EXHAUSTION OF UNDERLYING POLICY LIMITS: THE COMPETING CASE LAW AND THE POTENTIALLY RELEVANT POLICY LANGUAGE

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1 ABA Section of Litigation 2012 Coverage Litigation Committee CLE Seminar, March 1-3, 2012 EXHAUSTION OF UNDERLYING POLICY LIMITS: THE COMPETING CASE LAW AND THE POTENTIALLY RELEVANT POLICY LANGUAGE John G. Buchanan, III Covington & Burling LLP Washington, DC Sarah M. Hall Covington & Burling LLP Washington, DC

2 Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2nd Cir. 1928) 1928 In consideration of the reduced premium charged for the policy to which this indorsement is attached, such policy is issued and accepted: 1. As excess and not contributing insurance, and shall apply and cover only after all other insurance herein referred to shall have been exhausted in the payment of claims to the full amount of the expressed limits of such other insurance. 2. Upon the further condition that, if the assured shall fail to carry other insurance against loss or damage of the kind covered hereby in the amount of at least five thousand and 00/100 dollars ($5,000) at all times while the policy to which this indorsement is attached is in force, then the insurance hereunder shall be null and void. Burglary Policy does not require underlying insurer itself to pay its full limit; insured may compromise underlying limits and pay the gap to reach excess coverage (hereinafter, the Zeig result ). 1 It is doubtless true that the parties could impose such a condition precedent to liability upon the policy, if they chose to do so. But the defendant 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. To require an absolute collection of the primary insurance to its full limit would in many, if not most, cases involve delay, promote litigation, and prevent an adjustment of disputes which is both convenient and commendable. A result harmful to the insured, and of no rational advantage to the insurer, ought only to be reached when the terms of the contract demand it. 1 Because of the large number of decisions over the past eight decades that have followed Zeig or reached the same result, only a representative sample is cited in this listing, which is not intended to be exhaustive. 1

3 Stargatt v. Fidelity and Casualty Co. of New York, 67 F.R.D. 689 (D.Del. 1975), aff d 578 F.2d 1375 (3rd Cir. 1978) 1975 The Insurers shall not be liable to indemnify the Assured hereunder to any greater extent than $750,000 and then only when the Primary Policy in the amount of $250,000 has been exhausted. D&O Zeig result. Opinion based on policy language and public policy. Johnson v. Milgo Industrial, Inc., 458 F.Supp. 297 (D. Minn. 1978) 1978 Liability of the company with respect to any one occurrence shall not attach unless and until the insured, the company in behalf of the insured, or the insured s underlying insurer, has paid the amount of retained limit. Catastrophe Liability Zeig result. Opinion relies on the failure to maintain underlying insurance provision to conclude that insurer should not avoid liability for fortuity of settlement. In the event of failure by the insured [to maintain the underlying policies as warranted], the insurance afforded by this policy shall apply in the same manner it would have applied had such policies been so maintained in force. Allstate Ins. Co. v. Riverside Ins. Co. of America, 509 F.Supp. 43 (E.D. Mich. 1981) 1981 [Insurer] shall not be liable under this Part I for a greater proportion of any loss than the applicable limit of liability stated in the declarations bears to the total applicable limit of liability of all collectable insurance against such loss: provided, however, the insurance with respect to a temporary substitute automobile or a non-owned automobile shall be excess insurance over any other collectable insurance. 3rd-Party Auto Zeig result. Holding was largely based on policy language. 2

4 Wright v. Newman, 598 F.Supp (W.D. Mo. 1984) 1984 Liability... shall not attach unless and until the Primary and Underlying Excess Insurers shall have admitted liability for... [their] Limit(s) or unless and until... and only after the Primary and Underlying Excess Insurers have paid or been held liable to pay the full amount of... [their] Limits. Business Auto Garnishment claim against excess carrier denied on multiple alternative grounds, including rejection of the Zeig result, where non-party underlying insurers had not paid or been held liable to pay. Excess carrier deemed to have a rational interest in having its policy read literally, because plaintiffs sought to garnish more than double the policy limits due to alleged bad faith failure to settle within policy limits; and because excess carrier should not be deprived of the bargained-for benefit of a good faith defense of the claim by the underlying insurers. Kelley Co. v. Central National Ins. Co. of Omaha, 662 F.Supp (E.D. Wis. 1987) 1987 INSURING AGREEMENT: Provided always that it is expressly agreed that liability shall attach to the Company only after the Primary Insurers have paid or have been held liable to pay the full amount of their respective ultimate net loss liability as shown in Item 4 of the Schedule (hereinafter called the Primary Limits).... General Liability Zeig result. This Court does not interpret the language in the policy to require actual payment of the deductible amount. ATTACHMENT OF LIABILITY: Liability under this policy shall not attach unless and until the Primary Insurers shall have admitted liability for the Primary Limit or Limits, or unless or until the Insured has by final judgment been adjudged to pay a sum which exceeds such Primary Limit or Limits. 3

5 Drake v. Ryan, 514 N.W.2d 785 (Minn. 1994) 1994 No exhaustion language cited in the court s reasoning. 3rd-Party Auto Zeig result. Opinion found that excess insurer was not prejudiced by the result and deferred to public policy concerns. Smit v. State Farm Mutual Automobile Ins. Co, 525 N.W.2d 528 (Mich. Ct. App. 1995) 1995 No exhaustion language cited in the court s reasoning. 3rd-Party Auto Zeig result. [I]t is not necessary to exhaust the limits of the primary policy insuring the owner in order to proceed with a claim for excess coverage available under a second policy insuring the driver. Such a claim is permitted where the judgment against the insured exceeds the limits of the primary policy. However, the excess insurer is not required to pay more than the limits of its policy to satisfy the amount of the judgment remaining to be paid after credit is given for the total amount of the primary insurance coverage. 4

6 Koppers Co., Inc. v. Aetna Cas. and Sur. Co., 98 F.3d 1440 (3rd Cir. 1996) 1996 No exhaustion language cited in the court s reasoning. General Liability Zeig result. Settlement with the primary insurer functionally exhausts primary coverage and therefore triggers the excess policy though by settling the policyholder loses any right to coverage of the difference between the settlement amount and the primary policy s limits.... Courts have adopted this rule because it encourages settlement and allows the insured to obtain the benefit of its bargain with the excess insurer, while at the same time preventing the insured from obtaining a double recovery. Rummel v. Lexington Ins. Co, 123 N.M. 752 (1997) 1997 Liability of the Company under this policy shall not attach unless and until the Insured s Underlying has paid or has been held liable to pay the total applicable underlying limits. Failure of [Circle K Corporation] to [maintain the Underlying in full effect] shall not invalidate this policy, but in the event of such failure [excess insurer]shall only be liable to the same extent as it would have been had the Named Insured so maintained such policy or policies. General Liability Zeig result. Looking at the language, has been held liable to pay, would be senselessly redundant to also connote the idea of payment in full, in cash. Lapse of an underlying policy is analogous to the nonpayment and partial payment of the underlying policies in this case. Reliance Ins. Co. v. Transamerica Ins. Co., 826 So.2d 998 (Fla. Dist. Ct. App. 2001) 2001 Excerpt cited: The excess insurance policy provides coverage only after all primary insurance is exhausted. Property Zeig result. Principal rationale we align ourselves with Zeig. 5

7 Danbeck v. Am. Family Mut. Ins. Co., 629 N.W.2d 150 (Wis. 2001) 2001 We will pay under this coverage only after the limits of liability under any bodily injury liability bonds or policies have been exhausted by payment of judgments or settlements. 1st-Party Underinsured Motorist (UIM) Rejects Zeig result for 1st-party UIM coverage, distinguishing prior general liability coverage decisions (Loy and Teigen) that allowed exhaustion of primary limits through partial-limits payment and credit for balance. UIM benefits are owed only when the tortfeasor s liability insurance is insufficient to cover the UIM policyholder s damages.... In other words, the motorist is not underinsured as a definitional matter until his or her policy limits are fully not partially paid. Archer Daniels Midland Co. v. Aon Risk Services Inc. of Minnesota, 356 F.3d 850 (8th Cir. 2004) 2004 No exhaustion language cited in the court s reasoning. Property Zeig result. Relied on Drake in determining that exhaustion did not mean that policyholder must have collected every dollar of the underlying coverages and that settlement with the underlying insurers does not absolve an excess insurer from liability. Elliott Co. v. Liberty Mutual Ins. Co., 434 F.Supp.2d 483 (N.D. Ohio 2006) 2006 No exhaustion language cited in the court s reasoning. General Liability Zeig result. The court did not want to discourage settlement, especially when excess insurers are not harmed. 6

8 Pereira v. Nat l Union Fire Ins. Co. of Pittsburgh, P.A., No , 2006 WL (S.D.N.Y. Jul. 12, 2006) 2006 The Company shall provide the Insured with insurance excess of the Underlying... only after all Underlying has been exhausted by actual payment of claims or losses thereunder. In the event of the depletion of limits of liability of the Underlying solely as the result of actual payment of claims or losses thereunder by the applicable insurers, this policy shall... apply to claims or losses as excess insurance over the amount of insurance remaining under such Underlying. D&O Zeig result. The court found multiple reasonable interpretations of policy language. Interpreting the policy to excuse the excess insurers from providing coverage within their respective layers on account of the unrelated insolvency of an intermediary insurer would work a similar hardship on the insureds, who have already been deprived of a layer of coverage by the insolvency, and provide a windfall to the excess insurers. 7

9 Comerica v. Zurich American Ins. Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007) 2007 DEPLETION OF UNDERLYING LIMIT(S): In the event of depletion of the limit(s) of liability of the Underlying solely as a result of actual payment of loss thereunder by the applicable insurers, this Policy shall... continue to apply to loss as excess.... This policy does not provide coverage for any loss not covered by the Underlying except and to the extent that such loss is not paid under the Underlying solely by reason of the reduction or exhaustion of the available Underlying through payments of loss thereunder. INSURING AGREEMENT: Coverage hereunder shall attach only after all such Underlying has been reduced or exhausted by payments for losses. D&O Excess coverage forfeited (despite arguably inconsistent language in Maintenance of Underlying clause) because [p]ayments by the insured to fill the gap, settlements that extinguish liability up to the primary insurer s limits, and agreements to give the excess insurer credit against a judgment or settlement up to the primary insurer s liability limit are not the same as actual payment (hereinafter, the Comerica/Qualcomm result ). MAINTENANCE OF UNDERLYING INSURANCE: All of the Underlying... shall be maintained during the Policy Period in full effect, except for any reduction of the aggregate limit(s)... solely by reason of payment of loss thereunder. Failure to comply with the foregoing shall not invalidate this Policy but the Insurer shall not be liable to a greater extent than if this condition had been complied with. 2 2 Policy language potentially inconsistent with a court s Comerica/Qualcomm holding is bolded and italicized in this column. 8

10 Qualcomm, Inc. v. Certain Underwriters at Lloyd s, London, 73 Cal. Rptr. 3d 770 (Cal. Ct. App. 2008) 2008 LIMIT OF LIABILITY: Underwriters shall be liable only after the insurers under each of the Underlying Policies have paid or have been held liable to pay the full amount of the Underlying Limit of Liability. MAINTENANCE OF UNDERLYING POLICIES: This Policy provides excess coverage only. It is a condition precedent to the coverage afforded under this Policy that [Qualcomm] maintain [the National policy] with retentions/deductibles, and limits of liability (subject to reduction or exhaustion as a result of loss payments), as set forth in Items F. and G. of the Declarations. This Policy does not provide coverage for any loss not covered by the [National policy] except and to the extent that such loss is not paid under the [National policy] solely by reason of the reduction or exhaustion of the Underlying Limit of Liability through payments of loss thereunder. In the event [National] fails to pay loss in connection with any claim as a result of the insolvency, bankruptcy or liquidation of said insurer, then those insured hereunder shall be deemed self-insured for the amount of the Limit of Liability of said insurer which is not paid as a result of such insolvency, bankruptcy or liquidation. D&O Comerica/Qualcomm result, where insured settled with an underlying insurer (National Union) for less than full limits. Maintenance of Underlying Policies clause not applicable because confined to underlying insolvencies and thus does not address compromisedlimits settlements with underlying insurers. 9

11 HLTH Corp. v. Agricultural Excess and Surplus Ins. Co., No. 07C RRC, 2008 WL (Del. Super. Jul. 31, 2008) 2008 Only in the event of exhaustion of the Underlying Limit by reason of the insurers of the Underlying, or the insureds in the event of financial impairment or insolvency of an insurer of the Underlying, paying in legal currency loss which, except for the amount thereof, would have been covered hereunder, this policy shall continue in force as primary insurance, subject to its terms and conditions and any retention applicable to the Primary Policy, which retention shall be applied to any subsequent loss in the same manner as specified in the Primary Policy. D&O Zeig result. The opinion follows the precedent of Delaware and New Jersey, not citing Insuring Agreement that the Court in Goodyear relied upon to reach the opposite result. Fremont Reorganizing Corp. v. Federal Ins. Co., No. SACV JVS, 2010 WL (C.D. Cal. Feb ) 2010 [Insurer] agrees to indemnify the Insured for loss which exceeds the Underlying if such loss is properly payable thereunder, or would be, except for exhaustion of the Underlying.... Financial Institution Bond Zeig result. Because Continental s liability is triggered when the loss is payable and not paid, the plain language indicates that exhaustion by payment is not required to trigger liability. 10

12 Great American Ins. Co. v. Bally Total Fitness Holding Corp., No , 2010 WL (N.D. Ill. June 22, 2010) 2010 ACE Policy: It is expressly agreed that liability for any covered Loss shall attach to the Insurer only after the insurers of the Underlying Policies shall have paid, in the applicable legal currency, the full amount of the Underlying Limit and the Insureds shall have paid the full amount of the uninsured retention, if any, applicable to the primary Underlying Policy. D&O Comerica/Qualcomm result (despite arguably inconsistent language in ACE Limit of Liability clause and Fireman s Maintenance Of Underlying clause). LIMIT OF LIABILITY II(C): Notwithstanding any of the terms of this policy which might be construed otherwise, this policy shall drop down only in the event of reduction or exhaustion of the Underlying Limit and shall not drop down for any other reason including, but not limited to, uncollectibility (in whole or in part) of any Underlying Limits. The risk of uncollectibility of such Underlying Limits (in whole or in part) whether because of financial impairment or insolvency of an underlying insurer or for any other reason, is expressly retained by the Insureds and is not in any way or under any circumstances insured or assumed by the Insurer. 11

13 Bally Total Fitness (cont d) Fireman s Fund Policy: The insurance coverage afforded by the Policy shall apply (1) only in excess of all Underlying and (2) only after all Underlying has been exhausted by payment of the total underlying limit of insurance and (3) only if each and every Underlying Policy has responded by payment of loss as a result of any wrongful act. EXHAUSTION OF UNDERLYING INSURANCE: In the event of exhaustion of all the limits of insurance of the Underlying solely as a result of actual payment of loss or losses thereunder, this Policy shall, subject to the Limit of, terms and conditions of this Policy, apply as Primary subject to any retention specified in the Primary Policy. MAINTENANCE OF UNDERLYING INSURANCE V(B): If any Underlying is not maintained in full force and effect during the Policy Period or until all claims made hereunder have been resolved, or there is a change in the terms or conditions of any Underlying, the insurance coverage afforded by this Policy shall apply in the same manner as though such Underlying had been maintained in full force and effect. 12

14 Intel Corp. v. American Guar. and Liability Ins. Co., No , 2010 WL (N.D. Cal. Dec. 7, 2010) 2010 Nothing contained in this Endorsement shall obligate [insurer] to provide a duty to defend any claim or suit before the Underlying Limits shown in Item 6. of the Declarations are exhausted by payment of judgments or settlements. CONDITION H: WHEN DAMAGES ARE PAYABLE: Coverage under this policy will not apply unless and until the insured or the insured s underlying insurance has paid or is obligated to pay the full amount of the Underlying Limits of stated in Item 6.B. of the Declarations. General Liability Comerica/Qualcomm result (despite arguably inconsistent language in Condition H) but addresses exhaustion only in the context of duty to defend. Trinity Homes LLC v. Ohio Cas. Ins. Co., 629 F.3d 653 (7th Cir. 2010) 2010 INSURING AGREEMENT: We will pay on behalf of the insured the ultimate net loss which the insured is legally obligated to pay as damages in excess of the underlying insurance or for an occurrence covered by this policy which is either excluded or not covered by underlying insurance because of: (1) bodily injury... or (2) personal injury.... LIMITS OF INSURANCE:... b. If the limits of underlying insurance have been exhausted by payment of claims, this policy will continue in force as underlying insurance. General Liability Umbrella Zeig result (reversing district court). While the umbrella agreement does state that a CGL policy is exhausted when the policy limit has been completely expended, it does not clearly provide that the full limit must be paid out by the CGL insurer alone. As such, the policy is ambiguous and susceptible to the meaning... that a CGL policy can be exhausted when an insured and a CGL insurer enter into a settlement agreement where the primary insurer will pay a large percentage of the total limit and the insured takes responsibility for the remainder. 13

15 JPMorgan Chase & Co. v. Indian Harbor Ins. Co., No /08, 2011 WL (N.Y.Sup. May 26, 2011) 2011 Twin City Policy: SECTION I.A: The Underwriters shall provide the Insured(s) with during the Policy Period which is in excess of the total limits of liability and any retention/deductible under all Underlying, as set forth in Item D of the Declarations, whether collectible or not. Section II.A: It is expressly agreed that liability for any loss shall attach to the Underwriters only after the Primary and Underlying Excess Insurers shall have duly admitted liability and shall have paid the full amount of their respective liability (hereinafter referred to as the Underlying ) and the Underwriters shall then be liable to pay only such additional amounts up to the Limit of Liability set forth in item C of the Declarations, which shall be the maximum liability of Underwriters in each Policy Year. SECTION III.C. It is a condition precedent to this policy that the policy(ies) of the Primary and Underlying Excess Insurers shall be maintained in full effect while this policy is in force except for any reduction of the aggregate limits contained therein. Bankers Professional Liability and Securities Action Claim Comerica/Qualcomm result (despite arguably inconsistent language in some of the policies at issue, including language suggesting that excess carrier remains liable even if insured fails to maintain underlying insurance, and excess insuring agreement that does not specify which party must make payment of loss to exhaust underlying limits). The court agrees with the Supreme Court of New Mexico s analysis [in Rummel] that Lexington s policy [at issue in Rummel] unambiguously anticipates circumstances in which the underlying insurance is not paid in full, in cash ; yet the court concludes that virtually identical language in the Swiss Re policy expressly mandates that the excess policy is triggered upon payment (or liability for payment) by the underlying insurers of their full policy limits. SECTION III.D. Failure of the Insured to Comply with the foregoing shall not Invalidate this policy, but in the event of such failure the Underwriters shall be liable only to the extent that it would have been liable had the Insured complied therewith. 14

16 JPMorgan Chase & Co. (cont d) Lumbermens Policy: SECTION I: The insurance afforded under this Policy shall apply only after all applicable Underlying with respect to an Product has been exhausted by actual payment under such Underlying, and shall only pay excess of any retention or deductible amounts provided in the Primary Policy and other exhausted Underlying. Swiss Re Policy: 2. The Underwriters liability to pay under this Policy shall attach only when the Underlying Insurer(s) shall have paid or have been held liable to pay, the full amount of the Underlying Limit(s).... St. Paul Policy: SECTION 3 (ATTACHMENT AND LIMIT OF LIABILITY): A. The Insurer shall only be liable to make payment under this policy after the total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying as covered loss thereunder. In the event of the reduction or exhaustion of the total amount of the Underlying Limit of Liability solely by reason of the payment by the insurers of the Underlying of covered loss, this policy shall: (1) in the event of such reduction pay excess of the reduced amount of the Underlying Limit of Liability... or (2) in the event of such exhaustion continue in force as primary insurance.... Arch Policy: SECTION I, INSURING AGREEMENT: B. The insurance coverage afforded by this Policy shall apply only after exhaustion of the Underlying Limit solely as a result of actual payment under the Underlying in connection with Claim(s) and after the Insureds shall have paid the full amount of any applicable deductible or self insured retentions. 15

17 Schmitz v. Great American Assurance Co., 337 S.W.3d 700 (Mo. 2011) 2011 Coverage under this policy will not apply unless and until the Insured or the Insured s underlying insurance is obligated to pay the full amount of the Underlying Limits of. When the amount of loss has finally been determined, we will promptly pay on behalf of the insured the amount of loss falling within the terms of the policy. If the Underlying Limits of are either reduced or exhausted solely by payment of loss, such insurance provided by this policy will apply in excess of the reduced underlying limit or, if all underlying limits are exhausted, will apply as underlying insurance subject to the same terms, conditions, definitions, and exclusions of the first underlying insurance, except for the terms, conditions, definition of exclusions of this policy. However, we will not pay that portion of a loss that is within the Underlying Limits of which the insured has agreed to fund by self-insurance or means other than insurance. General Liability Zeig result. [P]olicy was unambiguous Great American s obligation to pay claims was not dependent on the underlying insurer exhausting its limits. The two requirements for Great American to promptly pay occurred once Virginia Surety was obligated to pay the full amount of the underlying limits of insurance and the amount of loss was finally determined. 16

18 Citigroup, Inc. v. National Union Fire Ins. Co., 649 F.3d 367, 373 (5th Cir. 2011)) 2011 Federal Policy: End. 6 (RESTATEMENT OF EXCESS INSURANCE COVERAGE AND MAINTENANCE OF UNDERLYING INSURANCE): The Company shall provide the Insured with insurance during the Policy Period excess of the Underlying as scheduled in Item 2 of the Declarations. Coverage for any loss shall attach only after: (a) all Underlying carriers have paid in cash the full amount of their respective liabilities, (b) the full amount of the Underlying policies have been collected by the plaintiffs, the Insureds or the Insureds counsel, and (c) all Underlying has been exhausted. MAINTENANCE OF UNDERLYING INSURANCE: Failure to comply with the foregoing shall not invalidate this policy but in the event of such failure, the Company shall only be liable to the same extent as if the insured had complied with this condition. St. Paul Policy: SECTION 3.A: ATTACHMENT AND LIMIT OF LIABILITY: The Insurer shall only be liable to make payment under this policy after the total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying as covered loss thereunder. SECTION 3.D.: The risk of uncollectability of the Underlying, in whole or in part, whether because of financial impairment or insolvency of an underlying insurer or for any other reason, is expressly retained by the Insured(s) and is not in any way or under any circumstances insured or assumed by the Insurer. Mortgage Lender Liability Comerica/Qualcomm result (despite arguably inconsistent language in some of the policies at issue, including language suggesting that excess carrier remains liable even if insured fails to maintain underlying insurance, and excess insuring agreement that does not specify which party must make payment of loss to exhaust underlying limits). The court nonetheless concluded that the plain language of the policies dictate that the primary insurer pays the full amount of its limits of liability before excess coverage is triggered. 17

19 Citigroup, Inc. (cont d) SR International Policy: LIMIT OF LIABILITY: SECTION III(D): In the event the insurer under any Underlying Policy fails to pay loss in connection with any claim covered under any Underlying Policy as a result of the insolvency, bankruptcy or liquidation of said insurer, then the Insureds hereunder shall be deemed self-insured for the amount of the limit of liability of said Insurer which is not paid as a result of such insolvency, bankruptcy or liquidation. SECTION III(E): The Insurer shall be liable only 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 as set forth in Item 5 of the Declarations. Steadfast Policy: DEPLETION OF UNDERLYING LIMITS: Coverage attaches [i]n the event of the exhaustion of all of the limit(s) of liability of such Underlying solely as a result of payment of loss thereunder. 18

20 Goodyear Tire & Rubber Co. v. National Union Ins. Co. of Pittsburgh, No , 2011 WL (N.D. Ohio Sept. 19, 2011) 2011 INSURING AGREEMENT: The Company shall provide the Insureds with insurance during the Policy Period excess of the Underlying Limits. Coverage hereunder shall attach only after the insurers of the Underlying shall have paid in legal currency the full amount of the Underlying Limit for such Policy Period. (Emphasis added by court.) SECTION 3: Only in the event of exhaustion of the Underlying Limit by reason of the insurers of the Underlying, or the Insureds in the event of financial impairment or insolvency of an insurer of the Underlying, paying in legal currency loss which, except for the amount thereof, would have been covered hereunder, this policy shall continue in force as primary insurance, subject to its terms and conditions and any retention applicable to the Primary Policy, which retention shall be applied to any subsequent loss in the same manner as specified in the Primary Policy. The risk of uncollectability of any Underlying, whether because of financial impairment or insolvency of an underlying insurer or any other reason, is expressly retained by the Insureds and is not in any way insured or assumed by the Company. D&O (asserting that case law favoring Zeig result almost exclusively arose in the context of uninsured/ under-insured motorist litigation ) Comerica/Qualcomm result (despite arguably inconsistent policy language). Rejects the argument that the underlying settlement did not prejudice the excess insurer, deeming prejudice to arise from insurer s coverage litigation efforts and assumption that premium was based on its asserted expectation of the scope of coverage. 19

21 Federal Ins. Co. v. Estate of Irving Gould, No , 2011 WL , (S.D.N.Y. Sep. 28, 2011) 2011 Federal Policy: INSURING AGREEMENT: Coverage hereunder shall attach only after all such Underlying has been exhausted by payment of claims and shall then apply.... MAINTENANCE OF UNDERLYING INSURANCE: [T]he Underlying Policy(ies)... shall be maintained during the Policy Period in full effect and affording coverage at least as broad as the Primary Policy, except for any reduction of the aggregate limit(s) of liability available under the Underlying solely by reason of payment of losses thereunder. Failure to comply with the foregoing shall not invalidate this policy but the Company shall not be liable to a greater extent than if this condition had been complied with. D&O Comerica/Qualcomm result (despite arguably inconsistent language in some of the policies at issue, including language suggesting that excess carrier remains liable even if insured fails to maintain underlying insurance, and excess insuring agreement that does not specify which party must make payment of losses to exhaust underlying limits). DEPLETION OF LIMITS: In the event of the depletion of the limit(s) of liability of the Underlying solely as the result of payment of losses thereunder, this Policy shall... continue to apply to losses as excess insurance over the amount of insurance remaining under such Underlying. In the event of the exhaustion of all of the limit(s) of liability of such Underlying solely as a result of payment of losses thereunder, the remaining limits available under this policy shall... continue for subsequent losses as primary insurance and any retention specified in the Primary Policy shall be imposed under this policy

22 Estate of Irving Gould (cont d) Travelers Policy: INSURING AGREEMENT: Coverage hereunder shall attach only after all such Underlying has been exhausted.... DEPLETION OF UNDERLYING LIMIT(S): In the event of the depletion of the limit(s) of liability of the Underlying solely as the result of actual payment of losses thereunder by the applicable Insurers, this Policy shall... continue to apply to losses as excess insurance over the amount of insurance remaining under such Underlying. In the event of the exhaustion of all of the limit(s) of liability of such Underlying solely as a result of payment of losses thereunder, the remaining limits available under this Policy shall... continue for subsequent losses as primary insurance