Comerica Inc. v. Zurich American Ins. Co.

Issue Discussed: Exhaustion of Underlying Policy Limits

Submitted by Cecilia Froelich Moss, Karen C. Baswell

Date Promulgated: July 27, 2007

Comerica Inc. v. Zurich American Ins. Co., 498 F. Supp. 2d 1019 (E.D. Mich. 2007)

Court: United States District Court for the Eastern District of Michigan

Issues Decided:  Whether an insured’s below-limits settlement with its primary insurance carrier is sufficient to exhaust the primary policy and trigger coverage under an excess policy when the insured “filled the gap” between the settlement amount and the primary policy limits?

Background

Zurich American Insurance Co. (“Zurich”) issued a first layer excess policy to Comerica Inc. (“Comerica”), attaching excess of Comerica’s $20 million primary policy.  Comerica was sued in a number of securities fraud class actions.  Comerica and the securities plaintiffs reached a $21 million settlement , subject to insurer approval.  Comerica’s primary carrier initially refused to consent to the settlement, but ultimately settled its coverage dispute with Comerica and agreed to contribute $14 million towards the settlement.  Comerica and its primary carrier agreed that the primary policy would be “deemed fully exhausted” as a result of the settlement.

Comerica turned to Zurich for payment of $1 million toward the settlement and an additional $2.6 million in defense costs.  Zurich refused to pay on the basis that the primary policy had not fully exhausted, and that certain parts of the settlement were not covered.  Comerica then filed suit against Zurich and Zurich moved for summary judgment.

Key Holdings

Zurich argued that its policy language was unambiguous, and did not provide coverage until the primary insurer had paid its full limits to or on behalf of Comerica.  Comerica argued that the policy was ambiguous as to whether the primary insurer itself had to pay the full limits, and that because it had filled the gap between the $14 million settlement and the primary policy’s limit, the primary policy should be deemed exhausted.  Comerica relied on Zeig v. Masschusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928) and its progeny, which endorsed a below-limits settlement  “exhausting” an underlying policy when the insured filled the gap.

The court noted that the Zeig line of cases rely on “an ambiguity in the definition of ‘exhaustion’ or lack of specificity the excess contract as to how the primary insurance is to be discharged,” and that “a different result occurs when the policy language is more specific.”  498 F. Supp. 2d at 1030-31.

The Zurich policy provided that “[c]overage hereunder shall attach only after all such ‘Underlying Insurance’ has been reduced or exhausted by payments for losses . . . .”  Id. at 1022.  Further, it provided that “[i]n the event of the exhaustion of the limit(s) of liability of such ‘Underlying Insurance’ solely as a result of payment of loss thereunder, the remaining limits available under this Policy shall . . . continue for subsequent loss as primary insurance . . . .”  Id. 

Based on this language, the court rejected Comerica’s argument that the policy was ambiguous, and ruled in favor of Zurich.  It held that the Zurich policy “required that the primary insurance be exhausted or depleted by the actual payment of losses by the underlying insurer.”  498 F. Supp. 2d at 1032.  Further, the court held that “[p]ayments by the insured to fill the gap, settlements that extinguish liability up to the primary insurer’s limits, and agreements to give the excess insurer ‘credit’ against a judgment or settlement up to the primary insurer’s liability limit are not the same as actual payment.”  Id.

In addition to the above, the court rejected the insured’s argument that it was excused from meeting the exhaustion requirement because Zurich had allegedly repudiated its policy.  The court did not find a clear repudiation in Zurich’s actions, and held that, regardless, Zurich’s alleged repudiation did not cause the failure to exhaust the underlying policy.

Key Takeaways

• The language of the excess policy will determine how an underlying policy may be exhausted in order to trigger coverage under the excess policy. When the excess policy is not ambiguous, and requires payment of the full underlying limits by the underlying carrier, a below-limits settlement with the insured “filling the gap” will not serve to exhaust the underlying policy for purposes of triggering coverage under the excess policy.

* 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.