Great American Ins. Co. v. Bally Total Fitness Holding Corp.

Issue Discussed: Exhaustion of Underlying Policy Limits

Submitted by Cecilia Froelich Moss, Karen C. Baswell

Date Promulgated: June 22, 2010

Great American Ins. Co. v. Bally Total Fitness Holding Corp., 2010 WL 2542191 (N.D. Ill. June 22, 2010)

Court: United States District Court for the Northern District of Illinois

Issues Decided: Whether an insured’s below-limit settlements with its first and second layer excess carriers satisfied the exhaustion requirements to trigger coverage under its third and fourth layer excess insurance policies?

Background

Bally Total Fitness (“Bally”) had a total of $50 million in D&O coverage  from a primary carrier and four excess layer carriers, in the relevant year.  After incurring $33 million in legal costs, Bally and its former executives sought coverage from its insurers.  The primary carrier brought suit to invalidate coverage, and Bally brought third party complaints against the excess layer carriers.  Ultimately, the primary carrier and the first two layer excess carriers settled with Bally.  The primary carrier paid its full policy limit, but both the first and second layer excess carriers settled for less than their full policy limits, and the insured paid the difference.  The third and fourth layer excess carriers continued to deny coverage, arguing that their policies were not triggered until the underlying carriers paid the full amounts of their policy limits ($30 million).  The insured argued that the third and fourth layer excess policies covered claims above $30 million, regardless of who made payment for the underlying $30 million.  The parties cross-moved for summary judgment on this issue.

Key Holdings

The insured argued that the third and fourth layer excess policies were ambiguous as to whether the insurance carriers must pay the full limits of the underlying policies, and that the rule from Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928), should apply, allowing the below-limits settlements to “exhaust” the underlying policies.  The court reviewed the relevant language of the excess policies at issue, and held that they were not ambiguous and clearly defined how the underlying insurance must be exhausted.

The third layer excess policy provided that “liability for any covered Loss shall attach to the Insurer only after the insurers of the Underlying Policies shall have paid, in the applicable legal currency, the full amount of the Underlying Limit . . . .”  2010 WL 2542191, at * 1 (N.D. Ill. June 22, 2010).  The court held this policy required actual payment by the “insurers of the Underlying Policies” for the “full amount of the Underlying Limit” in order to exhaust the underlying policies.  Id. at *5.

The fourth layer excess policy provided that coverage would apply “only after all Underlying Insurance has been exhausted by payment of the total underlying limit of insurance . . . .” and further clarified that “[i]n the event of exhaustion of all of the limits of insurance of the Underlying Insurance solely as a result of actual payment of loss or losses thereunder, this Policy shall, subject to the Limit of Insurance, terms and conditions of this Policy, apply as Primary Insurance . . . .”   Id. at *1.  The court held this policy  required “actual payment of loss or losses thereunder” by “all Underlying Insurance,” for the “total underlying limit of insurance” to exhaust the underlying policies.  Id. at *5.

The court granted summary judgment to the third and fourth layer excess carriers, holding that the excess policies required the underlying insurance carriers to make actual payment of their full policy limits before coverage under the third or fourth layer policies was triggered.  Id. at *5.

Key Takeaways

• The specific language of the excess policy at issue will determine how an underlying policy may be exhausted in triggering coverage under the excess policy. When the policy language clearly defines exhaustion, the court will enforce the policy as written.  When the language of the excess policy requires the underlying carriers to pay the full limits of their policies, a below-limits settlement is not sufficient to exhaust the underlying 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.