The commentary "Perkins Coie LLP on Second Circuit Requires Payment of Underlying Losses to Trigger Excess Coverage Based on Policy Provisions," by Les Brown and Norton Cutler, analyzes the much discussed recent decision of Ali v. Fed. Ins. Co., 2013 U.S. App. LEXIS 11384 (2d Cir. June 4, 2013) [enhanced version available to lexis.com subscribers]. There the Second Circuit held that excess insurance policies are triggered when the payment of losses exceed the attachment point of the excess insurance. The court in essence found that someone has to actually pay or be held liable to pay the full amount of any gap between (1) settlements at less than policy limits by primary and/or lower level excess carriers and (2) the attachment point of the upper level excess carriers before the excess coverage is triggered if the policy wording requires it. The court made clear that to trigger excess policies it is not necessary that it is the underlying insurer(s) that make the payment, as long as payment is made.
The commentators note that pro-insurer advocates are proclaiming this decision as the "death knell" in the Second Circuit of its seminal, pro-policyholder ruling in Zeig v. Massachusetts Bonding and Insurance Co., 23 F.2d 665 (2d Cir. 1928) [enhanced version available to lexis.com subscribers], setting forth certain dicta in the decision which the commentary identifies. The commentators explain why they feel this is not the case, as follows.
"Whether or not the insured actually received payment for the lower levels on a claim or even made the payment themselves, does not affect the price of the insurance. In evaluating risks and pricing policies the relevant issue is whether the liability will likely exceed the attachment point, not who pays the loss. If the excess insurer’s real position is that it plans to avoid payment because the carrier below refuses to pay its full limits even though the claim is for more than the limits, then that would appear to be bad faith."
They point out that the Ali decisions found “obligations" are not synonymous with “payments” on those obligations particularly where the policy wording involved does not include the “or held liable to pay” wording as well. They conclude that the traditional case law relying upon Zeig remains in effect and that Ali holds that if an insured settled with a primary carrier for less than the policy limits and then paid or promised to pay the difference between the limit and the amount of the settlement, then the excess carriers have an obligation to cover any judgment or settlement above the primary limit. The result of the court's decision will enable policyholders to resolve claims involving the underlying policies while protecting their ability to recover under excess insurance policies.
The commentary ends with prudent and sagacious advice for policyholders, their counsel and insurance brokers in light of the Ali decision.
Perkins Coie LLP is an 850 lawyer firm with 19 offices across the US and Asia. The firm has over 45 insurance coverage lawyers who represent only policyholders
Les Brown is a partner in the Los Angeles office who has represented policyholders for over 25 years and has recovered several hundreds of millions of dollars for them in contested litigation.
Norton Cutler is a Senior Counsel in the Denver office who was in charge of insurance coverage at the NCR Corporation from 1990-93 and has also recovered over one hundred million dollars for firm policy holder clients.
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