Excess Insurer Loses Claim of Lack of Exhaustion of Primary Insurance
Excess insurance policies are designed to function only in catastrophes and have no obligation until the primary insurance policies are exhausted. In addition the insured is required to advise the excess insurer once it determines there is a potential that the primary policies may be exhausted well before they are exhausted.
When there are multiple layers of primary insurance and multiple claims because of potential widespread, multiple state pollution events, calculating what is covered and how much has been expended by the various primary insurers, before the excess insurer is required to respond.
In Velsicol Chemical, LLC v. Westchester Fire Insurance Company, as successor in interest to International Insurance Company, No. 15-CV-2534, United States District Court Northern District Of Illinois Eastern Division (September 7, 2017) Velsicol Chemical, LLC sued Westchester seeking contractual damages and to enforce its rights to defense and indemnity under an excess insurance policy (the “Policy”) issued to it by International Insurance Company the predecessor to Westchester. The insurer sought summary judgment in its favor to not pay defense or indemnity.
Velsicol is a limited liability company and until September 30, 2008, Velsicol was known as Velsicol Chemical Corporation. International Insurance Company (“International”) now Westchester, issued the Policy to Velsicol for the period of January 1, 1983 to January 1, 1986. Pursuant to an Assumption and Indemnity Reinsurance Agreement effective January 1, 1993, the Policy was reinsured by Westchester, with Westchester assumed all of the rights and obligations of International under the Policy.
During the pertinent time period, Velsicol had two underlying primary comprehensive general liability insurance policies. Under the terms of the Policy, Westchester is not responsible for claims until the underlying primary coverage is exhausted.
On October 15, 1998, Velsicol filed a Second Amended Complaint in the Circuit Court of Cook County captioned “Fruit of the Loom, Inc. and Velsicol Chemical Corporation v. Admiral Insurance Company, et al.,” (the “Illinois State Court Action”), against International, among others. In the Illinois State Court Action, Velsicol alleged claims for declaratory judgment and/or breach of contract against, among others, International and sought defense and indemnity coverage under the Policy for numerous sites, including certain sites at issue in this suit.
Damages occurred at nine different sites.
Primary Policy Exhaustion
From 1995 through 1997, Stephanie McLaughlin was employed as an environmental claims specialist and, in that capacity, was the adjustor responsible for the handling of Velsicol’s claims on behalf of Westchester. On January 6, 1997, McLaughlin created a “Strategic Plan” for the Velsicol account. McLaughlin’s January 6, 1997 Strategic Plan indicated that she had received a report from a law firm representing London Market Claims Services advising that Velsicol had incurred $95,129,111 in total costs associated with sites for which it had made insurance claims as of December 31, 1995. McLaughlin’s January 6, 1997 Strategic Plan included a report, also from the law firm representing London Market Claims Services, stating that the costs incurred by Velsicol in connection with its claims, as well as anticipated costs associated with those claims in which the costs incurred, exceeded $70,000,000.
Westchester maintains that the underlying primary policies are not exhausted under the terms of the Policy, and that Velsicol has not met its burden of proving primary coverage exhaustion.
Under Illinois law, an insurer has a duty to indemnify when the insured becomes legally obligated to pay damages in the underlying action that gives rise to a claim under the policy. Once the insured has incurred liability as a result of the underlying claim, an insurer’s duty to indemnify arises only if the insured’s activity and the resulting loss or damage actually fall within the CGL policy’s coverage.
Westchester moves for summary judgment on each remaining count, arguing that Velsicol’s claims are not covered by the Policy. Westchester specifically argues that Velsicol’s notice of claims was untimely as a matter of law for the claims involving the various claims. Finally, Westchester argues that Velsicol has failed to show the exhaustion of all triggered primary policies.
Breach of Notice
Westchester argues that Velsicol’s notice of the claims for the seven of the sites where claims were made were untimely as a matter of law.
Under Illinois law, insurance policy notice provisions impose valid prerequisites to insurance coverage. Illinois courts examine reasonable notice differently in the context of excess insurance policies. An excess policy generally requires notice of an occurrence or suit ‘when it appears likely’ that the excess policy will be implicated. Illinois courts consider when a reasonable person would have believed it reasonably likely that the claim would implicate the excess insurance.
The notice provision at issue states: “Upon the happening of an occurrence reasonably likely to involve the company hereunder, written notice shall be given as soon as practicable to the company or any of its authorized agents.” (Emphasis added) The question, therefore, is when a reasonable person would have believed it reasonably likely that the claim would implicate the excess insurance.
Because Velsicol presented evidence creating a genuine dispute as to material facts for trial, the Court denied Defendant’s summary judgment motion based on breach of notice as to the seven sites.
While insurers have the burden of proving that an exclusion applies, insureds, in turn, have the burden to prove that an exception to an exclusion restores coverage.
Velsicol demonstrated genuine issues of material fact pertaining to the pollution exclusion with respect to its application to claims arising from permitted uses. Velsicol also demonstrated genuine issues of material fact pertaining to whether all primary policies have been exhausted.
When hundreds of millions of dollars have been paid or are anticipated for an excess insurer to avoid its obligation to step in and provide defense and indemnity after primary exhaustion it must be a very high layer and must be able to show that there was still available insurance below the excess insurer’s requirement to proceed. Westchester tried but found that the insured was able to raise a question of fact sufficient to avoid summary judgment. Trial may allow Westchester to avoid the exposure but, as these cases tend to grow exponentially, probably not.
This article and all of the blog posts on this site digests 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 and expert witness 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 49 years in the insurance business. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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