Category: Excess Coverage

Court of Appeals Clarifies Standard for Determining Exhaustion of Primary Insurance Coverage in Long-Term Losses

A recent Washington Court of Appeals decision helps clear up the obligations of excess insurers for losses occurring over many years when multiple insurance policies were in effect. Many businesses have two layers of insurance: “primary” insurance, which pays for losses up to a certain dollar amount, and then “excess” insurance, which kicks in if losses are so great that the primary insurance coverage amount is exhausted before the insured is fully compensated for the loss.

But what happens where the loss occurs over a decade during which the insured had multiple different primary and excess insurance policies–does the insured need to exhaust its primary coverage in each policy year in order to access the excess coverage?

The Court of Appeals’ August 23, 2021 ruling in Gull Industries v. Granite State Insurance Company answered that question “no”. This was a lawsuit brought by a gas station operator, Gull Industries, against multiple insurance companies seeking coverage for environmental contamination caused at 200 gas stations over 50 years. The spillage occurred gradually in the normal course of running the gas stations: customers spilled gas while filling their cars, supply trucks spilled gas while filling up storage tanks, and storage tanks gradually seeped gas into the ground. The company faced liability for the environmental contamination including lawsuits at 24 sites and regulatory action at 19 sites.

A main issue in the case was when and if Gull’s excess insurer, Granite State Insurance Company, had to start paying for the environmental contamination. That depended on when Granite State’s primary insurance was considered to have been exhausted. Gull argued this should be viewed for each policy year individually; in other words, as soon as one policy year’s worth of primary coverage was exhausted, Granite State’s excess obligation kicked in regardless of whether there was primary coverage in other policy years.

Granite State disagreed, claiming that its excess coverage was not in play until all of the first level coverage in every policy year of the many decades of contamination was exhausted. The trial court agreed with Granite State. Gull appealed.

The Court of Appeals ruled that the trial court erred when it accepted Granite State’s argument that Gull had to exhaust its primary coverage in every year before Granite State had any excess insurance obligations. The court noted the absence of Washington State caselaw on this question. But it relied on a California Supreme Court ruling that decided the issue using the same rules of insurance policy interpretation applied in Washington State.

The California Supreme Court found that the most natural reading of similar insurance policy language means that the excess coverage kicks in whenever the primary coverage is exhausted in the same policy year, regardless of what happened in other coverage periods. The court also pointed out that requiring an insured to prove it exhausted primary coverage in multiple policy years creates unreasonable obstacles to an insured seeking coverage and undermine the insured’s reasonable expectations.

The Court of Appeals found this reasoning persuasive. It emphasized the importance of the reasonable expectations of the insured in interpreting insurance policies. It also noted that requiring the insured to prove it exhausted the primary limits of every policy period of a multi-decade loss would unreasonably require the insured to sue over coverage obligations of different primary policies that was not anticipated when it purchased the excess policy.

This ruling is a good reminder that Washington State courts will interpret insurance policies to give effect to reasonable expectations of coverage over impractical and overly technical readings of the policy fine print.

ERISA Litigation Spawns Ninth Circuit Decision in Case of First Impression Regarding Excess Insurance Coverage

The Ninth Circuit Court of Appeals (the federal appellate court with jurisdiction over Washington and other western states) recently decided a novel question regarding so-called “excess” insurance coverage. Excess insurance exists where a person or entity has two layers of insurance: a “primary” insurer that provides coverage up to a specific dollar amount, and a second, “excess”, insurer that provides additional coverage above that amount. In its September 14, 2020 decision in AXIS Reinsurance Company v Northrop Grumman Corporation, the Ninth Circuit addressed the question whether an excess insurer can challenge the primary insurer’s decision to pay a claim and thereby trigger the excess insurer’s obligation to pay.

The dispute between AXIS and Northrop Grumman began with an ERISA lawsuit. The federal Department of Labor sued Northrop Grumman alleging Northrop acted improperly in handling its ERISA-governed employee savings and pension plans. Northrop paid a confidential amount to settle the DOL lawsuit. Northrop did not admit any wrongdoing, and the lawsuit never resulted in any findings about what specific allegations the settlement payment addressed.

A few months later, Northrop settled a second, unrelated, ERISA lawsuit brought on behalf of the Plan by a plaintiff named Grabek.

Northrop had insurance against these types of ERISA lawsuit through both primary and excess insurance carriers. Northrop’s primary insurer, National Union Fire Insurance Company of Pittsburgh, PA, and an initial excess insurer, Continental Casualty Company, provided coverage up to a total of $30 million. AXIS provided secondary excess coverage for losses over $30 million. In other words, AXIS only had to pay claims if Northrop’s loss exceeded the $30 million covered by the first two insurers.

The carriers covered Northrop’s settlement for the Department of Labor lawsuit. The primary insurer, National Union, and the first excess insurer, Continental, determined the DOL lawsuit was covered, and paid Northrop’s full loss out of their combined $30 million limit.

But Northrop ran into trouble getting coverage for the Grabek lawsuit. Having paid for the entire DOL settlement, National Union and Continental determined that all but about $7 million that Northrop had to pay in the Grabek lawsuit exceeded their combined $30 million coverage limits. Having exhausted its first layer of coverage, Northrop turned to its excess insurer AXIS to pay the remainder of the Grabek settlement.

AXIS refused to pay. It agreed there was coverage for the Grabek lawsuit, but it claimed that the first two insurers shouldn’t have paid the DOL settlement. AXIS claimed that the primary insurers’ policies excluded the DOL settlement. So, AXIS argued, since the first two carriers shouldn’t have paid for the DOL settlement, the first $30 million in coverage should never have been exhausted, and AXIS should never have been called upon to pay for the Grabek lawsuit. According to AXIS, this was an “improper erosion” of the initial $30 million in coverage. No federal appellate court had previously addressed AXIS’ “improper erosion” theory.

The Ninth Circuit disagreed. It determined that AXIS bore the risk that the primary insurers would exhaust their coverage limits by paying for losses that weren’t really covered. The court explained that excess insurers generally may not reduce their own obligation to pay a covered loss by claiming that the primary insurers shouldn’t have paid. The court emphasized that excess insurers generally have no right to second guess primary insurers’ coverage decisions. The excess insurer could avoid this outcome by including in their policy contracts a provision that improper payments by the primary insurers don’t count, but AXIS had no such language.