Opinion
603766/08.
Decided May 26, 2011.
Plaintiffs were represented by Francis D. Landrey, Michelle R. Migdon, and John Gross, Esqs., Proskauer Rose LLP, New York, New York.
Defendant Indian Harbor Insurance Company was represented by David F. Cutter and John R. Gerstein, Esqs., Troutman Sanders LLP, Chicago, Illinois.
Defendant Houston Casualty Company was represented by Howard Anglin and William E. Smith, Esqs., Wiley Rein, LLP, NW, Washington.
Defendants The Travelers Indemnity Company as successor in interest by merger to Gulf Insurance Company, Arch Insurance Company and St. Paul Mercury Insurance Company were represented by Scott A. Schechter, Esq., Kaufman Borgeest Ryan LLP, Valhalla, New York.
Defendant Lumbermens Mutual Casualty Company was represented by Stephanie A. Nashban, Esq., Lewis Brisbois Bisgaard Smith LLP, New York, New York.
Defendant Twin City Fire Insurance Company was represented by Mitchell P. Hurley, Esq., Akin Gump Strauss Hauer Feld LLP, New York, New York.
Defendant Swiss Re International SE was represented by Robert J. Kelly, Esq., Coughlin Duffy LLP, New York, New York.
In motions sequence numbers 004, 005, 006, 007, and 008, which are consolidated herein for disposition, defendants St. Paul Mercury Insurance Company ("St. Paul"), Arch Specialty Insurance Company ("Arch"), Twin City Fire Insurance Company ("Twin City"), Lumbermens Mutual Casualty Company ("Lumbermens"), and Swiss Re International SE ("Swiss Re") move, pursuant to CPLR 3212, for summary judgment dismissing plaintiffs' claims against them.
Background
Plaintiffs, JPMorgan Chase Co., JP Morgan Chase Bank, N.A. and J.P. Morgan Securities Inc. (collectively "JPMC") is successor to Bank One Corporation, Bank One N.A. ("BONA"), and Banc One Capital Markets, Inc. (collectively, the "Bank One Entities"). In this action, JPMC seeks money damages from the defendants, who are all excess insurers, claiming that defendants wrongfully failed to indemnify it for the monies that it paid to defend and settle claims based upon professional services that the Bank One Entities provided to their customer, NPF XII, Inc. ("NPF XII").
Prior to three separate mergers of the Bank One Entities with JPMC, on July 1, 2004, August 1, 2004, and November 13, 2004, pursuant to which JPMC assumed the obligations of the Bank One Entities, the Bank One Entities had purchased Bankers Professional Liability ("BPL") and Securities Action Claim coverage from the defendant insurers, and others, covering the period October 2, 2002 to October 2, 2003 ("Bank One Program").
The limit of the insurers' liability under the Bank One Program is $175 million, with a self-insured retention of $10 million for BPL claims and $25 million for Securities Action Claim coverage. Specifically, it consists of a primary layer issued by Indian Harbor providing coverage for $50 million in losses, with the Bank One Entities as 50% co-insurers of this layer, and seven excess layers, issued by nine insurers, providing coverage for $150 million excess of the $50 million primary layer and excess of the applicable retentions. Above Indian Harbor's primary layer, the excess layers are (1) Houston ($15 million in excess of $50 million); (2) Gulf ($15 million in excess of $65 million); (3) American Zurich Insurance Company ("Zurich") ($15 million in excess of $80 million); (4) Twin City ($15 million in excess of $95 million); (5) Lumbermens, St. Paul, and Arch, each with a $10 million part of $30 million on a "quota share" basis ($30 million in excess of $110 million); (6) Federal Insurance Company ("Federal") ($10 million in excess of $140 million); and (7) Swiss Re ($50 million in excess of $150 million).
According to the Amended Complaint, under the BPL coverage part of the Indian Harbor primary policy, the participating insurers agreed to indemnify the Bank One Entities for all Losses (as defined in the insurance policies) "resulting from any Claim first made during the Policy Period for a Wrongful Act in the performance of Professional Services." Under the Securities Action Claim coverage, the participating insurers agreed to indemnify the Bank One Entities for all Losses (as defined in the insurance policies) "resulting from any Securities Action Claim first made during the Policy Period against the Company."
There was also a $250 million tower of director and officer liability insurance that was issued to the Bank One Entities for the October 2, 1998 to October 2, 2002 period ("98-02 Tower"), consisting of a $50 million primary policy, a $100 million quota share "First Excess Policy," and a $100 million quota share "Second Excess Policy." Steadfast Insurance Company ("Steadfast"), an affiliate of Zurich, participated in both the First Excess Policy and the Second Excess Policy with a $7.5 million quota share for each (reduced to $13.4 million through Steadfast's payment of defense costs).
Prior to the Mergers, the Bank One Entities were named as defendants in a series of interrelated lawsuits (namely, the "Arizona Noteholders Action", "MetLife/Lloyd's Action" and "NYC Pension Funds Action") brought by purchasers of notes issued by NPF XII, a special purpose, bankruptcy-remote corporation (collectively, the "NPF XII Actions").
The Arizona Noteholder Action also involved claims by purchasers of notes issued by NPF VI, Inc. ("NPF VI"), another bankruptcy-remote corporation and an affiliate of NPF XII.
In addition, BONA was named as a defendant in a lawsuit brought by purchasers of notes issued by NPF VI (the "ING Action").
The NPF XII Actions and ING Action were settled after the Mergers of the Bank One Entities with the JPMC Parties.
The Unencumbered Assets Trust ("UAT"), established pursuant to the NPF VI and NPF XII bankruptcy proceedings, and endowed with the power to pursue claims on behalf of NPF VI and NPF XII, also commenced a lawsuit against BONA (and others) in connection with the services BONA had provided as trustee of NPF XII, seeking to recover the lost value of the NPF VI and NPF XII businesses (the "UAT Action"). In its complaint, UAT asserted a number of claims against BONA, including claims for fraud, breach of contract, breach of fiduciary duty, aiding and abetting the fraudulent conduct and breaches of fiduciary duties of others, gross negligence and negligence.
Credit Suisse Securities (USA) LLC, formerly known as Credit Suisse First Boston LLC ("CFSB") also made claims against the Bank One Entitites (the "CFSB Claims") in connection, inter alia, with CSFB's purchases of NPF XII and NPF VI Notes, which were settled after the Mergers and before the commencement of litigation by CFSB.
In settling the NPF XII Actions, ING Action, UAT Action, and CFSB Claims (collectively, the "NPF Actions") plaintiffs made the settlement payments on behalf of the parties identified in the settlement agreements, including the Bank One Entities.
In this action, plaintiff seeks indemnification, under the insurance contracts sold by the defendants to the Bank One Entities, for the defense costs incurred and the settlement payments made in connection with the claims against the Bank One Entitites in the NPF Actions.
Plaintiff does not seek in this action to recover for the loss arising out of claims made against plaintiff or any person or entity affiliated with the Bank One Entities.
JPMC argues that the claims of "Wrongful Acts in the "NPF Actions" based upon the Bank One Entities' alleged violations of state securities laws, constitute "Securities Action Claims" pursuant to the Indian Harbor Primary Policy.
The Amended Complaint alleges that the settlement payments and defense costs made to defend and settle the claims against the Bank One Entities in the NPF Actions, after accounting for applicable retentions, are covered by, and far exceed, the $175 million limits of the Bank One Program. Thus, according to JPMC, the full limits of the defendant insurers' insurance coverage in the Bank One Program are due and owing to JPMC, as successor to the Bank One Entities, to indemnify it for covered losses.
According to plaintiff, the claims in the NPF Actions were settled for total payments on behalf of all settling parties of more than $718 million.
Of the insurers participating under the Bank One Program, eight are defendants in this action. The other two insurers, Federal and Zurich, are not named as defendants, because they settled with JPMC after the filing of the original Complaint in December 2008, but prior to the filing of the Amended Complaint in August 2009.
JPMC settled its claims against Zurich in this action, and other claims against Steadfast, pursuant to a single settlement agreement, the "Zurich and Bank One Settlement Agreement and Release" ("Settlement Agreement"), between JPMC, for itself and as successor to Bank One Corporation, on the one hand, and Zurich and its affiliate, Steadfast, on the other hand. Pursuant to the Settlement Agreement, Zurich and Steadfast paid a total of $17 million, an amount deemed to "fully exhaust the American Zurich and Steadfast limits under the Zurich Polices." The "Zurich Policies" specifically includes Zurich's excess policy in the Bank One Program, and Steadfast's participation in the 98-02 Tower. Paragraph 8 of the Settlement Agreement provides that "[t]he Parties understand, acknowledge and agree that the negotiation, execution and performance of this Agreement shall not constitute, or be construed as, an admission of Liability or infirmity of any defense or claim whatsoever by any Party."
The Amended Complaint contains one cause of action against the defendant insurers for breach of contract. JPMC alleges that the costs incurred in defense of the claims in the NPF Actions were reasonable and constitute a covered loss under the Bank One Program. JPMC further alleges that defendants breached their obligations under their respective contracts by failing to fulfill their duties to pay the covered losses that JPMC incurred as successor to the Bank One Entities in the NPF Actions. JPMC also asserts that it has complied with all applicable conditions of the insurance contracts for the Bank One Program, including providing sufficient and timely notice of the claims made in the NPF Actions, and it has incurred covered losses regarding those claims in excess of the $175 million limit of the Bank One Program and any applicable retention.
Discussion Motion Seq. No. 004
Twin City argues that plaintiff's claim for breach of contract against it cannot be sustained because plaintiff cannot establish its compliance with the express conditions precedent contained in Twin City's policy, which requires it to pay losses "only after" each insurance carrier beneath Twin City in the insurance tower has both admitted liability for the losses under its policy and paid the full amount of its liability under its respective policy. Here, plaintiff settled with Zurich without obtaining the requisite admission of liability and structured the settlement with Zurich in such a way that it renders it impossible for plaintiff to prove the amount, if any, paid by Zurich with respect to the Zurich policy underlying the Twin City policy in the Bank One Program. In other words, the parties did not allocate the payment in the Settlement Agreement between the Zurich policy and the Steadfast policies.
It is undisputed that Illinois law applies to the subject matter of this lawsuit ( see e.g. Certain Underwriters at Lloyd's, London v Foster Wheeler Corp. , 36 AD3d 17 [1st Dept 2006], affd 9 NY3d 928).
"Primary insurance coverage is insurance coverage whereby, under the terms of the policy, liability attaches immediately upon the happening of the occurrence that gives rise to liability. . . . Excess or secondary coverage is coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted." ( Whitehead v Fleet Towing Co., 110 Ill App 3d 759, 764, [Ill App 1982]). "The Seventh Circuit interprets exhausted,' in the context of excess insurance policies, to mean that the underlying insurance limits have been met through payment and this does not include the insolvency of the underlying insurer." ( New Process Baking Co. v Federal Ins. Co., 1989 WL 134513 at *2, [ND Ill 1989], affd 923 F2d 62 [7th Cir 1991]).
The Twin City policy specifically provides in Section II (LIMIT of LIABILITY) as follows:
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 Insurance") 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.
The words of an insurance policy, like any other contract, must be accorded their plain and ordinary meaning, and where the provisions are clear and unambiguous, they are to be applied as written ( Nicor, Inc. v Associated Elec. Gas Ins. Servs. Ltd., 223 Ill 2d 407, 416). According to Twin City, its policy requires the Underlying Excess Insurers to have "admitted liability" and "paid the full amount of their respective liability," which excludes a settlement where the insurer has paid less than the liability limit. Twin City argues that JPMC has not shown in this case that the underlying excess insurer, Zurich, either "duly admitted liability" or "paid the full amount of [its] respective liability."
In opposition, JPMC contends that it settled with Zurich for $17 million, exceeding the $15 million limit of Zurich's policy in the Bank One Program, although the settlement also resolved claims based on a different lawsuit and made under a policy that Steadfast issued as part of a separate insurance program. JPMC relies upon the phrase in the Settlement Agreement that, upon payment, the settlement amount is "deemed to fully exhaust the American Zurich and Steadfast limits under the Zurich policies." Thus, JPMC argues, the Zurich settlement of $17 million exhausted' the limits of the $15 million Zurich policy and the next level of excess coverage should attach.
However, there is no dispute that the $17 million settled claims involving both the Zurich policy and the Steadfast policies. Zurich and Steadfast are jointly defined as "Zurich" in the Settlement Agreement, indicating that no attempt was made to allocate the payment to any particular policy.
JPMC's reliance upon L.R. Nelson Corp. v Great Am. Ins. Co. ( 2008 WL 4391832, [USDC, CD Ill]) is misplaced. In the Nelson case, there were two primary insurance policies and two excess policies. Nelson eventually settled the underlying action with both primary policies, but did not designate in the settlement agreement any specific amount as payment for indemnity or payment for defense costs. After one excess insurer settled, the remaining excess carrier argued, inter alia, that it had no duty to indemnify Nelson because Nelson had failed to exhaust the coverage of its primary policies. The Court, however, found that the underlying policies had paid Nelson in excess of the combined indemnity limits of the primary policies and, therefore, rejected Great American's "invitation to engage in guess work" and "look beyond the face of the [underlying] settlement agreement and decipher the parties' intent with respect to an allocation between payment for indemnity and payment for defense costs." 2008 WL 4391832 at *7.
That case is distinguishable because there only one excess policy was involved and the issue was the allocation between indemnity and defense costs. Here, however, Zurich paid $17 million to settle more than $28 million in claims and deliberately chose not to allocate those payments between different policies involved in different underlying lawsuits.
Next, JPMC argues that, even if the settlement did not exceed the full limits of the Zurich policy, the Court should, nevertheless, deny Twin City's motion because Twin City is not being asked to "drop down" below its attachment point, or to increase its coverage obligations, and the claims far exceed the limits of the Bank One Program.
However, in the recent decision of Great American Ins. Co. v Bally Total Fitness Holding Corp., 2010 WL 2542191 (ND Ill 2010), decided after the oral argument in this case but subsequently briefed by both sides, the Federal Court for the Northern District of Illinois, Eastern Division found that where, as here, exhaustion is defined, the insured is bound by such language. Great American Ins. Co. v Bally Total Fitness Holding Corp. involved two excess insurance policies, one of which (the third layer) provided that liability would attach "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." The other policy (fourth layer) provided that the insurance would apply "only after all Underlying Insurance has been exhausted by payment of the total underlying limit of insurance," and it clarified "exhaustion" of the Underlying Insurance to mean "solely as a result of actual payment of loss or losses thereunder."
The first layer excess carrier settled with the insureds for $8 million, $2 million less than that policy's limit, and the second layer excess carrier settled with the insureds for $1.5 million, $8.5 million less than that policy's limit. The Court, applying Illinois law, found that liability did not attach, because the third and fourth layer excess policies required that the underlying excess carriers themselves must make actual payment of $10 million each for covered claims, prior to accessing the next layer of excess coverage, which they did not do. The Court further ruled that the language of the policies was not ambiguous as to the manner in which the underlying insurance policies must be exhausted, i.e., actual payment of the full limits of the underlying policies. Thus, the Court found that "in accordance with well-established Illinois law", it must enforce the plain language of the policy as written ( Great American Ins. Co. v Bally Total Fitness Holding Corp., supra at *5), (citing Hudson Insurance Company v Gelman Sciences, Inc., 921 F2d 92, 94 [7th Cir. 1990]).
Numerous decisions from other jurisdictions are in agreement ( see e.g. Comerica Inc. v Zurich Am. Ins. Co., 498 F Supp 2d 1019, 1034 [ED Mich 2007] [insurer not required to cover settlement of securities fraud class action lawsuits, because company settled with an underlying insurer for less than the policy limits]; Qualcomm, Inc. v Certain Underwriters at Lloyd's, London, 161 Cal App 4th 184, [Cal App 2008]; Trinity Homes LLC v Ohio Cas. Ins. Co., 2009 WL 3163108 at *12 [USDC, SD Ind 2009]). These well-reasoned decisions have similar factual scenarios, and this Court is not persuaded by JPMG's assertion that they are "wrongly decided" (Memorandum of Law in Opposition, at 17; Supplemental Memorandum of Law Addressing Great American Ins. Co. v Bally Total Fitness Holding Corp.).
In that case, the insured also argued, as does plaintiff here, that the insurer had not been harmed by any non-fulfillment of the underlying insurer's policy conditions.
Plaintiff's reliance on the case of Rummel v. Lexington Ins. Co., 123 N.M. 752 (Sup Ct, NM 1997) is misplaced because the language of the excess insurers' policy in that case stated that "[l]iability of the Company under this policy shall not attach unless and until the Insured's Underlying Insurance has paid or has been held liable to pay the total applicable underlying limits." 123 NM at 759. Given that language, this Court agrees with the Supreme Court of New Mexico's analysis that Lexington's policy "unambiguously anticipates circumstances in which the underlying insurance is not paid in full, in cash." ( id. at 761).
The case of Walbrook Ins. Co., Ltd. v Unarco Industries, Inc., 1994 WL 411404 (ND Ill), also relied upon by plaintiff, is distinguishable because in that case the excess policies provided that "[l]iability under this policy with respect to any occurrence shall not attach unless and until The Assured, or the Assured's underlying insurers shall have paid the amount of the underlying limits on account of such occurrence." Walbrook at *3.
The Twin City policy, on the other hand, makes no reference to the assured, or insured "filling the gap" so the next level of excess insurance attaches.
Plaintiff also cites the case of Hasemann v White, 177 Ill2d 414 (Sup Ct Ill 1997) in which the Court held that a plaintiff may settle his uninsured motorist claims with his own carrier for an amount less than the policy limits and still proceed against the Illinois insurance guaranty fund, which was established to protect policyholders in the event that an insurance company becomes insolvent, although the fund's liability would be offset by the full amount of the claimant's policy limits. This Court finds that the Hasemann decision, which discusses a public policy to protect motorists who are involved in accidents with uninsured motorists is completely inapposite and cannot be offered to indicate how the Illinois Supreme Court would rule on the issue before this Court which deals with highly sophisticated parties on all sides and specific policy language.
Similarly, in Hoglund v State Farm Mut. Auto. Ins. Co. ( 148 Ill 2d 272 [Sup Ct Ill 1992]), also involving an uninsured motorist claim, the Court noted that the "purpose behind the statutorily mandated uninsured motorist provision is that the uninsured be placed in substantially the same position as if the wrongful uninsured driver had been minimally insured" ( 148 Ill 2d at 277), a policy consideration that is clearly not relevant to the issues presented here.
In arguing that the enforcement of the policy as urged by the defendants would violate public policy, JPMC relies heavily upon the Second Circuit's decision in Zeig v Massachusetts Bonding Insurance Co., 23 F2d 665 (2nd Cir. 1928), which was discussed and distinguished by the courts in Great American Ins. Co. v Bally, Comerica and Qualcomm, supra. Zeig involved a $5,000 policy of burglary insurance that the defendant insurer issued to the plaintiff. The policy contained the following provisions:
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.
In Zeig, the plaintiff had three other policies totaling $15,000, but settled these policy claims for $6,000. The excess insurer refused coverage on the ground that the policies had not been "exhausted in the payment of claims to the full amount of the expressed limits of such other insurance." The Second Circuit held that claims are paid to the "full amount of the policies, if they are settled and discharged, and the primary insurance is thereby exhausted" ( id. at 666). The Court further ruled that it was unnecessary to interpret the word "payment" as relating only to payment in cash; since "[i]t often is used as meaning the satisfaction of a claim by compromise, or in other ways." ( id.) Significantly, the excess policy in Zeig required that the insured plaintiff need only maintain other insurance in an amount of at least $5,000, and then settled for more than that amount (i.e., $6,000) with the other insurers.
"The cases that follow Zeig generally rely on an ambiguity in the definition of exhaustion' or lack of specificity in the excess contract as to how the primary insurance is to be discharged. See, e.g., Stargatt v. Fid. and Cas. Co. of New York, 67 F.R.D. 689 (D. Del. 1975)" Comerica Inc. v. Zurich American Insurance Co., supra at 1030. "A different result occurs when the policy language is more specific." ( id.)
"If an excess insurance policy ambiguously defines exhaustion, as in Zeig, courts generally find that settlement with an underlying insurer exhausts the underlying policies. . . . However, in cases when the policy language clearly defines exhaustion, the courts tend to enforce the policy as written." Great American Ins. Co. v Bally Total Fitness Holding Corp., supra at *4. "Parties in these circumstances may include excess policy language explicitly requiring actual payment as a condition precedent to coverage and . . . a court may reach a contrary result when the terms of the contract demand it.' ( Zeig, supra, 23 F.2d at p. 666)." Qualcomm, supra at 198.
Even the Court in Zeig recognized that "[i]t is doubtless true that the parties could impose such a condition precedent to liability upon the policy, if they chose to do so." (emphasis supplied) Zeig at 666.
JPMC also argues that the provision that Twin City relies upon (Sec. II.A. of the policy) is inconsistent with other provisions of the policy. For example, Section I.A. provides that "[t]he Underwriters shall provide the Insured(s) with Insurance during the Policy Period which is in excess of the total limits of liability and any retention/deductible under all Underlying Insurance, as set forth in Item D of the Declarations, whether collectible or not" (emphasis added). Section III. C. and III. D. provide that
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. . . . [and]
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.
Thus, according to JPMC, the policy contemplates that coverage would not be "forfeited" if the full limits are not collected, because the policy remains in effect even when the underlying insurance is neither maintained nor "collectible." While this is standard excess insurance language, it pertains to the solvency of the underlying insurer ( Premcor USA, Inc. v American Home Assur. Co., 2004 WL 1152847 (ND Ill), aff'd 400 F3d 523 [7th Cir 2005]; Northbrook Property Cas. Ins. Co. v United States Fid. Guar. Co., 150 Ill App 3d 479, [Ill App Dist. 1986]), a circumstance that is not at issue here. The provision pertaining to maintenance of insurance protects the excess insurer by establishing that its coverage will not "drop down" in the event that the insured failed to maintain an underlying policy or the policies were procured by fraud. These provisions deal with different underlying factual situations and are not in conflict with each other.
JPMC next argues that this Court should deny this motion on the basis of the doctrine of the "reasonable expectation of the insured", and submits in support the Affidavit of Jeffrey G. McKinley, CPCU with thirty-five-plus-years experience in the insurance industry.
Mr. McKinley states that "[t]he insurance marketplace dictates that high-limit liability insurance programs must be structured as a tower'" and that "the insured's expectation is to have the tower' provide seamless coverage with no gaps in limits or coverage and to have each carrier provide indemnification when a covered loss exceeds its attachment point." (McKinley Aff., p. 9).
Mr. McKinley further states that during his thirty-five-plus years in the insurance industry, he has become familiar with dozens of cases that involved large claim settlements and that
it was more common for settlements to be made on a carrier-by-carrier basis. In these cases it was common for excess carriers to make claim settlements and payments in spite of the fact that insurance companies below them in the "tower" had not admitted liability or paid their full policy limit. The policyholder made up the difference between the amount paid and the policy limit. The excess carriers were not asked to drop down and fill any gaps. That was the obligation of the policyholder. The excess carriers settled their portion of the claim as if the claim was fully paid by all underlying insurance companies.
Mr. McKinley further takes the position that the decision in Comerica Inc. v. Zurich American Insurance Company, supra "was contrary to their long-time custom and practice that was in place at the time Bank One's policy in this case went into effect," and that the "insurance market responded by endorsing their policies to provide coverage in a manner that is consistent with historical custom and practice" by including language "to make clear that an insured's settlement with an underlying carrier will not eliminate the excess coverage for which the insured had paid." (McKinley Aff., p. 15).
He further avers that Twin City relies on its "Limit of Liability" wording in Section II.A. of its policy to deny coverage while ignoring the language of its "Insuring Agreement" in Section I. which ends with the phrase "whether collectible or not." (McKinley Aff., p. 19).
It defies logic for the excess carriers to contend that the policyholder should be in a worse position because the insured had settled a claim with underlying insurers than if the insured had gone without insurance, if an underlying insurance company had gone bankrupt, if the underlying insurance had been cancelled, if the underlying policy had been rescinded, or if the underlying policy limits had been exhausted by a previous claim. . . .
An insured has a reasonable expectation that they should not be placed in a worse position for recovery under an excess policy when an underlying carrier makes a settlement payment than they would be if they had failed to maintain underlying insurance for any other reason.
(McKinley Aff., p. 20).
Defendants argue in reply that there is no conflict in these sections (as discussed, supra) and thus the policy is not ambiguous and must be strictly construed as written. Therefore, plaintiff cannot lean on the "reasonable expectations of the insured" doctrine or the McKinley Affidavit or any other evidence extrinsic to the policy.
Finally, JPMC cites Sahadi v Continental Natl. Bank Trust Co. of Chicago ( 706 F2d 193 [7th Cir 1983]) for the proposition that only a material breach of a contract provision by one party will justify non-performance by the other party. In Sahadi, the defendant bank called a loan because plaintiff tendered interest payments less than one day after they were due, even though, as plaintiff argued, time had not been made of the essence. The Court found the existence of numerous factual issues such as whetherthe parties considered the payment of interest — not its payment by an exact hour — to be a relevant condition, whether plaintiff had materially breached that condition, whether the Bank had previously accepted late payments from plaintiff, and whether the Bank's action was without precedent in the community which precluded summary judgment and warranted a trial. In contrast, the attachment point for triggering the coverage of each excess insurer in this case is clearly material, and the excess insurers certainly have an interest in enforcing these provisions.
After reading all the papers submitted, hearing oral argument and after due deliberation, this Court finds that the Twin City policy is not ambiguous and that JPMC has not set forth a reasonable alternative interpretation of the contractual provision in Section II.A of the Twin City policy which requires the Underlying Excess insurers to have "admitted liability" and "paid the full amount of their respective liability" before Twin City's liability attaches.
While this Court certainly favors and encourages settlements of cases whenever possible, it cannot do so in contravention of the clear language of the policy.
Accordingly, this Court grants defendant Twin City's motion to dismiss the complaint as against it.
Motions 005, 006, 007 and 008
The other defandants/movants (Arch, Swiss Re, St. Paul, and Lumbermens) adopt Twin City's arguments (as well as making additional arguments), and the analysis set forth above establishes that these movants are also entitled to summary judgment, although the relevant language in their respective policies differs somewhat from that of the Twin City policy.
The Lumbermens' excess policy provides in Section I that:
With respect to each Insurance Product, the Insurer shall provide the Insureds with insurance during the Policy Period excess of all applicable Underlying Insurance. Except as specifically set forth in the provisions of this Policy, the insurance afforded hereunder shall apply in conformance with the provisions of the applicable Primary Policy and, to the extent coverage is further limited or restricted thereby, to any other applicable Underlying Insurance. In no event shall this Policy grant broader coverage than would be provided by the most restrictive policy constituting part of the applicable Underlying Insurance.
The insurance afforded under this Policy shall apply only after all applicable Underlying Insurance with respect to an Insurance Product has been exhausted by actual payment under such Underlying Insurance, and shall only pay excess of any retention or deductible amounts provided in the Primary Policy and other exhausted Underlying Insurance (emphasis in original).
Thus, this excess policy expressly requires "actual payment under such Underlying Insurance." As stated in Comerica Inc. v Zurich Am. Ins. Co., supra at 1032: "[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."
Similarly, in Qualcomm, Inc. v Certain Underwriters at Lloyd's, London, supra at 198, the Court found that "the term payment' is susceptible of only one reasonable meaning: compensation paid by the liability insurer and received by the insured'" (quoting Danbeck v American Family Mut. Ins. Co., 245 Wis 2d 186, 196, [Wis Sup Ct 2001]; see also Schmitz v Great Am. Assur. Co., 2010 WL 2160748, [Mo App 2010]).
Swiss Re argues a second ground for dismissal, namely, the settlement with Federal, the sixth layer of excess coverage, and argues, therefore, that JPMC cannot establish that the insurance underlying the Swiss Re policy, including the Federal policy, has been exhausted. The Swiss Re policy provides:
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 Limits(s) shown in Item 6 of the Schedule and then for no more than the Limit of Liability shown in Item 5 of the Schedule subject, however, to Condition 3 of this Policy.
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.
As for St. Paul, its excess policy provides in 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 Insurance as covered loss thereunder.
B. 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 Insurance 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 but not to exceed the amount stated in Item 3 of the Declarations, or
2. in the event of such exhaustion continue in force as primary insurance provided always that this policy shall only pay the excess over any retention amount otherwise applicable under the Primary Policy, but not to exceed the amount stated in Item 3 of the Declarations.
Thus, the St. Paul policy expressly provides that St. Paul will only be liable after the "total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying Insurance . . ." (emphasis added).
Finally, the Arch Policy provides under 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 Insurance in connection with Claim(s) and after the Insureds shall have paid the full amount of any applicable deductible or self insured retentions.
As with the other policies discussed above, the Arch policy requires "actual payment" of the "Underlying Limit," which has not occurred here.
Accordingly, the motions by defendants Twin City Fire Insurance Company, Lumbermens Mutual Casualty Company, Swiss Re International SE, St. Paul Mercury Insurance Company and Arch Insurance Company for summary judgment are granted and the complaint dismissed as against said defendants with prejudice and without costs or disbursements. The Clerk is directed to enter judgment accordingly.
The action is severed and continued against the remaining defendants.
This constitutes the decision and order of this Court.