Author:
Frederick J Fisher, J.D., CCP A recent court finding on a D&O policy’s condition precedent to payment by the excess carrier bodes poorly for agents and insureds. Read on for more details on this court decision. The law offices of Morrison-Mahoney recently summarized a rather disturbing decision in the case of Pharmacia Corp. v. Arch Specialty Insurance Company, and Twin City Fire Insurance Company et. al. This case was on appeal from the United States District Court for the District of New Jersey and decided by the Third Circuit Court of Appeals. In essence, an excess Directors & Officers (D&O) policy issued by Twin City Fire Insurance Co (a member of the Hartford Insurance Group) was not obligated to share in the cost of a $207 million settlement of shareholder claims against the insured because Pharmacia (the insured) had not satisfied the policy’s separate requirements that each underlying policy not only have paid is limits in full, but that each insurer had to have admitted liability.
Despite Pharmacia’s contention that all the underlying insurers had ultimately paid their full policy limits, the Third Circuit noted that six of the seven underlying insurers refused to admit liability and therefore, the condition precedent had not been satisfied. The court rejected Pharmacia’s theory of functional exhaustion and its contention that paying a policy limit implicitly constituted an admission of liability.
As cited in the court’s decision, the Court’s conclusion was consistent with another similar case, J.P. Morgan Chase & Co. v Indian Harbor Ins. CO. (98 A. D. 3d 18 (N.Y. App, 2012) although the insurer claiming it had no obligation to participate in a $175 million settlement was again, Twin City Fire, the insurer issuing the policy. In that case, a court applied Illinois law in interpreting the identical exhaustion and found the Twin City policy to unambiguously impose conditions precedent for Twin City coverage: 1. admitting liability, and 2. paying the full amount of their liability.
These two cases present an interesting problem. First, it is quite annoying that the Pharmacia case was not certified for publication. This certainly sounds like avoidance to me, but at least it does not set a permanent precedent in New Jersey. On the other hand, it did not end well for the appellant. Notwithstanding that, there are serious consequences for this decision.
One consequence is for insurance brokers, as presumably, only those held to a higher standard of care would be involved in the placement of such a high level of coverage rather than an ordinary insurance producer who may or may not have any expertise.
Nonetheless, such a condition is almost impossible to satisfy given how settlements take place. Has anyone ever heard of a carrier admitting liability when paying a settlement? This rarely if ever occurs. In fact, settlement agreements and releases usually state the exact opposite, that there is no admission of liability. Thus, how can a party to a settlement deny liability, and then expect their insurance company to admit there is liability? Further, do not many or most liability policies specifically require the insured not to admit liability?
Another problem is the gap in the towers of excess coverage that would occur if an insurance company refused to participate in the settlement. This could leave a $10 or $20 million gap in coverage over the aggregate of the underlying insurers beneath them. Thus, if primary and excess layers of $40 million have committed to a high-level settlement, what happens to the layers above 50 million should an excess insurer with $10 million over $40 million not contribute? Would the insurers at the $60 million and higher level take the position that the underlying insurance had not been properly maintained and thus also deny coverage? Or would the insured have to fill the gap?
Not only does this create problems for the policyholder, but it also creates problems for the insurance broker for not catching such language and negotiating its removal. More importantly, now an insured cannot rely on the standard of generally accepted practices that “following form excess polices” means just that. Traditionally, “following forms” do not have inconsistent provisions from those of the underlying layers. Unfortunately, that may no longer be true as increasingly “following form” policies contain language like “except where this policy may differ.”
An insured might claim, in a similar situation as in the Pharmacia case, that they have a have a reasonable expectation of coverage based on generally accepted standards of “following form” policies. Unfortunately, the doctrine of the Reasonable Expectation of Coverage is tied not to what accepted practices has been, but in fact, is now tied to the concept that if an exclusion is clear and unambiguous, then there cannot be any reasonable expectation of coverage.
We now see the courts protecting suppliers of goods and services to the detriment of the consumer, without discriminating between an average citizen and major companies. This appears to be a dangerous trend in the insurance industry and is already affecting those supporting this agenda.
Attorneys at Lowenstein-Sandler, (Lynda A. Bennet, Alexander B. Corson, and Paul Giannoglu) published, citing a 1928 case, Zeig v. Massachusetts Bonding & Ins. Co. (23 F.2d 665, 666 (2d Cir. 1928). This finding rejected an insurer's argument that a policyholder had voided all coverage under an excess policy when it settled with primary insurers for less than their full underlying limits. The court held the excess insurer had "no rational interest in whether the insured collected the full amount of the primary policies, so long as it was only called upon to pay such portion of the loss as was in excess of the limits of those policies.” The attorneys went on to say that “…in so holding, the court refused to reach "[a] result harmful to the insured, and of no rational advantage to the insurer," which would, "in many, if not most, cases, involve delay, promote litigation, and prevent an adjustment of dispute which is both convenient and commendable." Zeig, among many other opinions nationwide, recognizes the commonsense reality that policyholders do not purchase excess insurance expecting to face a series of different coverage positions in the same tower of insurance.
Their comments of the Pharmacia Case pointed out that “…the Pharmacia opinion is troubling because it invites excess insurers to continue to insert conditions on coverage that have no rational connection to the rights of the parties and become a trap for the unwary, particularly at the upper-layer levels of a coverage tower where policy language rarely receives scrutiny during the policy placement or renewal process. An "admission of liability" requirement in a high-level excess policy seriously impedes the policyholder's (and other insurers') ability to resolve a contested claim, since an express admission of liability in the context of settlement is exceedingly rare. An excess policy including such a requirement is therefore arguably valueless, since multimillion-dollar claims that reach high-level excess layers are most often resolved through negotiated resolution.”
For insurance brokers and agents, here are some takeaways provided by the attorneys at Lowenstein-Sandler (see below link).
- "Negotiate the removal of limitations on exhaustion in excess policies, or at a minimum point out limitations to your insured
- Exercise caution as insurers work to settle contested claims
- Utilize knowledgeable professionals when placing coverage"
Law firms are analyzing this decision, which one law firm referred to as “hyper-technical.” For another synopsis of the case, visit this link.
Frederick Fisher, J.D., CCP is a specialist in Professional Liability. He is a Member of the Editorial Board for Agents of America, an original Faculty Member of the Claims College, School of Professional Lines sponsored by the Claims & Litigation Management Association, Senior Technical Advisor for over 33 years for Professional Liability Insurance, published by the International Risk Management Institute, a past President and a founding member of PLUS
Mr. Fisher expertise started with a 20 year career as a Professional Lines Claims Adjuster, which included qualitative claim auditing, risk management & loss control services, and acting as a TPA.
He then founded ELM insurance Brokers and served as CEO for another 20 plus years. During his 49 year career, he has authored over 80 Trade Journal articles and 1 book. He remains a Subject Matter Expert for several PLUS RPLU courses. In 2019, he was the PLUS recipient of the Founders Award. He has taught or given over 160 CE classes, lectures and Webinars concerning Specialty Lines Insurance Issues and coverage. He is an A.M. Best's recommended expert and has been testifying as an Expert witness for over 30 years. He consults regularly with Businesses concerned with "gotchya's" so prevalent in Executive Liability and Specialty Lines Insurance. In essence, he is strong proponent of advising and providing financial security to customers & clients, and let the competitors “sell some insurance."
Publication Date: March 29, 2024
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