Embed Size (px)
Citation preview
Horizontal vs. Vertical Exhaustion of Insurance:
Priority of Coverage and Settlement for Below
Policy Limits
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
WEDNESDAY, DECEMBER 11, 2019
Presenting a live 90-minute webinar with interactive Q&A
Brendan V. Mullan, Counsel, Crowell & Moring, San Francisco
Celia B. Waters, Attorney, Saxe Doernberger & Vita, Trumbull, Conn.
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-877-447-0294 and enter your Conference ID and PIN when prompted.
Otherwise, please send us a chat or e-mail [email protected] immediately
so we can address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the ‘Full Screen’ symbol located on the bottom
right of the slides. To exit full screen, press the Esc button.
FOR LIVE EVENT ONLY
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email
that you will receive immediately following the program.
For additional information about continuing education, call us at 1-800-926-7926
ext. 2.
FOR LIVE EVENT ONLY
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the link to the PDF of the slides for today’s program, which is located
to the right of the slides, just above the Q&A box.
• The PDF will open a separate tab/window. Print the slides by clicking on the
printer icon.
FOR LIVE EVENT ONLY
Today’s Agenda
➢ Overview of horizontal versus vertical exhaustion in the
additional insured context
➢ Applying horizontal exhaustion and vertical exhaustion
principles to long-tail claims
➢ Strategies for resolving issues when the primary carrier
settles for less than policy limits
➢ Review of relevant case law
➢ Practical tips
5
Risk Transfer Methods
6
Contractual Indemnity: Downstream party agrees to indemnify upstream party from project-related losses
Insurance: Downstream party agrees to purchase insurance which covers upstream party as an “additional insured”
ContractorSub’s
IndemnityClaimOwner
Sub’s
Insurance
Contractor’s
Insurance
Priority of Coverage
7
General Contractor
(“GC”)Owner
Owner’s Corporate
Primary Insurance
Owner’s Corporate
Excess Insurance
GC’s Primary Insurance
(Owner’s AI Carrier)
GC’s Excess Insurance
(Owner’s AI Excess Insurance)
Promise to
Indemnify
Promise to Procure
Insurance
7
8
Which Policy Responds Second?
Sharing
Priority of Coverage: State by State
9
Vertical Exhaustion:
4th Cir. (Virginia)
5th Cir. (Texas)
8th Cir. (Arkansas)
Kentucky
Missouri
Horizontal Exhaustion:
California
Illinois
New Jersey
New York
Vertical Exhaustion
10
(2) $5M Excess
(1) $1M Primary
(4) $5M Excess
(3) $1M Primary
General Contractor Subcontractor
GC tenders to AI primary and
AI excess
General Contractor sued
AI primary pays first, then AI
excess carrier pays
Vertical Exhaustion Example: Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8th Cir. 2002)
• Contract required $2M in liability insurance; Cheyenne
obtained $1M primary/$10M excess
• $11M settlement: paid by St. Paul ($1M) and RLI ($10M)
• Result: St. Paul paid first and RLI paid second; no
contribution from Wal-Mart’s insurer
11
Indemnity
National Union
$10M Primary
Wal-Mart Stores, Inc.Retailer
CheyenneSupplier
(1) St. Paul
$1M Primary
(2) RLI
$10M Excess
Horizonal Exhaustion
➢ All available primary policies must exhaust first
➢ Focus on policy language, not underlying contract
➢ Excess policy is a payer of last resort
12
Horizontal Exhaustion: Bovis v. Great American Ins. Co., 855 NYS 2d 459 (2008)
Elevator Sub.(AJ MCNULTY)
Great American
Decedent
Const. Mgr.(BOVIS)
Illinois $1M Primary Policy
Gen. Ctr.
(STONEWALL)
Liberty $1M Primary
Policy
Westchester $10M
Umbrella
Concrete Sub.(J&A)
QBE $1M Primary
United $5M Umbrella
Steel Ctr.(SMI-OWEN)
Owner
(DASNY)
13
Bovis: Trial Court Apportionment
QBE$1,000,000
J&A Primary
ILLINOIS$1,000,000
BOVIS Primary
WESTCHESTER$10,000,000
Stonewall Umbrella
UNITED$5,000,000
J&A Umbrella
LIBERTY$1,000,000
Stonewall Primary
1
2
3
4
514
QBE
$1,000,000
J&A Primary
LIBERTY
$1,000,000
Stonewall Primary
ILLINOIS
$1,000,000
BOVIS Primary
UNITED
$5,000,000
J&A Umbrella
WESTCHESTER
$10,000,000
Stonewall UmbrellaSharing pro rata
Bovis: Appellate Court Apportionment
1
2
3
4
15
HDI-Gerling Am. Ins. Co. v Zurich Am. Ins. Co.: Manuscript Endoremsents
City of New York
Skanska USA Civil
NortheastSiemens Corporation
Zurich (Skanska Primary) HDI-Gerling (Siemens Primary)
16
HDI-Gerling Am. Ins. Co. v Zurich Am. Ins. Co., 2017 NY Slip Op 01955 [1st Dept Mar. 16, 2017]
Zurich Policy
17
ISO’s First Attempt at SolutionPrimary CGL - CG 20 01 04 13
18
CG 20 01 04 13
ISO’s Second Attempt at SolutionExcess - CX 24 33 11 16
19
CX 24 33 11 16
20
CU 24 78 11 16
ISO’s Second Attempt at SolutionUmbrella - CU 24 78 11 16
Horizontal Exhaustion: Two-Part Solution
21
1. Fix the trade contract
2. Fix the policies
• Ensure subcontractor’s primary policy provides
primary/non-contributory coverage for GC
• Modify subcontractor’s excess policy to provide
primary/non-contributory coverage for GC
22
Sample Excess Policy Endorsement
23
Endorsement – Excess Liability Policy
Priority of Coverage
THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.
Any entity qualifying as an additional insured on the insurance stated in the Schedule of Underlying Insurance
shall be an additional insured on this policy.
This insurance shall apply immediately upon exhaustion of the insurance stated in the Schedule of Underlying
Insurance as respects the coverage afforded to any additional insured. This insurance shall apply before any
other insurance available to the additional insured, on which the additional insured is a named insured,
whether such other insurance is primary, excess, contingent, or on any other basis, and we will not seek
contribution from such insurance for defense or indemnity.
Where an entity qualifies as an additional insured on insurance stated in the Schedule of Underlying Insurance
based on a written agreement to provide liability insurance, the limits of insurance provided by this policy
shall not exceed the limits of insurance required by such written agreement.
Sample Excess Policy Endorsement
Horizontal/Vertical Exhaustion Checklist
Risk Management/Pre-Litigation
✓ Check applicable state’s law regarding horizontal/vertical
exhaustion
✓ Require vertical exhaustion of all AI policies in contracts
✓ Check AI policies’ “other insurance” provisions and
endorsements regarding horizontal exhaustion (i.e.,
primary, non-contributory coverage)
✓ Ensure that indemnity agreement is broad and enforceable
24
Long-Tail Claims
➢ Applying horizontal exhaustion and vertical exhaustion principles to
long-tail claims
25
Continuous Trigger
➢ “Continuous trigger” for claims of continuous or progressively deteriorating bodily
injury or property damage:
• Policies triggered: “[I]n the context of a third party liability policy ‘property damage that is
continuous or progressively deteriorating throughout several policy periods is potentially covered by
all policies in effect during those periods.’” State of California v. Continental Ins. Co., 55 Cal.4th
186, 196 (2012); Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645 (1995).
• The timing of the damage: The timing of the accident, event, or condition causing PD or BI is
largely immaterial in determining whether coverage is “triggered;” instead, what is relevant is when
the complaining party was actually damaged. See State of California, 55 Cal.4th at 197; Montrose,
10 Cal.4th at 670.
o There can be no coverage for bodily injury or property damage that begins after a policy expired.
See Aerojet-General Corp. v. Transport Indem. Co., 17 Cal.4th 38, 71 (1997); Buena Vista Mines, Inc.
v. Industrial Indem. Co., 87 Cal. App.4th 482, 487 (2001).
26
“All Sums”
➢ 10 jurisdictions follow the “all sums” approach
• For example, California is an “all sums” “with stacking” state that allows the insured to elect
from which of several triggered policies to seek indemnity, up to the policy limits of the
selected policy, and if the selected policy does not provide enough limits, it can select another
policy. Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1 (1996).
o Thus, subject to policy terms and conditions, each policy triggered by a particular claim may have the
duty to defend such claim completely and to indemnify the entire judgment obtained by the
claimant. See State of California v. Continental Ins. Co., 55 Cal.4th at 200.
o Uber-policy: “The all-sums-with-stacking indemnity principle properly incorporates the Montrose
continuous injury trigger of coverage rule and the Aerojet all sums rule, and ‘effectively stacks the
insurance coverage from different policy periods to form one giant ‘uber-policy’ with a coverage limit
equal to the sum of all purchased insurance policies.’” State of California, 55 Cal.4th at 201.
27
Horizontal Exhaustion of Primary Coverage
➢ “Horizontal exhaustion” of primary coverage is required to access excess policies.
• Under the principle of horizontal exhaustion, excess insurance is not required to begin paying
indemnity until after all triggered primary insurance is exhausted. See Montgomery Ward & Co. v.
Imperial Cas. & Co., 81 Cal. App.4th 356, 365 (2000).
• But be aware of policy language.
o If an excess policy says it applies once specific underlying insurance is exhausted (i.e., vertical
exhaustion), the horizontal exhaustion “rule” will not apply. Community Redevelopment Agency v.
Aetna Cas. & Sur. Co., 50 Cal. App.4th 329, 340 (1996).
o Under policy language providing that an excess insurer’s obligations do not arise until the underlying
policy “has paid or has been held liable to pay” its limits, an excess policy has no duty to provide
coverage where the policyholder settles with the primary carrier for less than policy limits.
Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 161 Cal. App.4th 184 (2008).
o Vertical exhaustion, not horizontal exhaustion, applies where excess coverage sits above an SIR.
Montgomery Ward & Co. v. I mperial Cas. & Indem. Co., 81 Cal. App.4th 356, 364, 369 (2000).
28
Horizontal Exhaustion of Excess Coverage?
➢ If a first-layer excess policy need not respond before all primary coverage is horizontally exhausted, must
a second-layer excess policy respond before all first-layer excess coverage is horizontally exhausted?
➢ The California Supreme Court is poised to resolve this question in Montrose Chemical Corp. v. Superior
Court, Case No. S244737.
➢ The court of appeal held that, if policy language required it, all underlying excess insurance in all
triggered periods must pay before the higher level excess policy can be called upon to pay.
➢ The California Supreme Court granted review to address the following issue: “When continuous property
damage occurs during several periods for which an insured purchased multiple layers of excess insurance,
does the rule of ‘horizontal exhaustion’ require the insured to exhaust excess insurance at lower levels
for all periods before obtaining coverage from higher level excess insurance in any period?”
➢ The case is fully briefed awaiting oral argument.
29
Contribution Claims
➢ “Spiked” Insurer: Under an “all sums” approach, it is possible that the “spiked” insurer will end up
paying not only its fair share of a claim, but other insurers’ shares as well. Thus, an insurer that defends or
indemnifies a claim and pays more than its fair share may seek contribution from other insurers at the
same level who also had a duty to defend or indemnify but did not do so (or did so but without paying its
complete fair share). See Scottsdale Ins. Co. v. Century Surety Co., 182 Cal. App.4th 1023, 1035-36
(2010).
➢ Settled insurers still subject to contribution claims: Contribution claims against settled insurers are
permitted, if the settlement was for less than the settled insurer’s fair share. See Fireman’s Fund Ins. Co.
v. Maryland Cas. Co., 65 Cal. App.4th 1279, 1288 (1998). In other words, there is no contribution bar
precluding claims against settled insurers.
➢ Allocation method: Trial courts have broad discretion in determining what method of allocation will
most “equitably” distribute the “loss” (defense and indemnity costs) among insurers on the risk. See
Scottsdale Ins. Co. v. Century Sur. Co., 182 Cal. App.4th 1023, 1032 (2010).
o However, an insurer cannot allocate any portion of the loss to periods during which the insured has
no insurance coverage. See State of California v. Continental Ins. Co., 55 Cal.4th at 200.
30
Compare Pro Rata Allocation
➢ The pro rata allocation method has its origins in the Sixth Circuit case Insurance Co. of N.
Am. v. Forty –eight Insulations, Inc. 633 F.2d 1212 (6th Cir. 1980)
➢ Followed in 16 jurisdictions
31
Pro Rata: Owens-Illinois
➢ For example, New Jersey employs continuous trigger, weighted pro rata allocation
and the unavailability rule
➢ Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974 (1994)
• “Although the use of a continuous trigger for property damage attributable to long-term embedding
of contaminants is more problematic (for example, the "property damage" may be attributable only
to third-party intervention, as in the form of a government order to rip out material previously
thought not to be defective), the latent nature of such property damage, at least in the case of
asbestos products, is sufficiently analogous to that in personal injury to warrant use of a continuous
trigger under the terms we have outlined.”
• Weighted allocation: “A fair method of allocation appears to be one that is related to both the
time on the risk and the degree of risk assumed.”
• The Unavailability Rule: “When periods of no insurance reflect a decision by an actor to assume or
retain a risk, as opposed to periods when coverage for a risk is not available, to expect the risk-
bearer to share in the allocation is reasonable.”
32
Pro-Rata: R.T. Vanderbilt
➢ R.T. Vanderbilt Co., Inc. v. Hartford Accident & Indem. Co., 171 Conn. App. 61 (2017)
• “pro rata, continuous trigger allocation is an artificial judicial construct designed to allocate costs
between the various insurance policies that are on the risk during the time over which a single,
indivisible injury develops” and has the “effect of maximizing the resources available to respond to
the multitude of claims facing” the policyholder.
• “the cases that have adopted an unavailability rule are better reasoned, represent the majority
position, and more closely comport with our Supreme Court's analysis in Security. Accordingly, it
was not improper for the trial court to exclude Vanderbilt from the allocation block for years in
which asbestos related insurance was unavailable.” Equitable exception to unavailability rule was
inapplicable based on the facts of the case.
• Vanderbilt was held responsible for liability that would have been allocated to insolvent insurers.
33
Insolvent Insurer(s)
➢ Does a solvent insurer have an obligation to provide coverage in place of an insolvent insurer?
➢ Depends on the policy language
• Drop down: There may be an obligation to drop down if the policy language is ambiguous. See
e.g., Donald B. MacNeal, Inc. v. Interstate Fire & Cas. Co., 132 Ill. App.3d 564(1985); Reserve Ins.
Co. v. Pisciotta, 30 Cal.3d 800 (1982).
• No obligation to drop down: There is no obligation to drop down with clear and unambiguous
policy language. Hoffman Constr. Co. v. Fred S. James & Co., 313 Ore. 464 (1992); Wells Fargo
Bank v. California Ins. Guarantee Ass’n, 38 Cal. App.4th 936 (1995); Morbark Indus. v. Western
Employers Ins. Co., 429 N.W.2d 213 (Mich. App. 1988).
34
What happens when the insured settles with the primary carrier for less than policy
limits?
It depends on your jurisdiction and policy language . . .
35
Zeig v. Massachusetts Bonding & Ins. Co.,23 F.2d 665 (2d Cir. 1928)
➢ Settlement by insured with primary carrier did not eliminate
excess coverage
➢ Excess carrier – no rational interest in whether insured
collected full primary limits
➢ Public policy: delay, promotion of litigation, chilling effect on
settlements
➢ But, parties could impose conditions precedent if they chose to
do so . . .
36
Comercia Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007)
➢ Distinguished Zeig – lack of specificity in excess policy
language
➢ Public policy favors settlements, but can’t supersede
unambiguous policy language
➢ Policy required “actual payment of losses” by the underlying
insurer
37
Practical Tips
➢ Review all relevant polices to assess scope, limits, and “other
insurance” provisions
➢ Determine applicable state/jurisdictional that may govern the
policies and trade contract(s)
➢ Upstream parties (i.e., GCs/Owners) should insist upon “primary
and non-contributory” language in downstream parties’ insurance
policies
➢ Consider whether a consolidated insurance (aka “wrap-up”) program
is cost-effective and otherwise appropriate for your project
38
Thank You
39
Celia B. WatersSaxe Doernberger & Vita, P.C.
203.287.2126
Brendan V. MullanCrowell Moring
415.365.7847
