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New York Court Rejects “Gap-Filling” Under Language of Excess Policies

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The Appellate Division with jurisdiction over Manhattan and the Bronx applied the language of an excess policy to find that the underlying layers could only be exhausted by “actual payment” of their limits by the underlying insurers. Forest Laboratories, Inc. v. Arch Ins. Co. et al., 984 N.Y.S.2d 361 (N.Y. 2014). The decision was a summary affirmance of the fully reasoned and more detailed trial court decision. Forest Laboratories, Inc. v. Arch Ins. Co. et al., 38 Misc.3d 260. 

The dispute involved an $80 million tower of directors and officers liability insurance. The top layer was written by RSUI Indemnity Company (RSUI). The plaintiff settled with the insurers on the two layers below RSUI, and then sought to invoke the RSUI Policy.

The RSUI policy was a “follow form” policy, and the Courts could have been faced with the interesting issue of whether the follow form language applied to the issue of policy limit exhaustion. They did not need to reach that issue, however, instead basing the ruling on the language of the RSUI policy itself. 

The RSUI policy provided that “[i]t is agreed that the Insurer shall not pay any amount until all retentions and Underlying Limits of Liability have actually been paid” and that RSUI will pay upon the exhaustion of underlying policies “solely as a result of the actual payment of a Covered Claim pursuant to the terms of the Underlying Insurance thereunder …” Rejecting the argument that this provision is ambiguous about who was required to actually pay, the Court found that RSUI was required to pay only after the underlying insurers themselves paid their policy limits.