Court Finds Exhaustion Provision Ambiguous, Holds Primary Insurers’ Insolvency Adequate for Exhaustion to Trigger Excess Coverage
A Washington Insured secured a victory by way of summary judgment that its excess carrier must provide coverage despite its insolvent primary carrier having made no payments towards the policy limit. Relying on Ninth Circuit precedent, a Massachusetts court, applying Washington law, found that the term “exhausted” in a Federal Insurance Company (Federal) Policy that required all underlying insurance be exhausted before the excess policy applied, could be satisfied through insolvency rather than through payment. The Insured, Water Applications Distribution Group1 (WADG), purchased primary insurance from a subsidiary of Reliance Insurance Company, that was declared insolvent, and formally dissolved effective November 29, 2021. In light of its inability to receive any money from the Reliance policies, WADG turned to its excess carrier, Federal, to obtain coverage for asbestos claims. WADG argued that the primary policy had been exhausted due to insolvency.
Federal, a unit of Chubb, argued that the insuring agreement’s exhaustion requirement was not ambiguous, and that extensive case law established that exhaustion required actual payment up to the policy limit. The Court, unpersuaded by the applicability of Federal’s purported favorable cases, applied the two-step framework established by the Ninth Circuit in Fed. Ins. Co. v. Scarsella Bros., 931 F.2d 599, 603 (9th Cir. 1991). First, the court found that the term was ambiguous and capable of meaning either that it required payment up to limits, or that it had been “used up, or consumed completely” through insolvency. Second, Washington law required such ambiguous language be interpreted in favor of the insured. As a result, the Court concluded that the primary insurance was exhausted when the insurer became insolvent and it was “a certainty that the primary carrier will not be making any payments on the insured’s covered losses.”
The Court emphasized that the cases cited by Federal provided no reason for it to stray from the Scarsella Brothersreasoning, and highlighted cases discussing policies which contain additional, more specific language in their exhaustion requirements. Indeed, the Court pointed out that Federal “was aware of, and has used, other terms to memorialize its “drop down” obligations which make clear that payment is required for exhaustion. The Court further denounced reliance on public policy reasons, even if “sensible,” once a term is deemed ambiguous. WADG’s motion for summary judgment was granted, and Federal was ordered to “step down” and provide coverage.
1Successor in interest to Pacific Waterworks Supply Co.
