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(Article from Insurance Law Alert, December 2018)

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A California federal district court ruled that a second-tier excess carrier was not obligated to cover uninsurable disgorgement payments notwithstanding that a primary and first layer carrier had settled those claims up to their policy limits.  AXIS Reinsurance Co. v. Northrop Grumman Corp., No. 2:17-CV-8660 (C.D. Cal. Nov. 21, 2018).

Northrop was insured under a primary policy issued by National Union, a first layer excess policy issued by Continental Casualty and a second layer policy issued by AXIS.  Northrop sought coverage from the insurers for a settlement with the Department of Labor relating to certain alleged wrongful activity.  National Union and Continental Casualty paid amounts equal to the remaining limits of their policies.  AXIS made some payment, but filed suit seeking reimbursement on the basis that its policy was “unnecessarily triggered as a result of improper erosion.” 

The court granted AXIS’s summary judgment motion, finding that the underlying settlement was an uninsurable loss.  The court reasoned that the settlement consisted of uninsurable disgorgement payments because the Department of Labor specifically instructed Northrop to restore all payments or reimbursements made in violation of ERISA.  Although “disgorgement” was not used in the settlement, the court concluded that it was clear from the investigation and settlement that Northrop was returning ill-gotten gains.   Further, the court ruled that AXIS was not obligated to provide coverage as a result of the lower level insurers’ decision to pay for the settlement and the exhaustion of their policies.  The court explained that AXIS was not bound by the independent decisions of the underlying insurers when its own policy did not provide coverage.  The court distinguished cases in which courts have prohibited excess insurers from challenging a primary carrier’s payment decisions on the basis that those cases involved losses that were within the scope of coverage under the excess policy.