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Condition Precedent Still Matters in Excess Insurance Suit

By Robyn Hagan Cain on September 18, 2012 | Last updated on March 21, 2019

Let's say you get a call from a client, a company that makes approximately a bazillion dollars annually. The company wants to sue its excess insurer for not ponying up the liability limits of an excess policy.

This is the time to remind your client of any relative condition precedent: "Your contract states that coverage won't kick in until X happens. X has not happened. They don't have to pay you a dime."

Your Bazillion Dollar Client may not want to hear it, but it's better that the bad news comes from you instead of the Sixth Circuit Court of Appeals.

In 2003, Goodyear Tire and Rubber Company announced that it would restate its earnings for some prior years. The day after the announcement, shareholders filed class-action lawsuits against Goodyear and several of its officers and directors under the securities laws. The SEC also started an investigation. Eventually, the lawsuits were dismissed and the investigation terminated, but not before Goodyear incurred $30 million of legal and accounting bills.

Goodyear tried to recover those costs from two of its insurers: National Union Fire Insurance Company and Federal Insurance Company. National Union’s policy with Goodyear 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.

Both insurers disputed whether Goodyear’s costs — particularly those relating to the SEC investigation — were reimbursable under their respective policies’ terms.

Goodyear eventually sued the two insurers. After several years of litigation, Goodyear settled with National Union for $10 million. That settlement created a new problem for Goodyear’s claim against Federal: Goodyear’s excess insurance policy with Federal stated that coverage attached only after National Union paid out the full amount of its $15 million liability limit, so the National Union settlement didn’t trigger the excess policy.

Under Ohio law, which controlled in this case, courts will not “rewrite the contract … if the language of the policy’s provisions is clear and unambiguous.” This was one of those “clear and unambiguous” cases.

The relevant provision of Federal’s policy provides: “Coverage hereunder shall attach only after [National Union] shall have paid in legal currency the full amount of the Underlying Limit [i.e., National Union’s policy limit of $15 million] for such Policy Period.”

While Goodyear admitted that the provision couldn’t be more clear, it argued that the Sixth Circuit should enforce Ohio’s “public policy favoring settlement, rather than the undisputed meaning of the parties’ agreement.”

The pro-settlement guilt trip didn’t work on the appellate court. The court responded that this was “an insurance agreement into which sophisticated parties freely entered,” and it should be enforced according to its terms.

Thomson Reuters News & Insight notes that decisions like this one can serve as a disincentive to settlement, despite a general judicial preference for settlement. What do you think?

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