Stacked Excess Policies Over a Self-Insured-Retention and Deductible Resolved by Application of Extrinsic Evidence
Insureds who face major liabilities often buy layers of liability insurance coverage. When all of the layers are involved in one or more case disputes require help from the courts to resolve disputes over who owes what to whom. If the policy language is ambiguous it will usually be interpreted against the drafter unless extrinsic evidence is allowed to help understand the true agreement of the parties.
In Lexington Insurance Company and National Union Fire Insurance Company Of Pittsburgh, Pa v. RLI Insurance Company, No. 19-1426, United States Court of Appeals For the Seventh Circuit (JANUARY 27, 2020) the Seventh Circuit followed Illinois law that allowed it to use extrinsic evidence to resolve a dispute over the meaning of insurance policy language.
Two insurers of New Prime, Inc., a trucking company, accuse a third insurer of not paying its share toward two multimillion-dollar personal injury settlements. Plaintiffs Lexington Insurance Company and National Union Fire Insurance Company contend that defendant RLI Insurance Company underpaid according to the policy it sold to New Prime, leaving National Union to make up the difference.
Lexington and National Union sought a declaratory judgment as to the meaning of the RLI Policy and equitable contribution of $2.5 million from RLI toward the settlements in question. The district court granted summary judgment to RLI, relying exclusively on contract language that it found unambiguous.
As a large commercial trucking company, New Prime faces substantial risks of tort liability. In the relevant years, New Prime managed and covered its own liability without insurance for the first $3 million of exposure per occurrence. To protect itself from unusually large claims, New Prime bought excess liability insurance from three different companies: RLI, Lexington, and National Union. (Lexington and National Union are referred to as AIG their parent).
The two tragic accidents occurred in 2015 when New Prime was covered by the RLI, Lexington, and National Union policies. On March 4, 2015, a New Prime tractor-trailer drifted into the median of Interstate 80 in Mercer County, Pennsylvania. The truck struck and severely injured Daniel Montini, who was changing a flat tire. In February 2018, Montini settled his lawsuit against New Prime for $16 million. On December 28, 2015, near Santa Rosa, New Mexico, a New Prime tractor-trailer rear-ended a sedan driven by Katherine and Samuel Herrera. Both were killed. In March 2018, the Herreras’ estates settled their claims against New Prime for $20 million.
The dispute is over how much RLI needed to contribute first to the Herrera settlement and then to the later Montini settlement, which were so large as to trigger the excess insurance policies. The parties agree that, starting from the first dollar, New Prime itself was required to cover $3 million of costs or losses for each occurrence because of the so-called “Self-Insured Retention” built into the RLI Policy. Excess insurance coverage attaches only after a predetermined amount of primary insurance or self-insured retention has been exhausted.
AGGREGATE CORRIDOR DEDUCTIBLE
The RLI Policy provided the next layer of coverage but came with a feature called the “Aggregate Corridor Deductible” or “ACD” added to the RLI policy by endorsement to the Policy with the ACD providing: “The Insured [i.e., New Prime] shall respond to, investigate, adjust, defend, and dispose of by payment or otherwise all losses and claims for losses covered by the Policy for which the total claim is greater than the $3,000,000 Self Insured Retention (SIR) until the Aggregate Corridor Deductible of $2,500,000 has been satisfied. Once the Aggregate Corridor Deductible has been exhausted by payment for one or more losses & ‘costs’, the Insured is only responsible for losses and ‘costs’ up to [the] Per Occurrence Self Insured Retention.” (Emphasis in original)
The endorsement also specified that the ACD amounts to “$2,500,000 excess of the $3,000,000 Self Insured Retention.” Although not a model of clarity, this endorsement obligated New Prime to pay out an additional $2.5 million above its Self-Insured Retention of $3 million per occurrence before RLI began to pay. But while the Self-Insured Retention applied to each covered incident, the $2.5 million ACD applied only once per year, so New Prime needed to pay that additional amount only once per policy year.
The dispute, however, is whether New Prime’s payments toward the Aggregate Corridor Deductible diminished the amount that RLI owed on any claims. RLI argued that the ACD sat within RLI’s $2 million layer, leaving RLI with no responsibility for making any payment on any claim until New Prime had both (a) paid $3 million per occurrence and (b) paid the year’s ACD total on losses between $3 million and $5 million per occurrence. If that is correct, then New Prime and RLI would together owe at most $5 million on any claim: the $3 million Self-Insured Retention plus the $2 million RLI Policy.
At the time of the Herrera and Montini settlements, RLI insisted on its view of the Aggregate Corridor Deductible. It paid none of the Herrera settlement and only $1.5 million of the Montini settlement. AIG reserved its rights to recoup the alleged deficit of $2.5 million from RLI. Because the settlements exhausted Lexington’s policy layer on any view of the RLI Policy, it is National Union that seeks equitable contribution through this lawsuit.
The basic problem is that the RLI Policy failed to define the custom-tailored Aggregate Corridor Deductible feature or to describe its mechanics with precision. The Seventh Circuit explained that a self-insured retention differs from a deductible in that a SIR is an amount that an insured retains and covers before insurance coverage begins to apply. Once a SIR is satisfied, the insurer is then liable for amounts exceeding the retention, less any agreed deductible. In contrast, a deductible is an amount that an insurer subtracts from a policy amount, reducing the amount of insurance.
The Seventh Circuit concluded that undisputed evidence of the negotiations between New Prime and RLI, and between New Prime and AIG, resolves the ambiguity in RLI’s favor. Illinois courts may consider extrinsic evidence upon a finding of ambiguity. Under federal procedural law, if uncontested facts clarify the meaning of a contract, an appellate court may decide the issue as a matter of law at summary judgment.
Although the district court here ruled only on textual grounds, the parties submitted extensive evidence and briefing regarding the history of the insurance contracts at issue. We may affirm summary judgment “on any ground that finds support in the record,” so long as that ground was “adequately presented in the trial court so that the non-moving party had an opportunity to submit affidavits or other evidence and contest the issue.” Box v. A & P Tea Co., 772 F.2d 1372, 1376 (7th Cir. 1985).
RLI was entitled to summary judgment because emails and underwriting files presented to the court show that New Prime, RLI, and AIG itself all intended the combined liability of New Prime and RLI to be capped at $5 million per occurrence, so that AIG’s liability would begin at $5 million per occurrence, not at $7 or $7.5 million. As a matter of Illinois law and common sense, the parties’ statements during negotiations and their conduct afterward carry more weight than legal interpretations offered in the run-up to litigation.
Illinois courts clarify ambiguous contract language based on general circumstances around contract formation but only actual conduct subsequent to formation.. All of New Prime’s concrete actions, in contrast, were consistent with RLI’s position in this lawsuit.
New Prime’s conduct supported RLI’s interpretation of the ACD. The language of the RLI Policy was ambiguous as applied to this dispute, but the extrinsic evidence compeled summary judgment in favor of RLI.
Illinois allows a court to consider extrinsic evidence when interpreting an insurance policy. Other states only allow their courts to consider the wording of the policy and the allegations of the suit – the four corners or eight corners – states. Those who refuse extrinsic evidence in the need to interpret an insurance policy should reconsider their position. Had Illinois been a four corners state the intent of RLI and the insured would have been ignored and justice would not have been done.
© 2020 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.