NOVEMBER 2013 BAD FAITH CASES: EXCESS INSURER CORRECTLY DENIED COVERAGE WHERE UNDERLYING SETTLEMENT HAD NOT YET BEEN PAID (Pennsylvania Superior Court)
The trial court granted defendant, the excess insurer, summary judgment, ruling the carrier’s duty to defend and indemnify were not triggered because the underlying policies were not exhausted at the time the plaintiff tendered the claims, as the underlying settlement had not actually been paid yet.
On appeal, plaintiff-appellant asserted the trial court erred in its strict interpretation of the policy’s exhaustion clause because although the limits had not been exhausted at the time the tender was presented, the terms of the proposed settlement, which would exhaust the limits, were sufficiently agreed upon to trigger defendant’s duty to defend.
Plaintiff, citing case law from the Second and Third Circuit Courts of Appeals, argued an insured can recover any losses suffered beyond the primary coverage under an excess policy, and that a settlement with a primary insurer, even if within the policy limits, functionally ‘exhausted’ the policy, triggering the excess coverage.
The court determined those cases were unpersuasive, as they considered the duty to indemnify, rather than the duty to defend. Furthermore, the question in Lexington was when the duty to defend arose, rather than whether it was triggered.
Instead, the court relied on different Second Circuit precedent and held an excess insurer has a relevant interest in awaiting actual payment of a settlement by the primary insurer before providing coverage under an excess policy. Because the excess policy explicitly stated the underlying policy would be considered exhausted “by payment” of judgment or settlement, the court held its duty to defend was triggered only by the actual payment of the relevant primary insurance.
Therefore, the underlying primary policy, but not the excess professional services liability policy, had to be exhausted by payment before defendant’s excess policy was triggered. As always, that duty would remain in effect until defendant could establish the claims against plaintiff were beyond the scope of coverage provided by the excess policy, or until a settlement was reached under the policy.
