Second Circuit Confirms That Excess Policies Require Payment Of Losses Covered By Underlying Policies Before Excess Policies Can Be Triggered

In Ali v. Federal Insurance Company, ___ F.3d ___, 2013 WL 2396046 (2d Cir. June 4, 2013), the United States Court of Appeals for the Second Circuit, applying both New York and Pennsylvania law, held that coverage under excess directors and officers (“D&O”) liability insurance policies was not triggered because the policies' plain language required that the underlying insurance policies be exhausted “solely as a result of payment of losses,” which had not occurred. Accordingly, the Second Circuit affirmed the district court's judgment dismissing a claim that the excess policies were triggered merely by the accrual of liability—and not actual payment by the underlying policies—to reach the attachment points of the excess policies.

Commodore International Limited (“Commodore”), a computer technology company, filed for bankruptcy in 1994. Id. at *1. By the time of its bankruptcy filing, Commodore had purchased a $50 million tower of D&O coverage. Id. at *1 n.2. Federal Insurance Company (“Federal”) provided the second and fifth layers of excess coverage for a combined total of $10 million in policy limits, and Travelers Casualty and Surety Company of America (“Travelers”) provided the seventh layer with a policy limit of $10 million. Id. The insurers that provided the first, third, fourth, and sixth layers of excess coverage in the tower are insolvent. Id. at *1.

Anticipating that the former directors and officers (theDirectors) of the company would file claims for coverage relating to a lawsuit against them filed in the Bahamas, Federal filed a coverage action against the Directors in the Southern District of New York seeking a declaration that it was not required todrop down to cover liability that would have been otherwise covered by the insolvent excess insurers. Id. The Directors filed a counterclaim against Federal and a third-party claim against Travelers (collectively, theExcess Insurers) seeking a declaration that the Excess Insurers'coverage obligations are triggered once the total amount of [the Directors'] defense and/or indemnity obligations exceeds the limits of any insurance policies underlying their respective policies, regardless of whether such amounts have actually been paid by those underlying insurance companies. Id. at *2 (emphasis and alterations retained, quotation marks omitted). The Excess Insurers filed a motion for judgment on the pleadings on their claim regarding the drop-down issue, and the Directors filed a...