NY Appellate Court: Excess Insurers Off the Hook Where It Can't Be Determined if Underlying Insurance Exhausted

In the latest of what is now a lengthening line of cases, on June 12, 2012, the New York Supreme Court, Appellate Division, First Department, applying Illinois law, ruled in a coverage case brought by JPMorgan Chase that owing to settlements by underlying carriers in a professional liability insurance program, excess insurers in the program have no payment obligation because conditions precedent to coverage under the excess carriers' policies had not been met. As discussed below, this case presents an interesting twist on the usual set of circumstances involved in these kinds of coverage disputes. A copy of the June 12 opinion can be found here.

Background

Though this coverage action was initiated by JP Morgan, the insurance coverage at issue was procured by Bank One, which later merged into JP Morgan. For the policy period October 1, 2002 through October 1, 2003, Bank One had procured a total of $175 million of bankers' professional liability insurance and securities action claim coverage. The insurance was structured in a program of eight layers, consisting of a primary layer and seven excess layers.

In November 2002, actions were brought against Bank One and certain of its affiliates in connection with their roles as indenture trustees of certain notes issued by various NPF entities. After it acquired Bank One, JP Morgan settled the NPF actions for a total of $718 million and sought coverage under the Bank One insurance program for a portion of the settlement amount.

Prior to initiating the coverage suit against the carriers in the Bank One insurance program, JP Morgan settled with the sixth level excess carrier for $17 million. The sixth level excess carrier's policy provided excess insurance coverage of $15 million in excess of $140 million. However, the $17 million insurance settlement with this sixth level excess carrier covered both the carrier's liability under the Bank One program and claims under a separate policy the same carrier's affiliate company issued under a different insurance program. There was no allocation of the $17 million insurance settlement among the carrier's various policies.

After initiating the coverage lawsuit, JP Morgan entered a separate $17 million settlement with the third level excess carrier. This separate insurance settlement covered both the third level excess carrier's liability under the Bank One program as well as a separate claim under a separate insurance policy the carrier had issued.

Following these developments, the excess carriers in the fourth, fifth, and seventh excess insurance layers moved for summary judgment in the coverage action, arguing that as a result of the settlement with the third level excess carrier (and in the case of the seventh level excess carrier, the settlement with the sixth level excess carrier), conditions precedent to coverage under their respective policies had not been fulfilled, particularly with respect to their policies' requirement that the underlying layers should be exhausted by payment of loss.

In a May 31, 2011 opinion, the New York (New York County) Supreme Court granted the excess carriers' motions for summary judgment. JP Morgan appealed.

The June 12 Opinion

A June 12, 2012 opinion written by Judge Leland DeGrasse for a five-judge panel off the New York Supreme Court, Appellate Division, First Department and applying Illinois law,  affirmed the lower Court's summary judgment rulings.

Focusing first on the fourth level excess carrier's position, the appellate court noted that the carrier's excess policy provide that "liability for any Loss shall attach to [the carrier] only after the Primary and Underling Excess Insurers shall have duly admitted liability and shall have paid the full amount of their respective liability." The court noted that the "plain language of this attachment provision" requires both the underlying insurers' admission of liability and the payment of the full amount of their limits, as "conditions precedent" to the carrier's liability.

The appellate court agreed with the fourth level excess carrier that neither of conditions precedent had been met. The first condition was not met because the third level excess carrier's settlement agreement with JP Morgan specifically provided that the agreement "shall not constitute, or be construed as, an admission of liability." Moreover, the court noted, there is "no way to determine that [the third level excess carrier] paid the full amount" under its excess policy in the Bank One tower, because the settlement agreement "provided for no allocation" of the $17 million insurance settlement payment between the two policies that the carrier had issued and that were part of the insurance settlement.

For similar reasons, the court further concluded that conditions precedent in the fifth and seventh level carriers' policies had not been met either. Relying on the Northern District of Illinois's 2010 opinion in the Bally Total Fitness Holding Corp. case (about which refer here) and the Fifth Circuit's 2011 opinion in Citigroup case (about which refer here), the court concluded that the lower court had "properly granted summary judgment" because JP Morgan's settlements with the third and sixth level excess carriers "preclude any determination" whether the settling excess insurers' policy limits were exhausted as required by the excess policies of the carriers that had moved for summary judgment, "because there was there was no allocation of settlement between the two underlying carriers."

The appellate court also rejected JP Morgan's efforts to rely on the venerable second circuit opinion in Zeig v. Massachusetts Bonding & Ins. Co. The appellate court here said that the Second Circuit's unwillingness in Zeig to allow the excess carrier to evade payment when an underlying carrier had settled for less than full policy limits had been dependent on a finding of an ambiguity in the excess policy at issue in that case. The appellate court found no ambiguity in the excess policies of the carriers that had moved for summary judgment here, making the present case distinguishable from Zeig. The appellate court also questioned, in reliance on the Bally Total Fitness case, whether Zeig was contrary to applicable Illinois precedent.

Discussion

As I noted at the outset, this decision joins a growing list of cases that have found Zeig to be inapplicable and that have required as a trigger of coverage for excess insurance coverage that the limit of liability of the underlying insurance be exhausted by payment of loss. (A full list of the growing line of cases can be found in the Discussion section of my post pertaining to the Fifth Circuit's opinion in the Citigroup case, refer here.)

An interesting complication in this case was the fact that the two excess carriers that had reached settlements with JP Morgan had in each case settled the insurance dispute with JP Morgan for payment of amounts that were actually greater than the amount of their respective excess layers in the Bank One insurance program. In each of the two settlements, the involved carrier's respective layers in the Bank One program were $15 million, and the amount of each insurance settlement was $17 million.

The complicating factor was that in each of these two settlements, the settlements had also involved the settlement of coverage under a second insurance policy, other than the carrier's policy in the Bank One program. Because of the involvement of these separate policies and because of the absence of any allocation between the policies in the respective insurance settlements, there was no way (the appellate court found) to determine whether or not the insurance settlements had exhausted the applicable excess policies in the Bank One program.

Although it may be twenty-twenty hind sight, you can certainly see in retrospect how these insurance settlements could have been structured to avert the outcome here. Just to put this into perspective, the policy limits of the excess carriers who prevailed on summary judgment in the lower court and on appeal totaled $95 million.

It is probably worth adding that there is nothing that says that even if the excess carriers had not prevailed on this specific issue that there would have been coverage available under their respective excess policies. Indeed, it appears that, even though the various carriers on the third level through seventh level excess layers are now out of the case (either through settlement or through summary judgment), the carriers on the primary and first two excess layer levels all apparently remain in this case and all apparently are continuing to contest coverage.

While this list of case authority on the excess trigger issue is growing longer, it is important to keep in mind that the outcome of each of these cases was a direct reflection of the specific language of the excess policies at issue. These cases underscore the critical importance of the language describing the payment trigger in the excess policy. In recent years, and in large part as a reaction to these cases, excess carriers increasingly have been willing to provide language that allows the excess carriers' payment obligations to be triggered regardless whether the underlying amounts were paid by the underlying insurer or by the insured. This language was not generally available in 2002 when Bank One purchased the insurance that was at issue here.

Increasingly larger settlement amounts and increasingly higher defense expenses are increasingly driving claims losses into the excess layers, and as a result these issues pertaining to the excess policies' coverage triggers are also increasingly important. These cases underscore the critical importance of the specific wording used in the excess policies, which in turn highlights the need to have an experienced, knowledgeable insurance professional involved in the insurance placement process.

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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