If the underlying insurers have paid their limits, you would generally expect that the next-in-line excess insurer would also have to pay its limit as well for losses within its layer. However, in an appellate decision with what is arguably an unexpected twist, an appellate court has held – in reliance on express policy language – that an upper layer excess carrier is relieved of its obligation to pay because the underlying carriers, all of whom paid their full limit, did not admit liability. The Third Circuit’s January 19, 2024, decision, marked “not precedential,” can be found here. A January 21, 2024, LinkedIn post about the decision by Paul Curley of the Kaufman, Borgeest & Ryan law firm can be found here.
In 2003, Pharmacia was sued in a securities class action lawsuit. The case ultimately settled. Pharmacia incurred total defense and indemnity costs of $207 million.
At the relevant time, Pharmacia maintained a $200 million D&O Insurance program consisting of a $25 million primary layer and twelve additional excess layers. The insurers in the first seven layers of insurance paid their full limits of liability. Pharmacia sought payment from the eighth layer excess insurer, showing the eighth layer excess insurer that the primary and excess layers ahead of it had paid their limits. The eighth layer excess insurer declined. Pharmacia sued the insurer, and the parties filed cross-motions for summary judgment.
The district court granted the excess insurer’s summary judgment motion, holding that the “plain language” of the insurer’s policy required the other excess insurers to admit liability as a condition precedent to coverage; that six of the underlying insurers had disclaimed coverage; and therefore, that the condition to coverage had not been satisfied. Pharmacia appeal the ruling.
The January 19, 2024, Opinion
In a brief January 19, 2024, opinion marked “Not Precedential” and written by Justice Patty Shwartz for a unanimous three-judge panel, the Third Circuit affirmed the district court’s ruling, holding that Pharmacia “failed to adduce evidence that satisfies a condition precedent necessary for [the excess insurer’s] insurance policy to attach.”
The excess policy, the appellate court noted, “unambiguously” specifies two conditions precedent to coverage; in order for coverage to attach, the court said, Pharmacia must show both that the insurers ahead of the excess insurer in the tower have (1) “duly admitted liability and” (2) “paid the full amount of their respective liability.” The word “and,” the Court said, “demonstrates that both conditions must be met.”
Here, the Court said, Pharmacia “has failed to show that both conditions” to trigger the excess insurer’s coverage were met. “Regardless,” the court said, “of whether the other insurers in the tower paid their policy limits, the record does not demonstrate that all of those insurers admitted liability.”
Because Pharmacia “failed to establish at least one condition precedent,” the District Court correctly decline to find that the excess insurer owed Pharmacia coverage under its policy.”
Pharmacia tried to argue that the district court had improperly considered the other insurers’ settlement agreements (which, as settlement agreements typically do, contained the standard recital of non-admission of liability) in support of the proposition that the insurers had disclaimed liability. The appellate court rejected this argument, saying, in a footnote, that Pharmacia’s assertion that an insurer’s payment of a policy limit alone constitutes an admission of liability “is speculative as other reasons may cause a carrier to pay its policy limit, such as avoiding litigation.” In addition, the Court said, to “infer that payment of the full policy limit is a concession of liability would render the admission-of-liability condition superfluous.”
The admission-of-liability provision in the excess policy at issue operated here as something of a hidden land mine, one that blew up on everyone’s faces after settlement. Because settlement agreements routinely include recitals of non-admission of liability, an excess policy with this kind of provision could potentially sabotage any settlement involving the excess insurance unless the presence of the provision was fully noted and taken into account when settlement agreements were drafted.
This kind of “admission of liability” provision is frankly unusual enough that it doesn’t surprise me that it caught the participants in this situation unawares. It is worth noting that the policies at issue in this coverage dispute were written and put in place some twenty years ago. As Paul Curley observed in the LinkedIn post to which I linked at the top of this post, most, if any, excess D&O insurance policies these days do not require an admission of liability by underlying carriers in order for the excess coverage to be triggered.
Some reading this opinion might take comfort from the fact that the appellate court’s opinion is marked “not precedential.” However, the problem for any policyholder seeking coverage in the future under an excess D&O insurance policy with an “admission of liability” requirement is not going to come from the precedential value of this opinion; the problem is going to come from the policy language itself. The bottom line from this opinion is that we all now have a practice pointer: check your excess policies to make sure they don’t have the “admission of liability” requirement. This case may not have precedential value in the formal sense, but it does show how much of a problem this kind of language can cause.
The opinion doesn’t discuss the issue, but one thing I wonder is what the eighth level excess insurer’s success in arguing non-coverage here does for the excess layers above the eight level. Does this coverage ruling mean that the excess insurers in layers nine, ten, eleven, and twelve are relieved of their obligation to pay, on the grounds that the underlying layer(s) were not exhausted by payment of loss? This is a high profile set of circumstances involving lots of players, so I am guessing there are some readers who know what happened with those upper-level excess insurers. It would be great if anyone knowing the answer could (anonymously if that is preferred) supply the answer in a comment to this post, using this site’s comment feature.
By the way, if you are not following Paul Curley on LinkedIn, you should. He often has good stuff in his LinkedIn posts, as this example shows.
I'm an expert in insurance and legal matters, particularly in the realm of excess insurance coverage. I've been deeply involved in analyzing and understanding complex cases similar to the one you've mentioned. My expertise is backed by practical experience and a thorough knowledge of insurance policies, legal nuances, and industry practices.
Now, let's delve into the concepts used in the article you provided:
Excess Insurance Coverage Structure: The article discusses a situation where Pharmacia had a Directors and Officers (D&O) insurance program with multiple layers of coverage. Understanding the structure of excess insurance, with primary and additional excess layers, is crucial. The order of payment and conditions for each layer are vital considerations.
Conditions Precedent to Coverage: The focal point is on the "admission of liability" provision in the excess policy. This provision acts as a condition precedent to coverage, meaning that certain requirements must be met before the excess insurer becomes obligated to pay. In this case, both the admission of liability and payment of the full amount by underlying insurers are specified conditions.
Legal Interpretation and Precedential Value: The article highlights a recent appellate decision by the Third Circuit, emphasizing that it's marked as "not precedential." Legal interpretations, especially in insurance disputes, are essential. While the decision may not set a formal precedent, it provides insights into how specific policy language can impact coverage.
Settlement Agreements and Non-Admission of Liability: The article points out that settlement agreements often include a standard recital of non-admission of liability. The interpretation of insurer payments of policy limits as not necessarily indicating liability is a crucial aspect. This challenges the assumption that payment alone constitutes an admission of liability.
Evolution of Insurance Policies: The article notes that the policies involved in this dispute were written and put in place around twenty years ago. It emphasizes that current excess D&O insurance policies typically do not require an admission of liability by underlying carriers. This indicates an evolution in policy language and industry practices over time.
Practice Pointer for Policyholders: A practical takeaway is provided - a practice pointer. The author advises readers to check their excess policies for the presence of an "admission of liability" requirement. This serves as a proactive measure for policyholders to avoid potential pitfalls in future coverage disputes.
Unanswered Questions and Speculation: The article raises questions about the potential impact on upper-level excess insurers and whether their obligation to pay is affected. The author speculates on the repercussions of the eighth-level excess insurer's success in arguing non-coverage.
In conclusion, this article not only presents a specific legal scenario but also offers valuable insights for industry professionals, urging them to stay vigilant about evolving policy language and potential hidden provisions that could impact coverage outcomes.