Excess Carrier’s Unrestricted Payment to Primary Carrier Creates Doubt as to Whether Primary Policy Was Exhausted

The United States Court of Appeals for the Tenth Circuit, applying Texas law, has held that an excess carrier for one policy period could not seek contribution from the excess carrier for a second policy period because the first period’s excess carrier could not prove that the second period’s primary layer was exhausted.  Scottsdale Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 12-1513 (10th Cir. Sept. 2, 2014).

The insurers’ policyholder—a general contractor—was sued in 2003 for construction flaws which became apparent in 2002.  The policyholder had CGL coverage through a single primary carrier that issued successive annual primary policies, each with a $2 million aggregate limit of liability, but with different excess carriers for the 2002-03 and 2003-04 policy periods.

The underlying claim settled, with the primary carrier contributing the limit of both of its policies and the 2002-03 excess carrier contributing $4.35 million.  The excess carrier for the 2003-04 policy period declined to contribute to the settlement.  Consequently, the 2002-03 excess carrier paid $500,000 to the primary carrier pursuant to a separate agreement to “reallocate[e] their shares of the Settlement Amount” and filed a contribution and subrogation action against the 2003-04 excess carrier.  The agreement between the 2002-03 excess insurer and the primary carrier did not specify whether or how the $500,000 payment would be allocated among the 2002-03 and 2003-04 primary policies.

The district court granted summary judgment for the defendant insurer on the grounds that the 2002-03 excess carrier failed to meet its burden of proving that the primary policy underlying the 2003-04 excess policy was exhausted.  The Tenth Circuit affirmed the district court’s opinion.  According to the court, since the agreement between the 2002-03 excess carrier and the primary carrier did not specify how the $500,000 payment to the primary carrier would be credited, the primary carrier might have used some or all of the payment to replenish the limit of the second period’s primary policy.  Accordingly, the 2002-03 excess carrier could not meet its burden of proving that the 2003-04 primary policy was exhausted.