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By Kevin T. Merriman and William R. Leinen

In a March 31, 2014 decision, the Northern District of New York found a primary insurer liable to an excess insurer for bad faith settlement practices in the defense of its insured in an underlying motor vehicle lawsuit. After a bench trial in Quincy Mutual Fire Insurance Co. v. New York Central Mutual Fire Insurance Co., Civil Action No. 3:12-CV-1041, the Court found that New York Central, as the primary insurer, acted in bad faith and grossly disregarded the interests of Quincy, the excess carrier, by: (1) refusing to increase its settlement offer for almost four years; (2) refusing to tender its policy limits until three weeks before trial where the damages were indisputably in excess of the primary limits several years earlier; and (3) failing to conduct or obtain an analysis and valuation of the underlying litigation’s potential jury verdict value until mere weeks before the scheduled damages-only trial. The Court found that New York Central’s conduct caused it to lose two opportunities to settle the case at times in which liability against its insured was clear and Quincy’s excess exposure would have been none or significantly less than the full amount of its policy limits. Importantly, the Court recognized that Quincy, as the excess insurer, had no duty to undertake a defense in the underlying litigation, and therefore rejected New York Central’s argument that Quincy’s conduct in monitoring the litigation contributed to its damages. As a result, the Court awarded Quincy the full amount of its policy limits in damages, plus prejudgment interest.

Quincy’s bad faith claim against New York Central was based on New York Central’s defense of its insured in an underlying motor vehicle accident case. In November 2000, New York Central’s insured failed to yield the right of way at a stop sign and caused an accident with the underlying plaintiff. At the time of the accident, New York Central provided $500,000 of primary insurance and Quincy provided $1M excess through a homeowner’s policy. When the insured was sued by the underlying plaintiff in October 2001, New York Central accepted coverage and assumed control of the defense. After protracted litigation, both New York Central and Quincy tendered the limits of their policies in September and October 2009, respectively.

Quincy brought suit against New York Central in June 2012, alleging that New York Central’s handling of the underlying litigation was in gross disregard of Quincy’s interests. In particular, Quincy argued New York Central’s conduct amounted to bad faith because New York Central refused to engage in realistic settlement negotiations, even though liability against the insured was established early in the underlying litigation and the plaintiff’s damages far exceeded New York Central’s limits at that time. Quincy argued New York Central squandered several opportunities to settle the underlying litigation for significantly less than the combined policy limits, and by failing to do so, exposed Quincy to additional indemnity.

The Northern District of New York found that New York Central’s conduct amounted to bad faith and grossly disregarded Quincy’s interests. The Court found, based upon the testimony of the underlying plaintiff’s attorney and the insured’s personal attorney, that New York Central’s actions caused it to lose an opportunity to settle the underlying litigation on two distinct occasions in 2005 and 2007. Had New York Central availed itself of these opportunities to settle, reasoned the Court, Quincy would not have been exposed to any indemnity, or would have contributed only $250,000, significantly less than the $1M it ultimately tendered.

The Court next found that when New York Central lost these opportunities to settle the litigation, liability had been firmly established against its insured. The evidence adduced at trial proved that New York Central knew, as early as March 2001 (approximately seven months prior to the commencement of the underlying litigation), that its insured was negligent for failing to yield the right of way at a stop sign. Liability was established as a matter of law in May 2005, when the trial court granted the underlying plaintiff’s motion for summary judgment on liability and serious injury. Although New York Central was advised that an appeal of the decision had little chance of success, it proceeded with an appeal and in August 2006, the appeal was denied. The appellate court found the primary argument on appeal “meritless.”

The Court also found that when New York Central lost its opportunities to settle the underlying litigation, it had knowledge that the plaintiff’s likely damages far exceeded the limits of its policy. In particular, the Court noted that by 2005, when the first opportunity to settle was lost, New York Central was aware that the underlying plaintiff had undergone four surgeries, had not returned to work, was presenting a large lost wage claim and was experiencing PTSD and depression, all as a consequence of the subject accident. Additionally, New York Central was aware that interest, at nine percent per year, had begun to accrue upon the entry of the summary judgment order in May 2005. Moreover, the plaintiff’s expert disclosures, served in January 2007, estimated life care costs in the range of $2.4M – $4.4M. The underlying plaintiff would go on to have two additional surgeries in 2007 and 2008 related to the subject accident, and did not return to work in any capacity during the pendency of the underlying litigation. Thus, according to the Court, in 2005 and 2007, when the underlying litigation could have been settled, New York Central should have known that plaintiff’s damages far exceeded the limits of New York Central’s policy.

The Court also found that in spite of the established liability and high amount of damages, New York Central maintained a settlement offer of only $75,000 from December 2005 through September 2009. This offer, however, was not premised on any valuation or potential jury verdict analysis conducted by New York Central. Instead, the Court found that New York Central did not conduct any such analysis until September 2009. New York Central argued that Quincy’s actions or inactions during New York Central’s control of the defense contributed to Quincy’s damages. In particular,

New York Central argued that Quincy should have settled any potential excess exposure prior to the time New York Central tendered its policy limits. The Court rejected this argument, holding that it was without any legal basis. Although the Court noted that Quincy’s conduct may have had some relevance, it also noted that there is “no legal obligation on an excess carrier in Quincy Mutual’s position to negotiate a claim unless and until primary coverage is exhausted.” Imposing such an obligation, the Court noted, would place an excess insurer in a de facto primary insurer role.

Finally, the Court held that New York Central’s bad faith was further evidenced by the fact that despite tendering its $500,000 policy limit in the underlying litigation, it actually paid only $132,479 after receiving payments from its reinsurance carrier. Thus, the Court noted that during New York Central’s steadfast refusal to offer more than $75,000, New York Central was exposed to an additional $57,479 above that offer, while Quincy was exposed to the full $1M of its excess policy. This, according to the Court, “epitomize[d] bad faith negotiations, suggesting gross disregard for the interests of Quincy Mutual . . . and placing those of New York Central above them.”

By Diane Polscer

Pure Excess and Umbrella liability insurance are often confused for the same thing, and the terms routinely are used interchangeably.  In fact, umbrella coverage is often just a type of excess insurance that provides coverage different than pure excess insurance. Usually, an umbrella policy may provide pure excess insurance under one coverage form and drop-down umbrella coverage under a separate coverage form.  Under pure excess coverage, a defense obligation may be triggered only when the underlying insurance is exhausted by payment of settlements or judgments.  By contrast, under umbrella coverage,a defense obligation under the latter may be triggered on a primary basis due to gaps in coverage.

This distinction has been addressed by the Washington Court of Appeals in a series of cases.  In Christal v. Farmers Ins. Co. of Washington, 133 Wn. App. 186, 135 P.3d 479 (2006), the Court stated: “whereas excess policies provide coverage over and above that available through an underlying policy, an umbrella policy may provide primary coverage in areas not otherwise covered.” As the Court explained in Diaz v. Nat’l Car Rental Sys., Inc., 143 Wn.2d 57, 64, 17 P.3d 603 (2001),“[t]he name given the policy however is not the controlling factor as to whether the policy is excess, primary or umbrellas.”For the insurer, the difference between a pure excess policy and an umbrella policy can mean the difference between owing a duty to defend the insured and not.  Two recent cases illustrate this distinction.

In a recent decision, the Washington State Court of Appeals confirmed that an excess insurer has no obligation to defend or indemnify until after underlying insurance coverage is exhausted. QuellosGrp. LLC v. Fed.Ins. Co., 312 P.3d 734, 2013 WL 5989370 (Wash. Ct. App. Nov. 12, 2013) (published).TheQuellosdecision involved an insured that purchased several tiers of excess insurance totaling approximately $30 million in excess coverage.  The underlying insurer carried a $10 million policy and paid approximately $5 million of the $10 million to settle certain claims on behalf of the insured, Quellos. Quellos then paid the remaining $5 million out of its own pocket in an attempt to trigger the $30 million in excess tiers.   The Court, however, found that the excess insurance was only triggered by exhaustion of the underlying insurance through payments by the underlying insurer.  The Court relied on the plain language of the excess policies in rejecting the insured’s attempt to self-exhaust the underlying limits. Notably, the Court also rejected the insured’s argument that the exhaustion of the underlying limits was a “condition” of the excess policy for which the insurer must show prejudice, finding that the use of the terms “only after” “reflects the distinguishing characteristic and function of an excess insurance policy” and was not a condition of the policy. Quellos,2013 WL 5989370 at *16.

Conversely, in National Fire & Marine Ins. Co. v. Certain Underwriters at Lloyd’s London, 169 Wn. App. 1016, Not Reported in P.3d (2012), the Washington Court of Appeals held that under an umbrella policy an insurer is required to defend against claims that trigger a gap in underlying policy coverage.  The Court found that an “umbrella policy provided coverage for amounts exceeding the limits of the underlying or primary policy and protects against gaps in that underlying policy” and “umbrella insurers typically agree to provide not only excess coverage on claims within the ambit of the insured’s primary policy, but also primary coverage for those claims not included in the insured’s basic primary coverage.”  The Court deemed this umbrella coverage to apply on a primary basis as “gap-filling” coverage.

As a result, the Court in National Fire held that “when gaps in a primary policy’s coverage trigger the gap-filling provisions in an umbrella policy, Washington courts treat the umbrella policy as a primary policy for purposes of duty to defend and duty to indemnify analysis.”  Thus, an umbrella insurer may have a duty to defend even though there is a primary insurer that has already picked up the defense.  In National Fire,the Court found that the umbrella policy provided gap-filling coverage in at least four different ways:(1) the underlying policy’s “your product” exclusion contained no real estate exception like the umbrella policy;(2) while the underlying policy had a fiduciary exclusion provision, the umbrella policy did not, and the complaint contained allegations of breach of fiduciary duty;(3) the umbrella policy contained no alienated premises exclusion similar to the underlying policy; and (4) the umbrella policy was issued over different years than the primary policy and therefore provided gaps in policy years.

The National Fire Court ultimately determined that the umbrella insurer owed a defense obligation despite the fact that other primary insurers had picked up the defense. The Court also provided some guidance on how to determine whether the policy provides drop down or pure excess defense obligation, stating that, had the umbrella insurer intended to bind itself to defend only if no other insurer had a duty to defend, it should have used that language.  Even though the umbrella policy in National Fire provided a defense only where the underlying policy did not provide “coverage,” the Court observed that “coverage” is different than “defense.”

These two cases highlight an important distinction in pure excess and gap-filling umbrella coverage when it comes to an insurer’s obligation to defend. Thus, it is important to recognize the differences in the policies and not assume that there is no defense obligation simply because there is an excess policy issued, especially in Washington, where a wrongful denial of a defense obligation can have dire consequences, including waiver of coverage defenses and policy limits. Safeco v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992).The Quellosand National Fire decisions illustrate how important it is to look at the language actually used in the policy in determining what type of coverage is afforded and not simply relying on the name of the policy or general description in the declaration page.