Maximus, Inc. v. Twin City Fire Ins. Co.

Issue Discussed: Exhaustion of Underlying Policy Limits

Submitted by Cecilia Froelich Moss, Karen C. Baswell

Date Promulgated: March 12, 2012

Maximus, Inc. v. Twin City Fire Ins. Co., et al.,856 F.Supp.2d 797 (E.D. Va. 2012)

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

Issues Decided: Whether underlying policies had been “exhausted,” thus triggering coverage under the excess policy at issue, when the insured: (i) settled with the underlying carriers for less than full policy limits; and (ii) “filled the gap” (i.e. absorbed the difference) between the settlements and the underlying policy limits?

Background

Plaintiff maintained professional liability insurance in several layers with various insurance companies.  After settling a dispute regarding an alleged default and/or breach of a subcontract agreement, Plaintiff sought coverage from its insurance carriers for the settlement payments and related damages.

Plaintiff settled with its primary insurer and two excess carriers for amounts less than the full limits of coverage under those policies.  In each settlement, Plaintiff absorbed the difference between the amount the carrier actually paid and the full policy limits (i.e. Plaintiff “filled the gap”).  Plaintiff brought suit against the remaining excess carriers that refused to indemnify Plaintiff.[1]

The insurance policy issued to Plaintiff by Axis, the remaining excess carrier before the court, provided that the policy “shall apply only after all applicable Underlying Insurance with respect to an Insurance Product has been exhausted by actual payment under such Underlying Insurance . . . .”  Based on this language, Axis counterclaimed that it was not liable to the Plaintiff because the underlying policies had not been exhausted as the underlying carriers had paid less than full limits.  Plaintiff moved to dismiss that counterclaim.

Key Holdings

The court rejected Axis’ argument that the “actual payment” language of the policy required the underlying insurers to pay the full amount of their policy limits before the excess policy was triggered.  Specifically, the court found that the policy language did not “clearly require all underlying insurance carriers themselves to pay the full amounts of their policy limits” and did not “clearly provide that settling for less than the policy limit, even if the insured fills the gap, fails to satisfy the exhaustion requirement.”  865 F. Supp. 2d 797, 804.  Thus, the court found the policy ambiguous as to these issues.  Id.  Noting the general rule that when an insurance contract is ambiguous, the terms are construed against the insurer, and in favor of coverage for the insured, the court ruled in favor of the Plaintiff, holding that the exhaustion requirement had been satisfied by Plaintiff’s filling the gap between its settlements with the underlying insurers and the full limits of the underlying policies.  Id.

In its analysis, the court distinguished the language in the Axis policy from the applicable language in several other cases which explicitly required payment by the underlying insurers of the full limit of underlying policies, including:

• Comerica Inc. v. Zurich Am. Ins. Co., 498 F. Supp. 2d 1019 (E.D. Mich. 2007) (finding the policy to unambiguously preclude exhaustion by below-limits settlements when the policy applied “in the event of the depletion of the limit(s) of liability of the ‘Underlying Insurance’ solely as a result of actual payment of loss thereunder by the applicable insurers. . . .”) (emphasis added).
• Great Am. Ins. Co. v. Bally Total Fitness Holding Corp., 2010 WL 2542191, (N.D. Ill. June 22, 2010) (holding that below-limits settlements did not exhaust underlying policies when the policies at issue provided they would apply “only after the insurers of the Underlying Policies shall have paid, in the applicable legal currency, the full amount of the Underlying Limit” or “only after all Underlying Insurance has been exhausted by payment of the total underlying limit of insurance and . . . only if each and every Underlying Insurance Policy has responded by payment of loss as a result of any wrongful act”) (emphasis added).
• Citigroup Inc. v. Federal Ins. Co., 649 F.3d 367 (5^th 2011) (finding below-limits settlements with underlying insurers did not trigger coverage under excess policies when the excess policies did not attach until “after the total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying Insurance as covered loss thereunder” or until “after any Insurer subscribing to any Underlying Policy shall have agreed to pay or have been held liable to pay the full amount of its respective limits of liability.”) (emphasis added)

Key Takeaways

• The language of the policy at issue will determine how underlying policy limits must or may be exhausted. If the policy does not clearly require full payment by the underlying carrier(s), underlying policies may be deemed exhausted by settlement if the insured fills the gap.

* 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.

[1] Twin City Fire Ins. Co. settled with Plaintiff, leaving Axis as the remaining defendant.