Fifth Circuit Holds Settlement With Primary Insurer Did Not Result In Exhaustion

Fifth Circuit Holds Settlement With Primary Insurer Did Not Result In Exhaustion

By Brian Margolies, Partner, Traub Lieberman Straus & Shrewsberry LLP

In Citigroup Inc. v. Federal Ins. Co., 2011 U.S. App. LEXIS 16316 (5th Cir. Aug. 8, 2011), the United States Court of Appeals for the Fifth Circuit, applying Texas law, considered whether a settlement between an insured and a primary layer insurer for an amount less than the policy's limits could be considered exhaustion of that policy for the purpose of triggering excess policies in the insured's tower of coverage.

Citigroup, as successor to Associates First Capital Corporation, sought coverage under a $200 million tower of directors and officers coverage for underlying consumer lending practices claims.  While Citigroup provided timely notice of the claims, it later settled the matters without the consent of its insurers, prompting an initial denial of coverage from each of the insurers in the tower.  Citigroup's primary insurer, Lloyd's, later changed its coverage determination and agreed to a $15 million settlement with Citigroup, notwithstanding the fact that the policy had a $50 million limit of liability.  The remaining insurers maintained their denial of coverage, resulting in coverage litigation.

The Fifth Circuit considered whether the lower court properly granted summary judgment to the insurers on the basis that there was no exhaustion of the primary Lloyd's policy.  Citing to New York law, Citigroup argued that if an excess policy ambiguously defines "exhaustion," then settlement with an underlying insurer, even if for an amount less than full policy limits, necessarily constitutes exhaustion for the purpose of determining excess layer attachment.  The court disagreed that there was any ambiguity, holding that each excess policy plainly defined when and under what circumstances underlying insurance would be considered exhausted.  Specifically, each policy required payment of the "full" or "total" amount of underlying limits.  As such, the court held that Citigroup's settlement with Lloyd's, for an amount less than the full policy limits of that policy, could not be considered exhaustion for the purpose of triggering Citigroup's excess insurance policies.

Read more at the Traub Lieberman Insurance Law Blog, Edited by Brian Margolies.

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