Many excess insurance policies provide that coverage is not available unless all underlying insurers have first paid the full limits of their policies. Relying on such language, excess insurers argue that when a policyholder settles a claim with an underlying insurer for less than the full limits of their policy, the policyholder forfeits any coverage under the excess policy. In recent years, many courts have begun accepting this common excess carrier argument, including most recently a New York appellate court in Forest Laboratories v. Arch Insurance Company. In the wake of this appellate decision, it is important for New York policyholders to understand the risk the decision presents, and what they can do to avoid it.
In Forest Laboratories, the policyholder was covered by an $80 million insurance tower, consisting of eight separate $10 million layers, with insurance company RSUI providing the “top” layer of coverage. Under the RSUI policy, coverage did not “attach” until the underlying limits of coverage had been exhausted by “actual payment of a Covered Claim pursuant to the terms and conditions of the Underlying Insurance.” The policyholder incurred more than $80 million to defend against and ultimately settle a securities action, looked to its insurance to cover these costs, but settled with some of the underlying insurers for less than their full $10 million limits. Given that the full limits of underlying insurance had not been paid by the insurers, RSUI argued that coverage under its excess policy did not attach.
The trial court agreed with RSUI. Although the attachment language at issue did not, as some excess policies do, explicitly state that the underlying limits must have been “paid by the insurer” (as opposed to the insured), the trial court held that this requirement was implicit in the policy language which provided that the underlying limits must be paid “pursuant to the terms and conditions of the Underlying Insurance.” The appellate court unanimously affirmed.
This case joins a growing list in which courts, considering attachment language similar to that at issue in Forest Laboratories, have found that when a policyholder chooses to accept less than 100 cents on the dollar in a settlement with an underlying insurer, it may forfeit coverage from an insurer higher in the tower.
Most in the policyholder bar strongly disagree with the reasoning in Forest Laboratories and other similar decisions. Reading into excess policies a forfeiture of coverage when the policyholder settles with underlying insurers for less than the full policy limits serves only to create delay and uncertainty, impede settlement and promote litigation. Nevertheless, these decisions cannot simply be ignored. Instead, policyholders should focus on practical solutions to avoid the risk presented by such decisions. For example:
- When purchasing excess coverage, policyholders should try to procure language that explicitly provides that coverage attaches after the underlying policy limits have been paid by the insurers or by the insured. Under such language, excess coverage would attach as soon as the insured has paid defense costs or settlements reaching the particular excess layer.
- If a policyholder receives a claim covered by an excess policy that does not include the more expansive attachment language, the policyholder should develop and implement a settlement strategy with decisions like Forest Laboratories squarely in focus. If a global settlement with all carriers is not feasible, policyholders might avoid the risk of forfeiture by employing a “top down” settlement strategy, negotiating a settlement with the highest level carrier first, then working down the tower as each higher level settles.
Excess coverage – which exists to protect policyholders against the largest and financially perilous claims – is of no value if it does not attach. Forest Laboratories and other similar decisions risk making excess coverage far less valuable, but through informed policy language negotiation and creative settlement strategies, policyholders can take steps to ensure they avoid forfeiture of their excess coverage.