Reed Smith LLP Policyholder Alert: Zeig Reconsidered?

   By John Berringer and Michael DiCanio, Attorneys, Reed Smith LLP

While it has long been the general rule in New York and other jurisdictions that a policyholder's settlement with a primary insurer for less than full policy limits can nevertheless trigger excess coverage, as long as the loss or liability in question exceeds the primary policy's limits, this general rule has been rejected in a number of recent cases.  Typically, excess liability insurance policies contain provisions stating that the policy will not respond to a claim until all underlying policies have been exhausted through payment of the underlying policy limits.  This approach was first endorsed in New York in the Second Circuit's seminal decision in Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2nd Cir. 1928).

A few recent cases, however, have rejected the Zeig approach, concluding that the underlying insurance must be exhausted by an actual payment by the primary insurer.  For this reason, policyholders should be aware of the potential risk posed by a settlement with a primary insurer for even a small discount off of the primary policy's limits.

In order to avoid the loss of all excess coverage for a large claim, policyholders may need to either insist on payment in full from the primary insurer or secure permission from excess carriers before the policyholder can "fill the gap" left by a settlement with a primary insurer for less than full limits.  Additionally, policyholders purchasing excess insurance policies should make every effort to secure an endorsement permitting them to settle claims with primary insurers for less than their full limits, with the policyholder in effect "stepping into the shoes" of the primary insurer for any difference between the primary's limits and the settlement amount.

John Berringer is a partner and Michael DiCanio is an associate in the New York office of Reed Smith LLP.  Mr. Berringer and Mr. DiCanio both are members of Reed Smith's Insurance Recovery practice group.

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