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Triggering Excess Insurer Duties Without Full Payments by Primary Insurers
During recent years, insureds have faced a wide range of claims with potential liability exceeding the limits of their primary insurance policies. In such a setting, excess insurers typically argue that their duties are not triggered unless and until the primary policy has paid its limits. Such arguments should not be readily accepted. Excess insurers owe duties even before primary policies have exhausted. And, when a primary insurer settles with its insured, excess insurers may be obligated to pay under their policies even if the settlement was for less than the primary policy's limits.
Courts have repeatedly rejected any notion that an excess insurer owes no duties to its insured until a primary policy is exhausted. For example, California courts have recognized the wide range of duties that an excess insurer owes its insured before a primary policy exhausts. See, e.g., Kelley v. British Commercial Ins. Co., Ltd., 221 Cal. App. 2d 554, 562, 34 Cal. Rptr. 564 (1963) (duty to participate in settlement discussions when potential settlement may invade limits of liability); Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 85, 52 Cal. Rptr. 2d 690 (1996) (duty to accept reasonable settlement); Schwartz v. State Farm Fire & Cas. Co., 88 Cal. App. 4th 1329, 1338, 108 Cal. Rptr. 2d 523 (2001).
Likewise, it is clear in most jurisdictions that an excess insurer must contribute to a settlement that reaches its limits even if the primary policy has not paid its full limits. In fact, this principle was established more than 75 years ago. In Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928), an excess insurer argued that an insured could not collect from it unless it first actually collected the full amount of the primary policy limits. The Second Circuit disagreed, stating:
[T]he [excess insurer] had no rational interest in whether the insured collected the full amount of the primary policies, so long as it was only called upon to pay such portion of the loss as was in excess of the limits of those policies. To require an absolute collection of the primary insurance to its full limit would in many, if not most, cases involve delay, promote litigation, and prevent an adjustment of disputes which is both convenient and commendable. Id. at 666.
The court also observed that a clause requiring a policy to be “exhausted in the payment of claims” does not require “interpreting the word 'payment' as only relating to payment in cash.” Id. As the court explained, “It often is used as meaning the satisfaction of a claim by compromise, or in other ways.” Id.
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