In a recent decision, the Sixth Circuit upheld a Northern District of Ohio decision rejecting the long-held rule that a policyholder’s settlement with an underlying insurer for less than full policy limits can nevertheless trigger excess coverage if and when the amount of the liability exceeds the underlying policy limits. Goodyear Tire and Rubber Co. v. Nat. Union Fire Ins. Co., --- F.3d ----, 2012 WL 4054122 (6th Cir., September 17, 2012). Prior to the Sixth Circuit’s decision, this principle frequently had been applied even though many excess policies contain provisions stating that the policy will not respond until all underlying policies have been exhausted through payment of the underlying limits. In other words, the policyholder has been permitted to “fill the gap” between the settlement amount and the full policy limits. In Goodyear, however, the Sixth Circuit predicted that under Ohio law, based on specific language in Goodyear’s Directors’ and Officers’ policy with Federal, Goodyear’s excess coverage with Federal was not triggered because Goodyear did not exhaust its underlying $15 million policy with National Union.
The Goodyear Decision -
In Goodyear, Goodyear Tire and Rubber Company (“Goodyear”) incurred approximately $30 million of legal and accounting fees and costs related to an SEC investigation and shareholder class-action lawsuits stemming from a restatement of its earnings for prior years. Goodyear sought recovery of these costs from its primary insurer, National Union Fire Insurance Company (“National Union”), and its excess insurer, Federal Insurance Company (“Federal”). Goodyear’s policy with National Union had an aggregate liability limit of $15 million, with a $5 million retention to be paid by Goodyear. Federal’s policy had an aggregate liability limit of $10 million in excess of the National Union policy and retention.
Goodyear filed suit against both National Union and Federal. Goodyear ultimately settled its claim against National Union for a $10 million payment, and Goodyear continued its suit against Federal. Goodyear’s policy with Federal, however, specifically provided that it would attach only after National Union paid its full liability limit, or $15 million. The Northern District of Ohio rejected the so-called “Zeig principle” (named from the 1929 Second Circuit case that first articulated the principle) based on express language in Goodyear’s Directors’ and Officers’ policy that provided that the excess policy “shall attach only after the [underlying] insurers … shall have paid in legal currency the full amount of the Underlying Limit.” Goodyear Tire and Rubber Co. v. Nat. Union Fire Ins. Co., No. 5:08cv1789, 2011 WL 5024823, at *1 (N.D. Ohio September 19, 2011). The Northern District of Ohio recognized the public policy interests in promoting settlements, but refused “to find Federal’s contract provision unenforceable.”
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