When a company is faced with defending itself against a large claim, it often requires the availability of insurance proceeds from not just the company’s primary insurer, but also from its excess insurance layers. In this scenario, however, excess insurers sometimes will refuse to step in after exhaustion of the underlying insurance layers, arguing that the exhaustion of those underlying layers was wrongful due to payments for uncovered claims. The excess insurer’s argument that its policy has not been triggered threatens to leave the insured exposed for such amounts.
The Ninth Circuit Court of Appeal addressed this issue on September 14, 2020, in AXIS Reinsurance Co. v. Northrop Grumman Corporation, No. 19-55135, 2020 WL 5509743 (9th Cir. Sept. 14, 2020), and severely limited an excess insurer’s ability to second-guess underlying insurers’ payment decisions. The Court reversed the lower court’s decision, which had held that AXIS had overpaid Northrop’s settlement of a class action lawsuit, and thereby was entitled to reimbursement from Northrop, because Northrop’s underlying insurers “improperly exhausted” their policies.
The Ninth Circuit panel rejected AXIS’s argument, which it referred to as the “improper erosion” theory of recovery, that when an insured purchases multiple layers of insurance, the insured bears the risk that an excess insurer may disagree with the underlying insurer’s payment decisions and withhold payment of otherwise valid claims due to allegedly improper payments for uncovered loss. The panel noted that AXIS’s argument, if accepted, “‘would undermine the confidence of both insureds and insurers in the dependability of settlements,’ eliminating one of...
