Recent Developments in Excess Policy Language Requiring Exhaustion of Primary Limits

Many claims and lawsuits implicate two or more levels of insurance coverage by way of excess policies layered on top of a primary policy or a self-insured retention. An excess insurance policy generally requires that a primary and all underlying insurance policies be exhausted before it provides coverage.[2] This is because “[t]he critical and distinctive feature of an excess insurance policy is that it provides coverage ‘only after the primary coverage is exhausted.’”[3] From an excess carrier’s point of view, “exhaustion” means “the actual payment of losses, through satisfaction of judgments or settlement of claims, but policyholders frequently argue . . . that the exhaustion requirement is ambiguous.”[4] Some courts have held that exhaustion can occur not only through actual payment by underlying carriers but also through functional exhaustion, where an insured settles with primary or underlying carriers for less than limits and the insured pays the gap, or through partial settlement, where the claimant provides a credit to the insured for the gap.[5] Settlements of primary or underlying insurance policies for less than limits pose problems for excess insurers, who rely on such policies to act as a buffer to coverage.[6]         
               
This article provides an overview of cases that have analyzed whether underlying limits were exhausted and some guideposts on interpreting policy language based on what courts have said in the past six years. A string of recent cases provides a better understanding of whether an excess policy means what it says or simply says what an excess carrier means it to say regarding whether exhaustion has occurred such that excess coverage is triggered. In sum, if a policy contains the magic words, actual payment of money by the primary or underlying carriers will be enforced as a condition precedent to triggering excess coverage. The trick is to determine whether the policy contains the magic words.