PROVING EXHAUSTION: HOW YESTERDAY'S PAYMENTS CAN BE SHOWN WITH TODAY'S TECHNOLOGY

Transcription

1 PROVING EXHAUSTION: HOW YESTERDAY'S PAYMENTS CAN BE SHOWN WITH TODAY'S TECHNOLOGY In this paper, we examine insurance policy exhaustion and its nuances, delving into case examples that define exhaustion and what proof is needed to attach an excess insurance policy above the primary layer. Michael Baird, David Cox, Diego Garcia, and Nancy Gutzler 3/1/2017

2 Ordinarily, the transition from one exhausted layer of insurance coverage to the next, untapped layer should happen seamlessly. As a rule, excess or umbrella coverages are designed to pick up where the primary insurance coverage leaves off, providing an additional layer of protection to the policyholder. Garamendi v. Mission Ins. Co., 131 Cal.App.4th 30, 48 (2005) (citation omitted). Complications can arise, however, in the context of long tail claims and demonstrating that the primary coverage has indeed left off can pose challenges: often records of the primary carrier s claims payments stretch back decades and are incomplete, lost or destroyed. Frequently, the policyholder is left in limbo. The primary carrier claims exhaustion and ceases paying claims but the next layer of coverage refuses to acknowledge that the underlying coverage is exhausted. WHAT IS EXHAUSTION? When we refer to exhaustion, we are discussing what needs to happen before an excess policy becomes ripe or attaches. As a general proposition, primary coverage is exhausted when it pays it applicable limits to resolve claims against the policyholder. In general, an excess insurance policy provides coverage that begins only after a predetermined amount of primary coverage is exhausted. - Steve D. Thompson Trucking, Inc. v. Twin City Fire Ins. Co., 832 F.2d 309, 310 (5th Cir. 1987) Primary coverage is exhausted when the primary insurers pay their policy limits in settlement or to satisfy a judgment against the insured. (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2003) 8:86, pp & 8 45.) - Travelers Cas. & Sur. Co. v. Transcontinental Ins. Co., 122 Cal.App.4th 949, 952 n.3 (2004). Although these principles seem simple enough, they can become quite complex, particularly in the context of long tail claims. SUBSTITUTES FOR EXHAUSTION As is always the case in the coverage world, policy language is paramount and trumps rules of general application. Although the primary insurer s payment of its limits may be one way to access the excess limits, there may be other ways. What needs to happen before an excess policy attaches depends As is always the case in the coverage world, policy language is paramount and trumps rules of general application. 1

3 on the provisions of the excess policy itself. Not all excess policies require that the primary carrier pay its limits before their obligations kick in. Many umbrella policies cover ultimate net loss above an applicable limit with ultimate net loss being defined as the total sum which the Insured, or any company as his insurer, or both, become obligated to pay by reason of... property damage... either through adjudication or compromise. See, e.g., Powerine Ins. Co. v. Superior Court, 37 Cal.4th 377, 386 (2005). Some excess insurers acknowledge that their obligations are ripe once the policyholder s loss reaches their attachment point whether or not underlying limits are paid. In re Rapid-American Corporation, 2016 WL , * 1 (S.D.N.Y. 2016) ( The Plaintiffs contend that payment is unnecessary; it is sufficient that the accrued (but unpaid) liabilities reach the level of the excess insurer's coverage....travelers agrees... that Aetna policy number XN3635WCA, covering the period January 4, 1983 to January 4, 1984, does not require exhaustion.... ) Under such policy language it generally is found that the policyholder may prove the amount of his loss, and if that loss was greater than the amount of the expressed limits of primary insurance, he [would be] entitled to recover the excess to the extent of the limits of the excess policy. Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2nd Cir. 1928) But, as Zeig notes, an excess insurance policy can condition its obligations on the primary insurer s performance. Thus, policy language that provides that the excess insurer s obligations do not arise until underlying policy has paid or has been held liable to pay its limits has been construed as precluding attachment where the policyholder accepted a settlement from the primary carrier of less than policy limits. See, e.g., Qualcomm, Inc. v. Certain Underwriters at Lloyd s, London, 161 Cal.App.4th 184 (2008). Although there has been substantial discussion of the meaning of paid in the paid or held liable to pay formulation, there has been scant analysis of the disjunctive term, held liable to pay. Presumably a court order requiring the primary insurer to pay its limits would satisfy this condition even if the insurer does not pay its limits for whatever reason. See Qualcomm, 161 Cal.App.4th at 196 (an obligation to pay full policy limits pursuant to a court order or judgment... would plainly fall within such policy language. ) Vickodil v. Lexington Ins. Co., 587 N.E. 2d 777, 780 (Mass. 1992) ( the policy language posits an eventuality in which a first-level excess insurer... is liable but for some reason, including insolvency, has not paid ). 2

4 BURDEN OF PROOF As a general proposition, courts have found that the burden of proving that primary coverage has been exhausted rests with the party asserting exhaustion. Primary Insurer: Hartford Acc. & Indem. Co. v. Sup. Ct. (Syntex), 23 Cal.App. 4th 1774, 1781 (1994) ( When a dispute arises over exhaustion of policy limits, a primary insurer must defend until it obtains a declaratory judgment or summary judgment that it has exhausted its policy limits. ). Policyholder: J.P. Morgan Chase & Co. v. Indian Harbor Ins. Co., 947 N.Y.S.2d 17 (N.Y. App. Div. 2012) (treating proof of underlying exhaustion as a condition precedent to attachment of excess policy, an event which must occur or an act which must be performed by one party to an existing contract before the other party is required to perform. ) Up until this point, it is very likely that the primary insurer has been solely responsible for tracking claims and making payments. This can cause issues when trying to gather evidence for proof of exhaustion. Further, what happens if an excess carrier disagrees with the nature of the claims that the primary chose to settle? PROOF AND EVIDENTIARY ISSUES When building an exhaustion case, certain types of evidence (and corresponding evidentiary hurdles) arise again and again. Checks, Wire Payments, Business Records o These documents, when available, go a long way toward strengthening the case for exhaustion. They can be analyzed to show payments meet or exceed the applicable primary policy limits. These documents can be selfauthenticating and not subject to a hearsay objection. U.S. v. Pang, 362 F.3d 1187, 1192 (9th Cir. 2004) ( As a negotiable instrument, a check is a species of commercial paper, and therefore self-authenticating.... Checks fall squarely in [the] category of legally-operative verbal acts that are not barred by the hearsay rule. ) Loss Runs o Loss runs, made up of claim information regarding payments toward a specific policy or policies, with proper foundation will be admitted as business records to show proof of claims paid leading to policy exhaustion. Authenticity and Hearsay Issues o In order for the Court to accept loss runs as evidence they often must be established through testimony in order to use the business record exception rule. 3

5 Percipient Testimony of Payments Made or Received o Direct testimony backing up business records is usually well-received. However, there is not always a readily identifiable person to testify to the matter. Expert Testimony and Sampling o Often times, the policyholder s counsel will bring in experts to testify about the nature of the business, or provide analysis to serve as evidence that the excess should attach given the available evidence. Sampling can be used to statistically estimate a fuller picture from a subset of data. WHAT MUST BE PROVEN: JUST PAYMENT OR PROPER EXHAUSTION? Primary carriers customarily have a right and duty to defend the policyholder against claims that potentially fall within the coverage grant, even if such claims are false or fraudulent. As part of that right and duty, primary carriers also have the right, at its sole discretion, to settle those claims. As a general proposition, those payments count toward the exhaustion of applicable policy limits whether or not they were actually covered. Windt, Insurance Claims and Disputes, 6.45 (2007) ( Absent fraud/bad faith an excess insurer is bound by the fact that the primary insurer has paid and cannot contest (a) that such payment reduces the primary insurer s applicable aggregate, or (b) that the excess insurer must provide policy benefits when the aggregate in any relevant primary policy has been exhausted. ) This customarily is the case even if the primary carrier settles a claim that, it is later determined, was not covered under the policy: Insurers contract to cover a particular period. If they settle before a final determination as to whether or not the injury actually or reasonably occurred within that period and it is later shown that the injury in fact occurred outside of the policy period, the settlement amount is still allocated to the period that the settling insurer contracted to cover. For example, if an insurer on the risk from June 1979 to June 1980 settled with Grace for asbestos-related property damage claims, that settlement is allocated to the period regardless of whether or not, at the end of the day, Grace actually has liability for that period. Maryland Cas. Co. v. W.R. Grace & Co., 1996 WL at * 12 (S.D.N.Y. 1996). As a rule, if the excess carrier feels that the primary carrier has settled clams improvidently, its recourse is against the primary carrier, not the policyholder. Ins. Co. of N. Am. v. Kayser-Roth Corp., 770 A.2d 403, 416 (R.I. 2001) ( [A]bsent fraud between the insured and the primary carrier, the insured does not carry the burden of proving the soundness of the primary carrier s decision to pay... [I]t is for the excess carrier to seek redress from the underlying carrier should the excess carrier believe that the underlying carrier has exposed it to liability or caused it harm by mishandling the claim in some respect. ). 4

6 Particularly in the context of long tail clams, however, excess insurers may refuse to acknowledge attachment and contest underlying exhaustion by contesting the manner in which primary insurers have allocated their claims payments to their policies on a theory that that allocation may have accelerated exposure to the next layer of coverage. Excess insurers dub this improper exhaustion. In the absence of policy language allowing the excess insurer to second guess the primary carrier s claims decisions, however, courts typically have rejected excess insurers attempts to reallocate primary payments: LSG Techs., Inc. v. U.S. Fire Ins. Co., 2010 WL , at *13 (E.D. Tex. Sept. 2, 2010) (excess Insurer fail[ed] to cite language from its policies giving it the right to examine the propriety of the primary Insurer's claims handling and payments or the strength of the underlying plaintiffs' claims. ); ARM Properties Management Group v. RSUI Indemnity Co., 2008 WL , at * 7 (W.D. Tex. 2008) ( whether or not the underlying insurers failed to take advantage of exceptions in their coverage or otherwise overpaid, as RSUI claims, is not relevant to the issue of whether RSUI's liability has attached. The simple fact that both underlying insurers have paid their policy limits as defined in Item 6 of the excess insurance contract is sufficient to trigger RSUI's duties under this clause. ); Edward E. Gillen Co. v. Ins. Co. of Pa., 2011 WL , at *4 (E.D. Wis. 2011) (excess insurer is free, as it has already done, to contest coverage under its own policy. But an excess liability insurer cannot avoid or reduce liability under its own policy by challenging a separate insurer's decision to settle or pay out claims at a prior layer of insurance. ); UNR Indus., Inc. v. Cont'l Ins. Co., 1988 WL , at *16 (N.D. Ill. Nov. 9, 1988) ( Home has cited no law which supports its theory that an excess insurer can proceed against its insured because of the primary insurer's alleged improper exhaustion of primary coverage... ). However, the excess insurer s policy language may dictate a different result. In Air & Liquid Systems Corp. v. Allianz Underwriters Ins. Co., 2013 WL (W.D. Pa. 2013), the trial court found that non-contribution clauses in the excess insurer s policies meant that it could challenge attachment based on the manner in which the primary carrier allocated its claims payments: Payments exceeding the settling insurers pro rata shares of liability pursuant to the 2005 agreement cannot be used to accelerate the exhaustion of the underlying policies. To the extent that the agreement allocated more money to the relevant policy years than New York law would otherwise dictate, that money did not exhaust the underlying policies for purposes of the New Hampshire policies. Air & Liquid Systems, 2013 WL at *52. IF AT FIRST YOU DON T SUCCEED... 5

7 If a Court enters judgment that primary coverage has not been exhausted, that does not preclude a later determination that exhaustion has taken place if subsequent events for example, later claims payments, so warrant. That is, a condition precedent that has not taken place today, may yet take place tomorrow: Rest., Judgments, s 54 ( Where a judgment is rendered for the defendant on the ground of the non-existence of some fact essential to the plaintiff s cause of action, the plaintiff is not precluded from maintaining an action after such fact has subsequently come into existence. ). American Broadcasting Cos. v. Walter Reade-Sterling, Inc., 43 Cal.App.3d 401, 408 (1974) ( law is settled beyond controversy that when an action has been brought prematurely because a condition precedent necessary to the cause of action has not been complied with, the plaintiff is not precluded from maintaining an action after his claim has matured ). In the end, when the primary carriers stop paying claims, the policyholder can find themselves in an uphill battle to recover from the excess insurers. This is especially true in the case of long-tail claims which can cause policy language and provisions to be increasingly difficult to decipher. As the arguments play out in Court, policy exhaustion and proof thereof becomes more and more defined by precedent, as to if and when a policyholder can recover from its excess policies. 6