Michael F. Aylward on the Disappearing Safety Net: Emerging Exposures Imperil Excess Insurers

Michael F. Aylward on the Disappearing Safety Net: Emerging Exposures Imperil Excess Insurers

Excess insurers have long relied on the principle that they would have no duty to indemnify their insureds until the underlying primary insurance had been exhausted. However, recent decisions of the Eight and Tenth Circuits and some state courts have been receptive to insureds’ contentions that in certain instances they should obtain excess coverage for catastrophic losses where the underlying insurance has not been exhausted.
 
As Michael F. Aylward, chair of Morrison Mahoney LLP’s complex insurance claims resolution group observes in his commentary, “While some of these issues have been explored in the past in ‘drop-down’ cases arising out of primary insurance insolvencies, these rulings point to new and potentially troubling (from the excess insurers’ point of view) recovery strategies.”
 
For example, the commentary addresses the groundbreaking opinion rendered in The Yaffe Companies, Inc. v. Great American Ins. Co., where the court found that the triggering event for the excess insurer’s coverage obligations was the point in time when the insured’s liability exceeded the primary insurer’s coverage limit and this did not depend on whether that amount was actually paid pursuant to the underlying insurance. The author writes: “Yaffe should stand as an object lesson to excess underwriters of the perils not only of using "retained limit" language to define the threshold point at which the umbrella policy arises, but also of the danger of not fully taking into account the effect that certain features in a primary policy may have in prematurely triggering an excess insurer's obligations. One could easily conceive of similar issues arising where, unbeknown to the excess underwriter, the primary policy is written with burning limits. Similar issues have arisen in cases where certain types of coverage afforded under the primary policy have limits lower than are afforded by the policy as a whole, as is commonly the case nowadays with sexual abuse endorsements and employment practices liability (EPL) coverages. Over the years, insurers have found that including sub-limits of coverage are in many respects more effective than excluding coverage all together.”
 
The commentary also discusses the seminal decision rendered in Waste Management of Minnesota, Inc. v. Transcontinental Ins. Co., 502 F.3d 769; 2007 U.S. App. LEXIS 22326, (8th Cir. 2007) where the court held that exhaustion did not require the primary insurer to pay the full dollar value of a policy but only that the insured prove that the claims aggregating the full amount of the policy have been settled under the policy. The author writes: “As with the Tenth Circuit's opinion in Yaffe, Waste Management reflects the ongoing tension between excess insurer arguments that their policies should not come into play until primary policies have actually been paid and policyholder claims that such language is either ambiguous or is in any event satisfied once their liabilities are determined to exceed the retained limit. Although not reflected in either opinion, excess insurers have argued in cases of this sort that the primary insurer acts as a kind of gatekeeper and that excess insurers rely on this gatekeeping function to ensure that any resulting determination of liability or judgment has fairly been disputed and adjudicated. What seems ultimately to have been determinative in the Waste Management case, however, was the fact that such safeguards likely already existed as the result of the arbitration and litigation process and that Transcontinental was left in no worse off position, not having been obligated to ‘drop down’ to act as a primary insurer, than would have been the case had Reliance remained solvent. To the contrary, the court suggested that Transcontinental would in fact have obtained a windfall by being relieved of any payment obligations if its arguments had prevailed.”
 
Aylward’s commentary analyzes several other cases of potentially vital importance to insurance coverage practitioners, including: West Bend Mut. Ins. Co. v. Rosemont Exposition Services, Inc., 378 Ill. App. 3d 478; 880 N.E.2d 640 (First Dist. 2007), in which the Illinois Appellate Court explored the potential peril presented by sub-limits; and Allmerica Financial Corp. v. Certain Underwriters at Lloyd's, London, 449 Mass. 621; 871 N.E.2d 418; 2007 Mass. LEXIS 519 (2007), where the court construed the interrelationship between primary and excess policies.