horizontal vs. vertical exhaustion of...
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Presenting a live 90‐minute webinar with interactive Q&A
Horizontal vs. Vertical Exhaustion of InsuranceEvaluating Priority of Coverage Issues and Resolving Disputes When Primary Carrier Settles for Less Than Policy Limits
T d ’ f l f
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, NOVEMBER 22, 2011
Today’s faculty features:
Jeffrey J. Vita, Partner, Saxe Doernberger & Vita, Hamden, Conn.
Rebecca DiMasi, Partner, Van Osselaer & Buchanan, Austin, Texas
William C. Eustace, Senior Vice President, Marsh USA, Inc., New York
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Evaluating Priority of Coverage Issues and Resolving g y g gDisputes When Primary Carrier Settles for
Less Than Policy Limits
Presented by: Jeffrey J. Vita, Saxe Doernberger & Vita, P.C.William C. Eustace, Marsh USA, Inc.Rebecca DiMasi Van Osselaer & Buchanan LLPRebecca DiMasi, Van Osselaer & Buchanan, LLP
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November 22, 2011
Priority of Coverage
Multiple parties
Multiple layers of coverage in AI context
Loss exceeds limits of a single primary policypolicy
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Priority of Coverage
2 schools of thought:
1. Review language of competing policies’ “ th i ” l“other insurance” clauses;
2. Determine intent of parties regarding risk transfer by reviewing underlying contract
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Priority of Coverage
Horizontal Exhaustion
All available primary policies must exhaust firstexhaust first
Focus on policy language not underlying Focus on policy language, not underlying contract
Excess policy is a payer of last resort
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Priority of Coverage
Vertical Exhaustion
AI policies (primary & excess) exhaust before upstream party’s primary policybefore upstream party s primary policy
Focus on underlying contract’s indemnity obligation not policy languageobligation, not policy language
Reflects intent of parties Avoids circuity of litigation
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Priority of Coverage - ExampleGC’s Corporate Excess
InsuranceSub’s Excess
Insurance(GC’s AI Excess Insurance)
GC’s Corporate Primary Insurance Sub’s Primary
(GC s AI Excess Insurance)
Primary Insurance yInsurance
(GC’s AI Carrier)
General Contractor(“GC”)
Sub-Contractor(“Sub”)
Promise to Indemnify
Promise to ProcurePromise to Procure Insurance
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Priority of Coverage - Example
Contract requires $5M of primary non-contributory coverage
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q $ p y y g
Horizontal v. Vertical Exhaustion - Views
1) Illinois View Focuses upon traditional rules of p
primary v. excess without examining language
2) New York/California View Focuses primarily upon the language Focuses primarily upon the language
within the policy
3) I d it Vi3) Indemnity View Focuses primarily upon the language of
the subcontractor agreementsthe subcontractor agreements
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Priority of Coverage
Horizontal Cases Vertical Cases
Illinois 4th Circuit (Virginia)th California
New York
5th Circuit (Texas)
8th Circuit New York 8 Circuit (Arkansas)
Mi i Missouri
Kentucky Kentucky
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Illinois View
Kajima Constr. Servs. v. St. Paul Fire and Marine Ins. Co., 227 Ill. 2d 102 (2007)Marine Ins. Co., 227 Ill. 2d 102 (2007)
N th Ri I C G i ll M t North River Ins. Co. v. Grinnell Mut. Reinsurance Co. 369 Ill. App. 3d 563 (2006)(2006)
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New York/California Views
Bovis v. Great Amer. Ins. Co., 855 N.Y.S. 2d 459 (2008)2d 459 (2008)
Ti h C t C G t A I Tishman Constr. Corp. v. Great Am. Ins. Co., 861 N.Y.S. 2d 38 (2008)
JPI Westcoast Constr. L.P. v. RJS & Assoc., Inc. et.al, 156 Cal. App. 4th 1448 (2007)( )
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Priority of Coverage – Horizontal Exhaustion Example
Owner(DASNY)
Const. Mgr Gen. Ctr. (BOVIS)
Illinois $1M Primary Policy
(STONEWALL)
Liberty $1M Primary Policy
Steel Ctr (SMI-OWEN)
Westchester $10M Umbrella
Elevator Sub. (AJ MCNULTY)
Great AmericanConcrete Sub.
(J&A)
QBE $1M Primary
United $5M Umbrella
DECEDENT
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BovisTrial Court Apportionment of AI Coverage for BovisTrial Court Apportionment of AI Coverage for Bovis
QBE$1,000,000
J&A PrimaryJ&A Primary
UNITED$5,000,000
J&A UmbrellaJ&A Umbrella
LIBERTY$1,000,000
WESTCHESTER$10,000,000
Stonewall Primary
ILLINOIS$1,000,000
Stonewall Umbrella
BOVIS Primary
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BovisAppellate Court Apportionment of AI Coverage for BovisAppellate Court Apportionment of AI Coverage for Bovis
QBE$1,000,000
J&A P iJ&A Primary
LIBERTY$1 000 000$1,000,000
Stonewall Primary
ILLINOIS$1,000,000
BOVIS Primary
UNITED$5,000,000
J&A Umbrella
WESTCHESTER$10,000,000
Stonewall UmbrellaSharing pro rata
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Indemnity ViewVertical Exhaustion/Circuity of Litigation
Wal-Mart Stores Inc v RLI Ins Co 292 Wal-Mart Stores, Inc. v RLI Ins. Co., 292 F.3d 583 (8th Cir 2002)
American Indemnity Lloyds v Travelers Property Casualty Ins. Co., 335 F.3d 429(5th Cir 2003)
Hertz Equip Rental Corp v Ammon Hertz Equip. Rental Corp. v. Ammon Painting Co. 2009 MO. App. LEXIS 1131 (Mo App 2009)(Mo. App. 2009)
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Vertical Exhaustion Example – Wal-Mart
National UnionRLI
$10M Excess2
3$10M Primary
$10M Excess
1 St. Paul$1M Primar
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Wal-Mart Retailer Cheyenne - Manuf.AI Status
Indemnity
$1M Primary
Contract – required $2M Primary
Obtained - $1M Primary/$10M Excess
Settlement - $11M: St. Paul $1M/RLI $10M
DJ – Wal-Mart and National Union sought to avoid contributingto $10M paid by RLI
Result – St. Paul $1M/RLI $10M
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Horizontal/Vertical Exhaustion Check List
Risk Management/Pre-Litigation
Check applicable state’s law regarding horizontal/vertical exhaustion
If Additi l I d (“AI”) dd ti l If you are an Additional Insured (“AI”), add a vertical exhaustion endorsement to your corporate policy
Require vertical exhaustion of all AI policies in contracts Require vertical exhaustion of all AI policies in contracts
Check AI policies’, “other insurance” provisions and endorsements regarding horizontal exhaustionendorsements regarding horizontal exhaustion
Ensure that indemnity agreement is broad and enforceable
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Horizontal/Vertical Exhaustion Check List
Claims & Litigation Management Put your corporate policy and all AI policies (primary + y p p y p (p y
excess) on notice of “occurrence” and “suit”
Demand that AI policies pay vertically
Demand indemnification from named insured on the AI policy to trigger circuity of litigation and ensure indemnity
Work with your corporate insurer to ensure coverage in the event horizontal exhaustion applies
C id b h f t t l i i t d i d if Consider breach of contract claim against named insured if they fail to obtain AI coverage promised
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What happens when the insured settlesWhat happens when the insured settles with the primary carrier for less than
policy limits?policy limits?
It depends on your jurisdiction It depends on your jurisdiction and policy language . . .
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Zeig v Massachusetts Bonding & Ins CoZeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928)
Settlement by insured with primary carrier didnot eliminate excess coverage
Excess carrier – no rational interest in whetherinsured collected full primary limits
P bli li d l i f li i i Public policy: delay, promotion of litigation,chilling effect on settlements
B t ti ld i diti d t if But, parties could impose conditions precedent ifthey chose to do so . . .
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Cases following the Zeig rationale: Koppers Company, Inc. v. Aetna Casualty and Surety Company,
98 F 3d 1440 (3d Ci 1996) (P l i l ) ( t did t98 F.3d 1440 (3d Cir. 1996) (Pennsylvania law) (court did notfocus on policy language; settlement with primary carrier“functionally exhausted” primary policy)
Trinity Homes LLC v Ohio Casualty Insurance Company 629 Trinity Homes, LLC v. Ohio Casualty Insurance Company, 629F.3d 653 (7th Cir. 2010) (Indiana law) (policy was ambiguous; didnot clearly require payment of full CGL limit)
Rummel v Lexington Insurance Company 123 N M 752 945 Rummel v. Lexington Insurance Company, 123 N.M. 752, 945P.2d 970 (N.M. 1997) (policy language – “liability of theCompany under this policy shall not attach unless and until theInsured’s Underlying insurance has been paid or has been heldli bl t th t t l li bl d l i li it ” did tliable to pay the total applicable underlying limits” – did notpreclude underlying insurer from settling for less than its limitsand being credited for the balance)
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Comercia Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007)pp ( )
Distinguished Zeig – lack of specificity in excessli lpolicy language
Different result with specific policy language P bli li f l b ’ Public policy favors settlements, but can’t
supersede unambiguous policy language P li i d “ t l t f l ” b Policy required “actual payment of losses” by
the underlying insurer
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C f ll i th C i ti lCases following the Comercia rationale:Citigroup, Inc. v. Federal Insurance Company, 649
F 3d 367 (5th Ci 2011) ( li i tF.3d 367 (5th Cir. 2011) (excess policies notambiguous; plain language dictated primary carrierpay full limits before excess coverage wasp y gtriggered)
Qualcomm, Incorporated v. Certain Underwriters atLl d’ 161 C l A 4th 184 73 C l R t 3d 770Lloyd’s, 161 Cal.App.4th 184, 73 Cal.Rptr.3d 770(Cal. Ct. App. 2008) (policy language was notambiguous; did not apply Zeig because it placedg pp y g ppolicy considerations above plain language,employed a strained interpretation of “payment,”and stated that parties could use express language)
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and stated that parties could use express language)
Policy language supporting no excess coverage:Policy language supporting no excess coverage: “(a) all Underlying Insurance carriers have paid in cash the full amount of their respective liabilities,
(b) the full amount of the Underlying Insurance policies have been collected by the plaintiffs, theInsureds or the Insureds’ counsel, and (c) all Underlying Insurance has been exhausted.”
“The insurer shall only be liable to make payment under this policy after the total amount of theUnderlying Limit of Liability has been paid in legal currency by the insurers of the UnderlyingInsurance.”
“only after any Insurer subscribing to any Underlying Policy shall have agreed to pay or have beenheld liable to pay the full amount of its respective limits ”held liable to pay the full amount of its respective limits . . .
“in the event of the exhaustion of all of the limit(s) of liability of such ‘Underlying Insurance’ solely asa result of payment of loss thereunder.”
Citigroup, Inc. v. Federal Ins. Co., 649 F.3d 367, 372-73 (5th Cir. 2011) (emphasis added). “Underwriters shall be liable only after the insurers under each of the Underlying Policies have paid Underwriters shall be liable only after the insurers under each of the Underlying Policies have paid
or have been held liable to pay the full amount of the Underlying Limit of Liability.”Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, 161 Cal.App.4th 184, 73 Cal.Rptr.3d 770 (Cal. Ct.App. 2008); but see Rummel v. Lexington Insurance Company, 123 N.M. 752, 945 P.2d 970 (N.M.1997) (similar language, opposite result).99 ) (s a a guage, oppos e esu ) Policy required “actual payment of losses” by underlying insurer, and stated that the “policy does not
provide coverage for any loss not covered by the ‘Underlying Insurance’ solely by reason of thereduction or exhaustion of the available ‘Underlying Insurance’ through payments of lossthereunder.”
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Comercia Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007).
Thank You!
Jeffrey J. VitaSaxe Doernberger & Vita, P.C.
203-287-2103
William C EustaceWilliam C. EustaceMarsh USA, Inc.212-345-2192
Rebecca DiMasiRebecca DiMasiVan Osselaer & Buchanan LLP
512 225 2823512-225-2823
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