Policyholders Should Act Now to Muffle the "Exhaustion Defense" in Excess D&O Policies

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A coverage decision troubling to D&O policyholders was handed down on September 17, 2011. A United States District Court ruled that that the policyholder (who had been sued for securities laws violations) could not tap its excess directors and officers liability insurance coverage, because the policyholder settled its insurance claim with the primary D&O insurance company for less than full policy limits.

According to the court, this was fatal to a recovery of excess D&O insurance coverage: "In the court's view, the plain language of the Federal policy's insuring clause — 'the full amount of the underlying limit' — does not mean 'some lesser amount' or 'partial amount,' nor does it contemplate the insured 'filling the gap' or 'crediting the difference[.]'"

In effect, the court ruled that the policyholder had forever forfeited its right to excess insurance coverage because the policyholder had accepted less than the full policy limits from the underlying D&O insurance company. This ruling is emblematic of a recent limited line of cases. These cases depart from the well-established decades-old majority rule (and insurance industry practice) by which a policyholder could recover excess insurance so long as it bridged the gap between the amount of money received from the underlying insurance company and the attachment point of the excess insurance company.

For more information, please see the below article:

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