1. final
October 28-29, 2013

3. Jennifer Mathis
Troutman Sanders LLP
Jerold Oshinsky
Kasowitz Benson Torres &Friedman LLP

4. 



Exhaustion 101: Who pays what, and why, to
trigger excess coverage
Effect of occurrence v. aggregate limit of
liability on trigger of excess coverage
Duties relevant to excess issues: notification,
reporting, settlement and defense
Vertical v. horizontal exhaustion

5. When is excess coverage triggered?

6. 
The underlying insurer(s)
 “[Excess insurer] shall be liable only after the insurers under each of the
Underlying Policies have paid or have been held liable to pay the full amount
of the Underlying Limit of Liability.”

The insured
 “shall not attach unless and until the insured, or the insured’s underlying
insurer, has paid the amount of Underlying Insurance”

Someone else
 “underlying policies will be reduced or exhausted only by payment made on
behalf of the insured”

Bankrupt and insolvent underlying insurers
 Policy language may address – maintenance clause?
 Ali v. Federal Ins. Co., 719 F.3d 83 (2d Cir. 2013) (excess insurer not
required to drop down to fill gap in coverage created by insolvent underlying
insurers where policy language required “payment” of underlying insurance
rather than just accrual of losses).

7. 
Actual payment
 “Coverage hereunder shall attach only after the
insurers of the Underlying Insurance shall have paid in
legal currency the full amount of the Underlying Limit”

Covered loss only?

Underlying insurer “held liable” to pay
 “liability does not attach until the underlying insurers
have paid or have been held liable to pay”

8. 
Gap-filling not allowed:
◦ See, e.g., Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 161 Cal.
App. 4th 184 (2008) (excess policy required actual payment of entire limit by
primary insurer); Goodyear Tire & Rubber Co. v. National Union Fire Ins. Co. of
Pittsburgh, Pa., 694 F.3d 781 (6th Cir. 2012); Comerica Inc. v. Zurich American
Ins. Co., 498 F. Supp. 2d 1019, 1028 (E.D. Mich. 2007) (excess policy required
primary insurer to exhaust entire limit of liability by actual payment).

Gap-filling allowed:
◦
See, e.g., Zeig v. Massachusetts Bonding & Sur. Ins. Co., 23 F.2d 665 (2d Cir. 1928) (insured
may fill in gap to trigger excess coverage; holding has since been limited); Schmitz v. Great
Amer. Assurance Co., 337 S.W.3d 700 (Mo. 2011) (per policy language, excess policy was
triggered when insured or underlying insurer became “obligated to pay” underlying limits,
despite primary insurer’s below limits settlement); Maximus Inc. v. Twin City Fire Ins. Co.,
2012 WL 848039 (E.D. Va. March 12, 2012) (excess policy requiring “actual payment under
such underlying insurance” allows insured to fill the gap).

Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d 1116
(N.J. 1988) (provides allocation formula to determine
whether excess might be triggered)

9. 
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Avoids problem of primary insurers
prematurely shifting obligations to excess
Premiums: significant difference between
excess and primary due to attachment points
Point at which excess defense obligation
might be triggered is important
Avoids settlement manipulation
-See Ali v. Federal Ins. Co., 719 F.3d 83, 94 (2d Cir. 2013)

10. 
Policy language is key

Know your jurisdiction

Carefully consider effects of settlements
with underlying insurer if loss may reach
into excess layer(s)

12. 
Difference between per occurrence and
aggregate limit of liability
◦ Examples of policy language
◦ Per perpetrator example (sexual abuse cases)

Why does it matter?
◦ Excess may attach earlier
◦ Insured may end up with less coverage
◦ Insurer may end up with less reinsurance

Review/understand policy language in the
application process

14. 
Timely tender to all layers: excess may raise
late notice defense
◦ Policy may address this; e.g., notification or consent
required only for claims that are likely to exceed a
certain percentage of underlying limits

Duty to keep excess informed of
developments?

15. 
Generally, “an excess carrier has no duty to
contribute to a settlement or to the defense of the
insured until the primary carrier’s policy limits have
been exhausted.”
-Continental Cas. Co. v. Royal Ins. Co., 219 Cal. App. 3d 111, 118 (1990)

Even if liability is likely to invade excess layer,
primary carrier has exclusive duty to defend
-Signal Cos., Inc. v. Harbor Ins. Co., 27 Cal. 3d 359, 380 (1980)

Primary insurer may not tender its limits to trigger
excess defense obligation.
-Douglas v. Allied American Ins. Co., 727 N.E.2d 376 (Ill. App. Ct. 2000)

Primary insurer retains right to control settlement
-Diamond Heights Homeowners Ass’n v. Nat’l Am. Ins. Co., 227 Cal. App. 3d 563, 577-78 (1991)

16. 
What if primary refuses to defend?
◦ Depends on language of excess policy as well as
jurisdiction. See, e.g., Nat’l Union Fire Ins. Co. of
Pittsburgh v. Seagate Techs, Inc., 2012 WL 169703
(9th Cir. Jan. 20, 2012) (no duty to drop down and
defend absent exhaustion); Johnson Controls, Inc.
v. London Market, 784 N.W.2d 579 (Wis. 2010)
(because primary denied coverage, no other
insurance was “available” and excess must defend).

17. 
Primary generally owes no contractual duty to
protect excess insurer’s interests
-See Commercial Union Assur. Cos. v. Safeway Stores, Inc., 26 Cal. 3d 912, 918 (1980)
-But seeFederal Ins. Co. v. North Am. Spec. Ins. Co., 921 N.Y.S.2d 28 (N.Y.App Div. 2011)

Claim for equitable subrogation may exist

-See Commercial Union Assur. Cos. v. Safeway Stores, Inc., 26 Cal. 3d 912, 918 (1980)
◦ Derivative of insured’s rights
-American Guar. & Liab. Ins. Co. v. USF&G, 668 F.3d 991 (8th Cir. 2012) (excess insurer’s
bad faith claim against primary failed where insured never made demand that primary settle within limits)

18. 
Keep excess informed

Be proactive

Broker input/assistance in dealing with
multiple layers?

19. Up and down and side to side

20. 



Long tail claims – multiple policy years
triggered
All primary insurance must be exhausted
Benefits excess insurer
Examples:
◦ State of California v. Continental Ins. Co. 55 Cal.4th 186
(2012) (adopted an “all sums with stacking” rule)
 Addressed again in Kaiser Cement & Gypsum Corporation v. Insurance
Company of the State of Pennsylvania, 215 Cal.App.4th 210 (2013) (all
primary insurance must be exhausted to trigger excess); opinion later
depublished
◦ United States Gypsum Co. v. Admiral Ins. Co., 643 N.E.2d
1226, 1261 (Ill. App. Ct. 1994) (all triggered primary policies
must be exhausted)

21. 


Excess triggered where specific underlying
primary policy exhausted, even if other
primary insurance is available
Benefits primary insurers and insureds
Examples:
◦ Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d
1116 (N.J. 1998)
◦ Westport Ins. Corp. v. Appleton Papers Inc., 787
N.W.2d 894, 918-19 (Wisc. Ct. App. 2010)

22. 
Excess over specific underlying or all
underlying?

Anti-stacking provision?

Other insurance provision?

24. 
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Jennifer Mathis
Troutman Sanders LLP
Phone: 949.622.2721; Email: jennifer.mathis@troutmansanders.com
Jerold Oshinsky
Kasowitz Benson Torres &Friedman LLP
Phone: 424.288.7903; Email: JOshinsky@kasowitz.com