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Excess D&O Policy Not Triggered Where Insured Settled Coverage Claim With Primary Insurer for Less Than the Policy Limit

On July 7, 2018, Justice Masley of the New York County Commercial Division issued a decision in Jiang v. Ping An Ins., 2018 NY Slip Op 31534(U), holding that coverage under an excess D&O policy was not triggered because the insured settled its coverage claim with the primary insurer for less than the policy limit and did not “absorb the gap” between the settlement amount and the policy limit.

In Jiang, a corporate officer sought coverage for the defense of a federal criminal prosecution and a parallel SEC enforcement action.  The corporation had $5 million in primary D&O coverage (split between two insurers) and $5 million in excess coverage.  The insured entered a settlement with one of the primary insurers for less than the policy limits, and then sought coverage from the excess insurer for defense costs incurred above $5 million.  The excess policy stated that coverage “shall attached only after” the underlying insurance coverage “has been exhausted by payment of claim(s).”  Justice Masley granted the excess insurer’s motion to dismiss, explaining:

The 2010 and 2011 Excess Policies clearly state that "[c]overage [under the Excess Policies] shall attach only after all such Underlying Insurance has been exhausted by payment of claim(s)".  Once the coverage under the excess policy attaches, it "shall then apply in conformance with the terms and conditions of the Primary Policy as amended by any more restrictive terms and conditions of any other Underlying Insurance, except as otherwise provided by this Policy."

First, there is no ambiguity in the 2010 or 2011 Excess Policies as to when excess coverage attaches. Affording the language employed in the policies their plain meaning, Chubb's obligation to provide excess coverage does not attach until all underlying primary policy limits have been exhausted by payment of a claim or claims, not by incurring costs or expenses that may exceed primary policy limits but have not yet been paid. The actual payment of the underlying policy limit is an expressly-stated condition precedent to triggering the excess coverage.

Additionally, where, as here, an insured has settled with a primary insurer for a below-limit amount, the primary policy limits are not deemed exhausted unless the insured "absorbs the resulting gap between the settlement amount and the primary policy limit"; there is no obligation to provide excess coverage until the gap is closed and the primary policy limits are deemed exhausted (cf. J.P. Morgan Chase & Co. v Indian Harbor Ins. Co., 98 AD3d 18, 25 [1st Dept 2012), Iv denied 20 NY3d 858 [2013]). Jiang does not allege that he absorbed the gap that remained following his below-limit settlement of claims with Ping An, thus, the excess coverage contemplated in the 2010 Excess Policy was not triggered.

Businesses often have multiple tiers of insurance coverage, and the excess tiers are not triggered until the underlying insurance coverage is exhausted.  As the plaintiff in Jiang discovered, settling with the primary insurer for less than the policy limits can affect the availability of excess coverage.  In some cases, the insured may be able to tap into the excess policies by paying the difference between the settlement amount and the primary policy limit out of pocket (“absorbing the gap”).  But depending on the wording of the excess policy, even that may not work.  In the First Department case, Justice Masley cited in the excerpt above, the excess policy offered coverage “only after the Primary and Underlying Excess Insurers shall have duly admitted liability and shall have paid the full amount of their respective liability.”  Applying Illinois law, the court held that this condition precedent was not satisfied by the insured “absorbing the gap”, where the underlying insurers settled with the insured without admitting or paying “the full amount of their respective liability.

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