Publications

4 Oct 2011

Precedent-setting ruling in SDNY: when is coverage triggered under excess policies?

Insurance Litigation Alert

Joseph G. Finnerty III

Setting a critical precedent in New York law, Federal Insurance Company has achieved a significant victory in an action concerning payment of excess policies.  DLA Piper represented Federal, a division of Chubb & Son, in the case.

On September 28, 2011, ruling in Federal Insurance Company v. The Estate of Irving Gould, et al., Judge Richard J. Sullivan agreed with Federal that it has no obligation under two excess directors and officers liability insurance policies to drop down in place of unavailable underlying insurance and advance defense costs to the former executives of long-defunct Commodore International Limited (Commodore was the maker of the classic Commodore 64 personal computer). 

Most notably, however, Judge Sullivan also agreed that Federal’s excess policies, which sit at the second and fifth excess layers of Commodore’s insurance tower, cannot be triggered unless and until the limits of all insurance underlying its layers are in fact paid, even if the loss otherwise reaches the excess insurance layers. 

In the wake of Commodore’s demise, various plaintiffs commenced litigation against Commodore and its directors and officers.  The directors and officers successfully defended or settled each claim, with the exception of one action still pending in the Bahamas.  Reliance Insurance Company and The Home Insurance of Indiana underwrote the first, third, fourth and sixth layers of Commodore’s excess insurance tower.  Both companies are insolvent and, as a consequence, these layers of insurance have not been and in all likelihood will never be exhausted.  Nevertheless, despite clear language in the policies that coverage “shall attach only after all such ‘Underlying Insurance’ has been exhausted by payment of claim(s),” the directors and officers demanded that Federal advance defense costs incurred in their defense of the Bahamian action and asked Judge Sullivan to declare that Federal’s excess policies would be triggered in the event they faced losses which reached the Federal layers, even if the underlying insurance was never paid. 

Judge Sullivan – who was General Counsel at Marsh, Inc. prior to becoming a federal judge, and thus no stranger to insurance law – held that, consistent with the unambiguous language of the Federal excess policies, coverage could only be triggered upon payment of all underlying limits of insurance. 

This is a critical new precedent in New York law.  Prior to this ruling, policy holders relied on a long line of New York cases, dating back to the Second Circuit’s 1928 decision in Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928) (Augustus Hand), which held that (depending upon the language of the policy in issue) coverage could be triggered in the event a claim (but not payment) reached the level of an excess insurance layer.  The Federal  decision, for the first time, clarifies that coverage under excess insurance policies that require exhaustion can attach only upon actual payment.  In so holding, Judge Sullivan recognized that the excess insurers demonstrated "impressive foresight" by including the exhaustion by payment requirement, noting that if the directors and officers “were able to trigger the Excess Policies simply by virtue of their aggregated losses, they might be tempted to structure inflated settlements with their adversaries  . . . that would have the same effect as requiring the Excess Insurers to drop down and assume coverage in place of the insolvent insurers.”

To review the decision, visit this page.

For more information about this decision and its impact on your business, please contact:

Joseph G. Finnerty III

Rachel Stevens