In Axis Reinsurance Co. v. Northrop Grumman Corporation, 2020 DJDAR 10114 (9th Cir. Sept. 14, 2020), a case of first impression under California law, the Ninth Circuit held that an excess insurer may not dispute exhaustion of underlying insurance or otherwise challenge on coverage grounds an underlying insurer’s decision to settle absent a showing of fraud or bad faith on the part of the insured or the underlying insurer.
The decision is significant because excess insurers sometimes dispute exhaustion in order to avoid providing coverage or in an attempt to negotiate the provision of less than full excess coverage. An excess insurer may do so on the theory that the underlying insurer overpaid on the underlying claim or paid for an uncovered claim. This decision squarely rejects such a theory and holds that when an entity purchases multiple layers of insurance, the excess insurers bear the risk that the primary and underlying insurers might adjust claims in a manner that would trigger secondary excess coverage.