Judicial opinions that purport to construe “the policy as a whole” are often bad news for insurers, but two recent decisions used that analysis to defeat plaintiffs with novel arguments for making their excess insurers liable for losses within the primary layer.
Intel Corp. v. American Guarantee & Liability Insurance Co., No. 692, 2011 (Del. Sept. 7, 2012), arose out of antitrust litigation against the chip manufacturer, in which Intel paid more than $50 million in defense costs. Intel had $5 million in primary coverage from Old Republic Insurance Company, $50 million in excess coverage from XL Insurance Company, and several layers of additional excess coverage, beginning with American Guarantee. After the conclusion of the underlying litigation, Intel reached a settlement with XL, in which it received $27.5 million. It then argued that this amount, together with Intel’s own payment of defense costs, triggered coverage under American Guarantee’s policy.
Although American Guarantee’s policy expressly disclaimed a duty to defend, Intel argued successfully that the disclaimer had been nullified, because the policy “followed form” to the XL policy, and XL’s policy included a duty to defend. On that basis, Intel argued that the defense costs it had paid should be included in any calculation to determine whether the “underlying limits” of the XL policy had been paid.
The American Guarantee policy also provided, however, that none of its terms would “obligate us to provide a duty to defend . . . before the Underlying Insurance Limits . . . are exhausted by payment of judgments or settlements.” The Supreme Court of Delaware held that this requirement could not be satisfied by “an insured’s own payment of defense costs.”
In Les Realty Trust ‘A’ v. Landmark American Insurance Co., No. 11-P-747 (Mass. App. Ct. Oct. 24, 2012), the insureds’ apartment complexes had $2.5 million in primary coverage and an excess policy that provided coverage up to the $8.7 million scheduled value of the property. The primary insurer paid the policy limit, and the excess insurer paid the remaining $6.2 million. However, the policyholders argued that the excess policy required payment of the entire $8.7 million scheduled value, despite the fact that $2.5 million of that value had already been paid by the primary insurer.
The plaintiffs relied on their policy’s definition of the term “ultimate net loss” as “the loss sustained by the Insured . . . after making deductions for all salvages, recoveries and other . . . insurance other than recoveries under the policy(ies) of the primary and underlying excess insurer(s).” Since recoveries from the primary insurer could not be “netted out” of the loss that was covered under the excess policy, plaintiffs contended that their excess carrier was liable for the full amount of the loss. A Massachusetts Appeals Court rejected that argument, because of another provision, which stated that the excess insurer’s coverage obligation did not attach until the primary carrier’s share of the “ultimate net loss” had been paid.
In both cases, the courts declared that the insureds’ interpretations of the policies focused on isolated or “cherry-pick[ed]” provisions and were contrary to the well-established principle that the court must consider policy language in context, and in light of the policy as a whole. Both courts concluded that the insureds’ interpretations failed to give effect to each policy provision. Although the Delaware Supreme Court found that the policy at issue in Intel was “admittedly complex,” that did not mean “that there is no single reasonable interpretation of its language, or that every proffered interpretation will be a reasonable one.” The Landmark court further emphasized that the insured’s interpretation of the policy was at odds with the usual operation of excess coverage, which insures only for “loss that exceeds the amount of coverage under another policy.”