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(Article from Insurance Law Alert, February 2018)

For more information, please visit the Insurance Law Alert Resource Center. 

As reported in previous Alerts, courts have addressed whether excess policies are triggered once the insured has incurred liability in excess of primary policy limits, or whether underlying limits must actually be paid out and exhausted in order for excess coverage to be implicated.  See June 2016 Alert, Jan. 2014 Alert, June 2013 Alert, Oct. 2012 Alert.  Last month, an Arizona court weighed in, ruling that an excess insurer had no coverage obligation until the underlying policy limits were actually paid.  Certain Underwriters at Lloyds London v. Republic Services Inc., No. CV 2017-005489 (Ariz. Superior Ct. Jan. 30, 2018).  The court noted that the language of the excess policy at issue was “not 100% clear” on this requirement, but concluded that the excess insurer’s position that underlying limits must be fully paid was the more reasonable interpretation of the policy language.

The excess policy required the Underwriters to “pay on behalf of the Insured excess of the Underlying Policies any claim or loss which triggers coverage under the Underlying Policies, and is not otherwise excluded.”  For purposes of the instant motion, the court assumed that the insured incurred losses exceeding the primary limit of $25 million and that the primary insurer had yet to pay such an amount.  In finding that actual payment was required to trigger excess coverage, the court noted that other provisions of the excess policy “speak in terms of the payment of claims” by the primary insurer, thus suggesting that “payment is the key event.”  Although the parties disputed whether New York law or Arizona law applied, they agreed that there was no difference between those states’ law on this issue of policy interpretation.