Courts Limit Insurer Liability and Increase Agent Responsibilities

Intentional Acts

It no longer matters whether somebody intended to do harm to someone else, only that they did so regardless of excuse. More and more often, courts are saying that the event was not fortuitous but instead intentional, even though the actor intended no harm. The worst thing somebody could say in an auto accident is that they thought they could make it through a yellow light, indicating that they intended to do so and not realizing that a motorcycle had moved into the intersection. They basically intended to ignore the warning of a yellow light.

Equally true is how absolute exclusions are being enforced. It doesn't matter that the insured had nothing to do with the underlying harm done to a third party; what matters is whether the language in the policies is clear and unambiguous.

Reasonable Expectations

The concept of reasonable expectations too has been affected by these decisions. It used to be that generally accepted practices and standards were tied to one's reasonable expectation of coverage. Unfortunately, the doctrine of the "Reasonable Expectation of Coverage" is tied not to what generally accepted practices have been but is now tied to the concept that if an exclusion is clear and unambiguous, then there can be no reasonable expectation of coverage. Does this not require a policyholder to be a knowledgeable coverage lawyer?

As recently as January 15, 2024, Allen N. Trask III and Amy H. Wooton, of Ward and Smith, P.A., wrote an article ¹ suggesting the policyholder needs to consult with coverage attorneys before they "sign on the dotted line." That article listed 18 policies that businesses typically purchase requiring review. Their review would equally have to include all potential jurisdictions, as Ohio might be different than Kansas. This is an unsustainable cost that would be required almost every year should policy forms and/or issuing insurers be changed. Why is this important?

Umbrella versus Excess Insurance Policies

It is difficult today to get a personal or even corporate umbrella policy that is a true umbrella policy. It used to be the standard that an umbrella policy was broader in coverage than the primary policy over which it provides coverage. Most umbrella policies used to drop down, subject to a $10,000 deductible if the primary policy would not respond to a claim. However, try to find a true umbrella policy that does that today. More and more, they are worded much like a typical excess policy.

Excess policies were traditionally following-form policies. However, and thanks to clever coverage attorneys, there is now a disclaimer in the language that is equally clear and unambiguous. That language states "except where this policy may differ."

The law offices of Morrison-Mahoney LLP recently summarized ² a rather disturbing decision in the case of Pharmacia Corp. n/k/a Pfizer, Inc. v. Arch Spec. Ins. Co., No. 22-2586 (3d Cir. Jan. 19, 2024). This case was on appeal from the US District Court for the District of New Jersey and decided by the Third Circuit Court of Appeals.

In that case, an excess directors and officers (D&O) liability policy issued by Twin City Fire Insurance (a member of the Hartford Insurance Group) was not obligated to share in the cost of a $207 million settlement of shareholder claims against the insured because Pharmacia (the insured) had not satisfied the policy's separate requirements that each underlying policy not only paid its limits in full but that each insurer had to have admitted liability.

Despite Pharmacia's contention that all of the underlying insurers had ultimately paid their full policy limits, the Third Circuit noted that six of the seven underlying insurers refused to admit liability and, therefore, the condition precedent had not been satisfied. The court rejected Pharmacia's theory of functional exhaustion as well as its contention that the payment of a policy limit implicitly constituted an admission of liability.

As cited in the court's decision, the court's conclusion followed another similar case, J.P. Morgan Chase & Co. v Indian Harbor Ins. Co., 98 A.D. 3d 18 (N.Y. App. 2012), and the insurer claiming it had no obligation to participate in a $175 million settlement was again Twin City Fire, the insurer issuing the policy. There, a court applied Illinois law in interpreting the identical exclusion and found the Twin City policy to unambiguously impose conditions precedent for Twin City coverage: admitting liability and paying the full policy limit.

These two cases present an interesting problem. First, it's annoying that the Pharmacia case was not certified for publication. This sounds like avoidance, but at least it doesn't set a permanent precedent in New Jersey. But it didn't end well for the appellant. Notwithstanding that, there are serious consequences for this decision.

One consequence is for the insurance broker as, presumably, only those held to a higher standard of care would be involved in the placement of such a high level of excess rather than an ordinary insurance producer who may not have such expertise. Nonetheless, such a condition is almost impossible to satisfy given how settlements take place. I doubt anyone has ever heard of an insurer admitting liability when paying a settlement. Settlement agreements and releases usually state the exact opposite—that there is no admission of liability. Thus, how can a party to a settlement deny liability and then expect their insurance company to admit there is liability? Further, most, if not all, liability policies specifically require that the insured not admit liability.

Another problem is the gap in the towers of excess coverage that would occur if an insurance company refuses to participate in the settlement. This could leave a $10 million or $20 million gap in coverage over the aggregate of the underlying insurers beneath them. Thus, if primary and excess layers of $40 million have committed to a high-level settlement, what happens to the layers above $50 million should an excess insurer with $10 million over $40 million not contribute? Would the insurers at the $60 million and higher levels claim that the underlying insurance had not been properly maintained and, thus, also deny coverage? Or would the insured have to fill the gap?

Not only does this create problems for the policyholder, but it also creates problems for the insurance broker for not catching such language and negotiating its removal. An insured cannot rely on the standard of generally accepted practices that "following form excess polices" means just that.

We now see the courts protecting suppliers of goods and services to the detriment of the consumer, without discriminating between an average citizen and major companies. This appears to be a dangerous trend in the insurance industry and is already affecting those supporting this agenda.

Attorneys at Lowenstein Sandler LLP published a review of Pharmacia, ³ citing a 1928 case, Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665, 666 (2d Cir. 1928). This finding rejected an insurer's argument that a policyholder had voided all coverage under an excess policy when it settled with primary insurers for less than their full underlying limits. The court held the excess insurer 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."

The attorneys went on to say that "… in so holding, the court refused to reach '[a] result harmful to the insured, and of no rational advantage to the insurer,' which would, 'in many, if not most, cases, involve delay, promote litigation, and prevent an adjustment of dispute which is both convenient and commendable.'" Zeig, among many other opinions nationwide, recognizes the commonsense reality that policyholders do not purchase excess insurance expecting to face a series of different coverage positions in the same tower of insurance.

Their comments on the Pharmacia case pointed out that:

The Pharmacia opinion is troubling because it invites excess insurers to continue to insert conditions on coverage that have no rational connection to the rights of the parties and become a trap for the unwary, particularly at the upper-layer levels of a coverage tower where policy language rarely receives scrutiny during the policy placement or renewal process. An "admission of liability" requirement in a high-level excess policy seriously impedes the policyholder's (and other insurers') ability to resolve a contested claim, since an express admission of liability in the context of settlement is exceedingly rare. An excess policy including such a requirement is therefore arguably valueless, since multimillion-dollar claims that reach high-level excess layers are most often resolved through negotiated resolution.

The Lawyers at Lowenstein-Sandler suggest that insurance brokers and agents consider these takeaways.

• Negotiate the removal of limitations on exhaustion in excess policies, or at a minimum, point out limitations to your insured.
• Exercise caution as insurers work to settle contested claims.
• Utilize knowledgeable professionals when placing coverage.