(Article from Insurance Law Alert, January 2021)
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A Connecticut appellate court ruled that a trial court erred in holding that excess policies did not attach based on the policyholder’s failure to exhaust primary policies, explaining that the trial court incorrectly determined the per-occurrence limits of the primary policies. Continental Cas. Co. v. Rohr, Inc., 201 Conn. App. 636 (2020).
Excess insurers filed suit against Rohr and several of its insurers, seeking a declaration of their coverage obligations for environmental remediation claims stemming from Rohr’s manufacturing facilities. The court, applying California law, issued the following rulings:
Annualization of Per-Occurrence Limits
Royal issued two three-year primary policies with limits of $2 million per occurrence and $2 million aggregate. The policies also included endorsements stating that the policy period “is comprised of three consecutive annual periods.” Both primary policies were extended for an additional three years.
The appellate court rejected the notion that the per-occurrence limits could be annualized, such that the two three-year primary policies and each of their three-year extensions provided a total of $24 million in per-occurrence coverage. The court reasoned that endorsement language stating that the policy period “is comprised of three consecutive annual periods” is only “relevant in that rates are based on annual periods.” Emphasizing that the word “comprised” means “to be made of up,” the court concluded that the language did not support an interpretation in which each year constitutes a separate policy period. As such, the court ruled that each Royal primary policy provided coverage of $2 million per-occurrence during the three-year policy period.
Policy Extensions
The appellate court also ruled that the three-year extensions of the two Royal policies did not result in additional per-occurrence limits. The court explained that the extensions were not new “stand-alone policies,” but rather extensions of the original policy periods, creating “continuous contract[s].” In so ruling, the court relied on language in the certificate that stated: “It is hereby understood and agreed that the term of [the] above policy is extended for a period of three years.” (Emphasis in original). Having ruled that the extensions were mere continuations of the original Royal policies, the court ruled that the $2 million limits for each policy applied “regardless of the number of years the coverage has been in force.”
Horizontal vs. Vertical Exhaustion
Emphasizing that under California law, “horizontal exhaustion is the rule . . . in long-tail cases unless specific policy language both describes and limits the underlying policies,” the appellate court ruled that horizontal exhaustion (which requires exhaustion of all primary policies across the relevant time period) applied to determine excess coverage obligations. The court explained that policy language defining “ultimate net loss” to include “all recoveries” and “other valid and collectible insurance” requires horizontal exhaustion, even if the excess policy makes reference to a specific primary policy as well.
The appellate court also addressed whether certain excess policies issued by Harbor and London contained language that rendered them “specific” to a particular underlying policy, thus warranting vertical exhaustion. The excess policies at issue conditioned attachment “only after the Primary and Underlying Excess Insurers have paid or have been held liable to pay the full amount of the Primary and Underlying Excess Limit(s).” Based on this language, the court ruled that the excess policies were not triggered until Rohr “has recovered all proceeds from all valid and collectible underlying insurance.” The court rejected the argument that the excess policies were “specific” to certain Royal primary policies because the excess policies “referenced” the Royal policies.
Actual Payment as Prerequisite to Exhaustion
The appellate court ruled that Royal was required to actually pay its policy limits in order to satisfy the exhaustion requirement of excess policies. The court relied on language sating that excess liability did not attach “unless and until the Assured has by final judgment been adjudged to pay an amount which exceed such Primary and Underlying Excess Limit(s) and then only after the Primary and Underlying Excess Insurers have paid or have been held liable to pay the full amount of the Primary and Underlying Excess Limit(s).”
The court rejected Rohr’s assertion that exhaustion could be established through evidence that the loss attributable to a single occurrence was greater than the attachment point of the excess policies. Similarly, the court rejected the contention that exhaustion was satisfied by virtue of the fact that Royal and other primary insurers continued to be defendants in this litigation, subject to liability through contribution claims of other insurers. Here, because Rohr’s settlement payment from Royal exceeded the combined $4 million limits of its two policies, the court ruled that the exhaustion requirement was satisfied.
Below Limits Settlements
With respect to certain excess policies issued by Federal and Century, the court ruled that where, as here, an excess policy specifically names certain underlying policies in its schedule of insurance, the policyholder must exhaust the limits of the policies listed in the underlying schedule. The court ruled that excess coverage under Federal’s and Century’s policies was not available because Rohr’s underlying settlement did not exceed the combined limits of policies directly underlying the Federal and Century policies (and listed in their respective schedules of insurance).