Ali v. Federal Ins. Co.

Issue Discussed: Exhaustion of Underlying Policy Limits

Submitted by Cecilia Froelich Moss, Karen C. Baswell

Date Promulgated: June 4, 2013

Ali v. Federal Ins. Co., 719 F.3d 83 (2d Cir. 2013)

Court: United States Court of Appeals for the Second Circuit

Issues Decided: Is an excess policy triggered once the aggregate amount of the policyholder’s covered losses exceeds the excess policy attachment point?  Or is the underlying policy only exhausted upon actual payment of claims?

Background

The insurers in this case, Federal Insurance Company (“Federal”) and Travelers Casualty and Surety Company (“Travelers”), issued various excess D&O policies to a company that later filed for bankruptcy.  Two other carriers also issued excess policies in the relevant insurance tower, but later became insolvent.  After filing for bankruptcy, the company and its officers and directors were named as defendants in multiple lawsuits, including a lawsuit in the Bahamas in which the plaintiffs sought $100 million in damages.  Federal filed a declaratory judgment action against the insureds, seeking a declaration that it was not required to “drop down” to cover the liability of the insolvent insurance carriers.  The district court ruled for Federal on this issue, and it was not appealed.

The insureds counterclaimed, seeking a declaration that the excess carriers’ coverage obligations were triggered once the total amount of the insured’s defense and/or indemnity obligations exceeded the limits of the relevant underlying policies, regardless of whether those amounts had actually been paid.  The district court denied this motion based on the language of the excess policies, which provided:

In the event of the exhaustion of all of the limit(s) of liability of such Underlying Insurance solely as a result of payment of losses thereunder, the remaining limits available under this policy shall . . . continue for subsequent losses as primary insurance . . . .

Federal Ins. Co. v. Estate of Gould, 2011 WL 4552381, at * 7 (S.D.N.Y. Sept. 28, 2011).  The district court held that this language required actual payment of losses before the excess policies were triggered.  Id.  The insureds then appealed this decision.

Key Holdings

The Second Circuit affirmed the holding that the language of the excess policies “expressly stat[ed] that coverage does not attach until there is payment of the underlying losses.”  Ali v. Federal Ins. Co., 719 F.3d 83, 91 (2d Cir. 2013) (emphasis in original).  Specifically, the Court noted that the Federal policies provided that coverage only attaches “after all . . . ‘Underlying Insurance’ has been exhausted by payment of claim(s),” and that exhaustion of the underlying insurance occurs “solely as a result of payment of losses thereunder.”  Id. (emphasis in original).  Similarly, the Travelers policy provided that coverage attaches “only after all such Underlying Insurance has been exhausted,” and that exhaustion occurs “solely as a result of payment of losses thereunder.”  Id. (emphasis in original).

In its analysis, the Second Circuit noted that the district court did not specify that the underlying insurers had to make the payments before the excess policies were triggered, only that payment of the underlying losses was required.  719 F.3d at 92.

The Court also distinguished this case from Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (1928), noting that: (1) Zeig involved a first-party property insurance policy and this case involved excess liability insurance policies; and (2) whereas in Zeig the insured suffered an out-of-pocket loss for which it sought indemnification, here the insured requested relief based on its obligations to pay third-parties.  719 F.3d at 93.

Key Takeaways

• The language of the policies at issue required “payment” of losses exhausting the underlying policy limits, not merely the accrual of liability in excess of those limits, in order to trigger coverage under the excess policies.

* Cecilia Froelich Moss is a founding partner of Chaffetz Lindsey LLP, where her practice focuses on representing major insurance companies in reinsurance disputes and in coverage litigation.  Ms. Moss also handles large scale commercial disputes in court and in international arbitration.

* Karen C. Baswell is an associate of Chaffetz Lindsey LLP, focusing on insurance and reinsurance dispute resolution.