Excess insurers facing claims should heavily scrutinize their policies for conditions that may be unsatisfactory —even if seemingly immaterial— because they can provide a complete defense to coverage. In a recent case, an excess insurer avoided a potential $10 million liability due to a policy condition that required carriers lower in the tower to “admit liability” for the excess insurer’s coverage to be implicated. 

In Pharmacia v. Arch, No. 22-2586, 2024 WL 208146 (3d Cir. Jan. 19, 2024), a pharmaceutical drug manufacturer purchased a $200 million directors and officers insurance tower from thirteen companies. One policy provided $25 million in primary coverage and the remaining twelve policies provided excess coverage. The policy at issue was the eighth layer and provided $10 million in coverage but specified “liability for any loss shall attach to [this excess insurer] only after the Primary and Underlying Excess Insurers shall have duly admitted liability and . . . paid the full amount of their respective liability.” (emphasis supplied). The insured was sued and it suffered losses that implicated the entire tower. The insured then tendered its coverage claim to the excess insurer with proof that all the other carriers had exhausted their limits. However, the excess insurer denied coverage based on the requirement that the other carriers also “admit liability.” The insured sued. 

At the District Court level, the excess insurer won summary judgment because six insurers in the tower disclaimed liability even though they tendered their policy limits. The insured appealed, but the Third Circuit affirmed the District Court’s decision because the policy “unambiguously impose[d] two distinct conditions precedent for coverage to attach,” and one was not met. Neither court had any reservations in enforcing a condition that was arguably immaterial, especially where the other insurers had all effectively acknowledged liability by tendering their policy limits. This case is a prime example of the power that diligent insurers wield when enforcing policy conditions. 

In Pharmacia, an elementary policy condition shielded an excess insurer from an otherwise coverable loss. Retaining experienced counsel to assist in reviewing policies can help an insurer craft strong coverage defenses that limit risks and save costs.