Excess Policy Requiring Exhaustion of Underlying Policy Limits Triggered Only After Exhaustion of Policy Limits

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Goodyear Tire & Rubber Company (“Goodyear”) was sued in numerous securities class actions, derivative lawsuits and an SEC investigation.  It was insured by two Directors and Officers policies: a primary policy of $15 million, subject to a $5 million retention for securities claims.  Federal Insurance Company issued an excess policy with limits of $101 million over the $15 million primary and SIR.   It provided that coverage “would attached only after the insurers of the Underlying Insurance shall have paid in legal currency the full amount of the Underlying Limit….”

Goodyear had incurred approximately $30 million in legal and accounting costs in defending the securities claims and related actions (including the SEC investigation).  It sued Federal in 2008 and filed an Amended Complaint in 2009.  In 2010, it settled with the primary insurer for $10 million. 

Federal argued that the settlement of $10 million did not fully exhaust the primary policy, and thus its excess policy was not triggered. It also argued that various other fees claims were not within the scope of the policy. The insured argued that the exhaustion of policy limits was a policy condition that required prejudice before enforcement, that the actual loss was in excess of the primary policy, that Ohio law favors settlements and disfavors forfeiture, and that the costs were all related.  The Court focused on the exhaustion issue and did not reach a decision regarding the remaining arguments. 

The Court held that under Ohio law and the plain language of the provision, the excess policy was not triggered.  Noting the public policy encouraging settlement and discouraging forfeiture, the Court distinguished it  from the present case by further noting that the cases cited were all in the UM context, which is state mandated coverage.  Since there was no mandate regarding Directors and Officers coverage, the Court held that there was an equal public interest in fostering “freedom of contracts” and holding parties to the bargains they make.  Further, the Court held that even if the underlying limits was a condition precedent requiring prejudice, Federal was prejudiced by litigating the matter for over two years.   Giving the policy language its full meaning, the Court held that the Federal excess policy did not attach.

For a copy of the decision click here

Sarah Delaney and Joseph Oliva