Avoiding the Excess Layers

While each of the insurers initially denied coverage, Lloyd's ultimately settled with Citigroup for $15 million, $35 million below Lloyd's $50 million limit, in exchange for a release. Citigroup thereafter sought additional insurance from its second- and third-level excess carriers, arguing that the Lloyd's settlement exhausted the available primary insurance sufficient to trigger the excess insurers' obligations (specifically policies issued by Federal Insurance Company, Steadfast Insurance Company, SR International Business and St. Paul Mercury). The excess carriers filed a declaratory judgment action seeking a declaration that a settlement below Lloyd's full limit did not constitute exhaustion.

The Fifth Circuit Court of Appeals, affirming the district court opinion in favor of the excess carriers, cited extensively to the exhaustion language included in each policy. That language included: 1) Federal's requirements that the underlying carriers pay in cash “the full amount of their respective liabilities” and the insured collect the “full amount” of underlying coverage; 2) the similar requirement in the SR International policy that the insured demonstrate that the underlying carrier pay the “full amount of its respective limits of liability,” defining those limits as $50 million; 3) the requirement in the St. Paul policy that coverage would not attach until the primary policy's “total” limit of liability was paid; and 4) Steadfast's requirement that coverage would attach only “in the event of the exhaustion of all the limit(s) of liability of such Underlying Insurance ' “

In reaching its holding, the circuit court reasoned that while the policies contained different operative language, words and phrases such as “full amount,” “total,” and “all,” were unambiguous and should be given their plain meaning to require payment of the entire underlying amount. Accordingly, the court reasoned that Citigroup's settlement with Lloyd's for something less than the primary policy's “total” or “full amount” of available coverage did not implicate the excess insurers' obligations:

In sum, the plain language of Federal's, Steadfast's, S.R.'s, and St. Paul's policies requires that Lloyd's pay Citigroup the total limits of Lloyd's liability before excess coverage attaches. Thus, Citigroup's settlement with Lloyd's for $15 million of its $50 million limits of liability in exchange for a release from coverage for the FTC and Morales claims, did not satisfy the requirements necessary to trigger the excess insurers' coverage.

See also Great Am. Ins. Co. v. Bally Total Fitness Holding Corp., No. 06 C 4554, 2010 U.S. Dist. LEXIS 61553 (N.D. Ill. June 22, 2010).

The JP Morgan Case

Following Citigroup, the New York Appellate Court, applying Illinois law, very recently reached the same holding in JP Morgan Chase & Co. v. Indian Harbor Ins. Co., 2012 N.Y. App. Div. LEXIS 4627 (N.Y. App. Div. June 12, 2012). In that case, the court found that the insured failed to prove the proper exhaustion of certain underlying policies. Affirming the lower court's grant of summary judgment in favor of the excess insurers, the court held that the insured was therefore precluded from potentially accessing $95 million in excess bankers professional liability/securities coverage.

JP Morgan marks another instance where a court has relied on the clear exhaustion requirements included in an excess policy to preclude excess coverage for an insured's below-limit settlement. The insured in JP Morgan settled select policies for aggregated amounts in excess of the policies' respective limits. The settlements resolved claims both within the subject insurance program and unrelated claims without allocating the monies paid. The court reasoned that, absent allocation, the insured could not prove proper and complete exhaustion of the underlying policies. The appellate court was unpersuaded by the fact that the actual settlement amount was well in excess of the underlying policy limits.

JP Morgan arose from lawsuits filed against Bank One and its affiliates related to their roles as indenture trustees. At the time of the lawsuits, Bank One had $175 million in bankers professional liability and securities claim coverage potentially available. JP Morgan was also named as a defendant in some of those same or related actions. While JP Morgan did not own Bank One at that time, the companies later merged.

JP Morgan settled six of the underlying actions with its excess insurers for $718 million, including a $17 million settlement under a policy issued by a sixth-level excess carrier that was subject to $15 million limits. The latter settlement also resolved coverage under an affiliate policy of the carrier, although that affiliate policy was not part of Bank One's insurance program. Other settlements similarly resolved claims under policies both within and without the Bank One program.

Several of Bank One's excess-level carriers moved for summary judgment, arguing that the existing settlements failed to exhaust the underlying Bank One coverage as required by each of the operative policies. Not unlike the controlling policy language in Citigroup, the excess policies required complete and total exhaustion of the underlying insurance. Just by way of example, JP Morgan's fourth-layer excess carrier provided that “liability for any loss shall attach ' only after the Primary and Underlying Excess Insurers shall have [1] duly admitted liability and [2] shall have paid the full amount of their respective liability,” while other policies applied “only after exhaustion of the Underlying Limit solely as a result of actual payment under the Underlying Insurance in connection with Claim(s) and after the Insureds shall have paid the full amount of any applicable deductible or self-insured retentions ' “

The appellate court concluded that the settlements failed to satisfy these and similar provisions, rejecting the insured's attempt to create an ambiguity where none existed by relying on Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d. Cir. 1928). The court explained that Zeig, a much older decision from the Second Circuit, relied on a perceived ambiguity in the term “payment” as used in that carrier's exhaustion provision. The JP Morgan provisions, however, were distinguishable from those in Zeig given their specificity, and did not control the outcome on these facts. Because it could not determine whether JP Morgan collected the full underlying limits absent evidence of allocation, the court concluded that the insured failed to prove exhaustion sufficient to trigger the excess carriers' payment obligations.

Conclusion

Citigroup and JP Morgan illustrate the importance of the specific exhaustion language in an excess policy. These cases also highlight the trend in which courts refuse to give too narrow a reading to unambiguous exhaustion language. Most importantly, these decisions serve as a reminder that lower-level insurance settlements can, and do, have significant impacts on an insured's opportunity to benefit from higher-level coverages. For J.P. Morgan, the lesson was a harsh one: Settling without allocation resulted in the forfeiture of $95 million in excess insurance.

William P. Shelley, a member of this newsletter's Board of Editors, is a member of Cozen O'Connor and chair of the firm's Global Insurance Group. Samantha Evans is an associate in the Global Insurance Group of Cozen O'Connor in the Philadelphia office.

Several courts have recently held that an insured bears the burden of demonstrating proper exhaustion of underlying policies, including where multiple policies are involved in a settlement. These decisions have prevented insureds from accessing millions of dollars in excess coverage based on the unambiguous exhaustion language included in the operative excess policies.

The Citigroup Case

Citigroup Inc. et al. v. Federal Insurance Company, et al. is illustrative of recent decisions addressing when a settlement with an underlying insurer qualifies as exhaustion sufficient to trigger excess coverage. 649 F.3d 367 (5th Cir. 2011) (applying Texas law). In that case, Citigroup, as successor in interest to Associates First Capital Convention (“Associates”), sought coverage from various insurers for two lawsuits alleging that Associates engaged in fraud, misrepresentation and various statutory violations. The relevant insurers included: 1) Lloyd's of London, which provided $50 million in primary coverage; 2) National Union Fire Insurance Company, which provided second-level excess coverage of $25 million; and 3) numerous other third-level excess carriers that collectively provided $100 million in additional insurance. Citigroup settled with the underlying plaintiffs for $240 million, plus $23 million in attorneys' fees, without the consent of any of the insurers.

While each of the insurers initially denied coverage, Lloyd's ultimately settled with Citigroup for $15 million, $35 million below Lloyd's $50 million limit, in exchange for a release. Citigroup thereafter sought additional insurance from its second- and third-level excess carriers, arguing that the Lloyd's settlement exhausted the available primary insurance sufficient to trigger the excess insurers' obligations (specifically policies issued by Federal Insurance Company, Steadfast Insurance Company, SR International Business and St. Paul Mercury). The excess carriers filed a declaratory judgment action seeking a declaration that a settlement below Lloyd's full limit did not constitute exhaustion.

The Fifth Circuit Court of Appeals, affirming the district court opinion in favor of the excess carriers, cited extensively to the exhaustion language included in each policy. That language included: 1) Federal's requirements that the underlying carriers pay in cash “the full amount of their respective liabilities” and the insured collect the “full amount” of underlying coverage; 2) the similar requirement in the SR International policy that the insured demonstrate that the underlying carrier pay the “full amount of its respective limits of liability,” defining those limits as $50 million; 3) the requirement in the St. Paul policy that coverage would not attach until the primary policy's “total” limit of liability was paid; and 4) Steadfast's requirement that coverage would attach only “in the event of the exhaustion of all the limit(s) of liability of such Underlying Insurance ' “

In reaching its holding, the circuit court reasoned that while the policies contained different operative language, words and phrases such as “full amount,” “total,” and “all,” were unambiguous and should be given their plain meaning to require payment of the entire underlying amount. Accordingly, the court reasoned that Citigroup's settlement with Lloyd's for something less than the primary policy's “total” or “full amount” of available coverage did not implicate the excess insurers' obligations:

In sum, the plain language of Federal's, Steadfast's, S.R.'s, and St. Paul's policies requires that Lloyd's pay Citigroup the total limits of Lloyd's liability before excess coverage attaches. Thus, Citigroup's settlement with Lloyd's for $15 million of its $50 million limits of liability in exchange for a release from coverage for the FTC and Morales claims, did not satisfy the requirements necessary to trigger the excess insurers' coverage.

See also Great Am. Ins. Co. v. Bally Total Fitness Holding Corp. , No. 06 C 4554, 2010 U.S. Dist. LEXIS 61553 (N.D. Ill. June 22, 2010).

The JP Morgan Case

Following Citigroup , the New York Appellate Court, applying Illinois law, very recently reached the same holding in JP Morgan Chase & Co. v. Indian Harbor Ins. Co. , 2012 N.Y. App. Div. LEXIS 4627 (N.Y. App. Div. June 12, 2012). In that case, the court found that the insured failed to prove the proper exhaustion of certain underlying policies. Affirming the lower court's grant of summary judgment in favor of the excess insurers, the court held that the insured was therefore precluded from potentially accessing $95 million in excess bankers professional liability/securities coverage.

JP Morgan marks another instance where a court has relied on the clear exhaustion requirements included in an excess policy to preclude excess coverage for an insured's below-limit settlement. The insured in JP Morgan settled select policies for aggregated amounts in excess of the policies' respective limits. The settlements resolved claims both within the subject insurance program and unrelated claims without allocating the monies paid. The court reasoned that, absent allocation, the insured could not prove proper and complete exhaustion of the underlying policies. The appellate court was unpersuaded by the fact that the actual settlement amount was well in excess of the underlying policy limits.

JP Morgan arose from lawsuits filed against Bank One and its affiliates related to their roles as indenture trustees. At the time of the lawsuits, Bank One had $175 million in bankers professional liability and securities claim coverage potentially available. JP Morgan was also named as a defendant in some of those same or related actions. While JP Morgan did not own Bank One at that time, the companies later merged.

JP Morgan settled six of the underlying actions with its excess insurers for $718 million, including a $17 million settlement under a policy issued by a sixth-level excess carrier that was subject to $15 million limits. The latter settlement also resolved coverage under an affiliate policy of the carrier, although that affiliate policy was not part of Bank One's insurance program. Other settlements similarly resolved claims under policies both within and without the Bank One program.

Several of Bank One's excess-level carriers moved for summary judgment, arguing that the existing settlements failed to exhaust the underlying Bank One coverage as required by each of the operative policies. Not unlike the controlling policy language in Citigroup, the excess policies required complete and total exhaustion of the underlying insurance. Just by way of example, JP Morgan's fourth-layer excess carrier provided that “liability for any loss shall attach ' only after the Primary and Underlying Excess Insurers shall have [1] duly admitted liability and [2] shall have paid the full amount of their respective liability,” while other policies applied “only after exhaustion of the Underlying Limit solely as a result of actual payment under the Underlying Insurance in connection with Claim(s) and after the Insureds shall have paid the full amount of any applicable deductible or self-insured retentions ' “

The appellate court concluded that the settlements failed to satisfy these and similar provisions, rejecting the insured's attempt to create an ambiguity where none existed by relying on Zeig v. Massachusetts Bonding & Ins. Co. , 23 F.2d 665 (2d. Cir. 1928). The court explained that Zeig, a much older decision from the Second Circuit, relied on a perceived ambiguity in the term “payment” as used in that carrier's exhaustion provision. The JP Morgan provisions, however, were distinguishable from those in Zeig given their specificity, and did not control the outcome on these facts. Because it could not determine whether JP Morgan collected the full underlying limits absent evidence of allocation, the court concluded that the insured failed to prove exhaustion sufficient to trigger the excess carriers' payment obligations.

Conclusion

Citigroup and JP Morgan illustrate the importance of the specific exhaustion language in an excess policy. These cases also highlight the trend in which courts refuse to give too narrow a reading to unambiguous exhaustion language. Most importantly, these decisions serve as a reminder that lower-level insurance settlements can, and do, have significant impacts on an insured's opportunity to benefit from higher-level coverages. For J.P. Morgan, the lesson was a harsh one: Settling without allocation resulted in the forfeiture of $95 million in excess insurance.

William P. Shelley, a member of this newsletter's Board of Editors, is a member of Cozen O'Connor and chair of the firm's Global Insurance Group. Samantha Evans is an associate in the Global Insurance Group of Cozen O'Connor in the Philadelphia office.