For decades, excess liability insurance policies provided that excess insurers were not required to pay out unless the full limits of underlying insurance were exhausted “in the payment of claims” or by “actual payments.” Based on this and similar language, excess insurance companies argued that if the policyholder settled its claim with the underlying
insurer for less than the underlying insurance company’s limits, its excess coverage was not triggered. Prior to 1928, some courts found in favor of excess insurance companies on this issue, holding that the words “exhausted in the payment of claims” required actual cash payment of full primary policy limits as a condition precedent to the right to recover excess insurance. In 1928, the Second Circuit, in Zeig v. Mass. Bonding & Ins. Co., soundly rejected those holdings and the court’s reasoning has been widely followed.
Recently, however, in response to Zeig and its progeny, excess insurance companies have begun to alter their policy language in various ways to avoid payment where anything less than full limits are actually paid out by the underlying insurance company. In certain jurisdictions, their efforts have been met with some success. Three cases in particular demonstrate this transition: in California, Qualcomm Inc. v. Certain Underwriters at Lloyd's, London; in Texas, Citigroup Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA; and in Illinois, Great Am. Ins. Co. v. Bally Total Fitness Holding Corp. In the wake of these recent decisions, it is imperative that policyholders be made aware of how courts currently are interpreting excess liability policies and what precautions they can take to ensure that their excess coverage remains viable in this new legal landscape.
The first part of this article will discuss the Second Circuit’s bellwether opinion in Zeig and its long trail of supporting case law. The second part will discuss recent opinions across the country that have gone against the rule in Zeig, based on the insurance industry’schange in standard policy language. The third and final part of this article will focus on what steps today’s policyholder must take in order to preserve excess coverage in the wake of this changing law.