertical Exhaustion of InsuranceEvaluating Priority of Coverage Issues and Resolving Disputes When Primary Carrier Settles for Less Than Policy Limits

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, NOVEMBER 22, 2011

Today’s faculty features:

Jeffrey J. Vita, Partner, Saxe Doernberger & Vita, Hamden, Conn.

Rebecca DiMasi, Partner, Van Osselaer & Buchanan, Austin, Texas

William C. Eustace, Senior Vice President, Marsh USA, Inc., New York

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Evaluating Priority of Coverage Issues and Resolving g y g gDisputes 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 LLPRebecca 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 policypolicy

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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 firstexhaust 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 policybefore upstream party s primary policy

Focus on underlying contract’s indemnity obligation not policy languageobligation, not policy language

Reflects intent of parties Avoids circuity of litigation

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Priority of Coverage - ExampleGC’s Corporate Excess

InsuranceSub’s Excess

Insurance(GC’s AI Excess Insurance)

GC’s Corporate Primary Insurance Sub’s Primary

(GC s AI Excess Insurance)

Primary Insurance yInsurance

(GC’s AI Carrier)

General Contractor(“GC”)

Sub-Contractor(“Sub”)

Promise to Indemnify

Promise to ProcurePromise 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 Vi3) Indemnity View Focuses primarily upon the language of

the subcontractor agreementsthe 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 AmericanConcrete Sub.

(J&A)

QBE $1M Primary

United $5M Umbrella

DECEDENT

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BovisTrial Court Apportionment of AI Coverage for BovisTrial Court Apportionment of AI Coverage for Bovis

QBE$1,000,000

J&A PrimaryJ&A Primary

UNITED$5,000,000

J&A UmbrellaJ&A Umbrella

LIBERTY$1,000,000

WESTCHESTER$10,000,000

Stonewall Primary

ILLINOIS$1,000,000

Stonewall Umbrella

BOVIS Primary

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BovisAppellate Court Apportionment of AI Coverage for BovisAppellate Court Apportionment of AI Coverage for Bovis

QBE$1,000,000

J&A P iJ&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 UmbrellaSharing pro rata

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Indemnity ViewVertical 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 UnionRLI

$10M Excess2

3$10M Primary

$10M Excess

1 St. Paul$1M Primar

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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 contributingto $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 exhaustionendorsements 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 settlesWhat 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 CoZeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928)

Settlement by insured with primary carrier didnot eliminate excess coverage

Excess carrier – no rational interest in whetherinsured 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 ifthey 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 t98 F.3d 1440 (3d Cir. 1996) (Pennsylvania law) (court did notfocus on 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, 629F.3d 653 (7th Cir. 2010) (Indiana law) (policy was ambiguous; didnot 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, 945P.2d 970 (N.M. 1997) (policy language – “liability of theCompany under this policy shall not attach unless and until theInsured’s Underlying insurance has been paid or has been heldli bl t th t t l li bl d l i li it ” did tliable to pay the total applicable underlying limits” – did notpreclude underlying insurer from settling for less than its limitsand 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 excessli lpolicy 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 lCases following the Comercia rationale:Citigroup, Inc. v. Federal Insurance Company, 649

F 3d 367 (5th Ci 2011) ( li i tF.3d 367 (5th Cir. 2011) (excess policies notambiguous; plain language dictated primary carrierpay full limits before excess coverage wasp y gtriggered)

Qualcomm, Incorporated v. Certain Underwriters atLl d’ 161 C l A 4th 184 73 C l R t 3d 770Lloyd’s, 161 Cal.App.4th 184, 73 Cal.Rptr.3d 770(Cal. Ct. App. 2008) (policy language was notambiguous; did not apply Zeig because it placedg pp y g ppolicy 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, theInsureds 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 theUnderlying Limit of Liability has been paid in legal currency by the insurers of the UnderlyingInsurance.”

“only after any Insurer subscribing to any Underlying Policy shall have agreed to pay or have beenheld 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 asa 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

or 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 thereduction or exhaustion of the available ‘Underlying Insurance’ through payments of lossthereunder.”

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

Thank You!

Jeffrey J. VitaSaxe Doernberger & Vita, P.C.

203-287-2103

William C EustaceWilliam C. EustaceMarsh USA, Inc.212-345-2192

Rebecca DiMasiRebecca DiMasiVan Osselaer & Buchanan LLP

512 225 2823512-225-2823

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