When multiple
insurers are potentially available to respond to a loss, states with “horizontal exhaustion” (including Florida) require all primary insurance policies to be exhausted before coverage is triggered under excess policies. In a minority of
jurisdictions, however, “vertical exhaustion” allows insureds to seek coverage from an excess insurer as soon as the primary policy directly related to the excess policy is exhausted, even if other primary policies exist. Understanding the consequences of these two approaches is important for the practitioner who crosses jurisdictional lines.
ABOUT
THE AUTHOR...
T
HE
E
XHAUSTING
T
ASK
OF
U
NDERSTANDING
H
ORIZONTAL
AND
V
ERTICAL
E
XHAUSTION
By Robert C. Weill
ROBERT C. WEILL, former manager of the appellate division of McIntosh, Sawran, Peltz & Cartaya in Fort Lauderdale, Florida, is now with the Appellate Group of the Florida office of Sedgwick, Detert, Moran & Arnold LLP. He specializes in civil appeals at all levels and civil litigation support. Mr. Weill received his B.A. degree from Cornell University and his J.D. degree from Nova Southeastern University. He was admitted to the Florida Bar in 1994 and served as a staff attorney to Florida Supreme Court Justice Harry Lee Anstead from 1994 to 1996. Mr. Weill is licensed to practice before the Flor-ida state courts; the United States Supreme Court; the United States Court of Appeals, Eleventh Circuit; and the United States District Court for the Northern, Southern, and Middle Districts of Florida. He is a member of the Florida Defense Lawyers Associa-tion, where he serves on the Editorial Board of the Trial Advocate Quarterly, the Defense Research Institute and the Broward County Bar Association. Mr. Weill has authored numerous articles for the Trial Advocate Quarterly.
Introduction
When there are multiple primary1
and excess policies2 covering a loss
or the same risk, questions of when the primary policies should pay, as opposed to the excess policies, may arise. In this situation, courts must decide whether an excess insurer must “drop down” to respond to the loss be-fore all available primary coverage has been exhausted (vertical exhaustion), or whether all primary policies must exhaust before any excess policies are triggered (horizontal
exhaustion).
This issue often arises in a “continu-ing loss” situation, which occurs when a loss or injury takes place over a period of time and cannot be linked or con-fined to one policy period, but instead implicates multiple policies or policy periods.3 In this situation, several primary policies or lower-level excess
policies are triggered and a court must determine whether the limits of the underlying policies for one year (verti-cal exhaustion) or all years (horizontal exhaustion) must be exhausted before a particular excess policy must pay.An excess carrier’s ultimate exposure for
contributing is completely dependent on the court’s determination regarding whether a horizontal or vertical al-location formula will be applied at the primary level.4
A simple illustration will further illuminate the differences between horizontal and vertical exhaustion.5
Let’s say Developer A purchased a $1 million primary policy from Insurer A, Developer B purchased a $1 mil-lion primary policy from Insurer B, and a third $1 million primary policy was issued by Insurer A to both Developers
A and B. Developer B also purchased a $5 million excess policy from Insurer C that was specifically excess to Insurer B. Developers A and B built a number of residential develop-ments in the 1980s and 1990s. Unfortu-nately, their devel-opments were built on unsuitable soils, resulting in continu-ing damage to many properties over a number of years. Not surprisingly, affected homeowners and homeowners associations sued Devel-opers A and B.
Insurer B settled many of the lawsuits, contributing its $1 million policy limits to the settlement. The re-maining suits were also subsequently
An excess carrier’s ultimate
exposure for responding
to a loss is completely
dependent on whether the
trial court decides to apply
a “horizontal” or “vertical”
formula for allocating
responsibility.
settled with Insurer A serving as the primary insurer and defend-ing Developers A and B until those cases were settled. The insureds and insurers, however, disputed how to share the settlement and defense costs. Insurer A argued for vertical exhaustion—that Insurer C (the excess carrier) had a duty to provide primary coverage in Insurer B’s place as soon as Insurer B paid its policy limits as part of the earlier settlement even though two other primary policies still had not paid. Insurer C argued for horizontal exhaustion—that it was not enough that the Insurer B policy was ex-hausted; instead, Insurer C argued it had no duty until all of Insurer A’s policies were exhausted.
This article generally explores horizontal and vertical exhaustion, which approach Florida adopts, and the nuances of determining when “exhaustion” has occurred, triggering an insurer’s indemnity obligation under either approach.
Horizontal Exhaustion
“Horizontal exhaustion” means that each primary policy triggered by a loss must indemnify the in-sured to the full extent of its policy limits before any excess insurer can be required to pay.6
Horizon-tal exhaustion is the theory most favored by excess insurers, since it may fully release the excess car-rier from indemnifying an insured or it may increase the insulation from loss that underlying insurance provides.7 Courts have found this
theory most appropriate because excess coverage carries a smaller premium than primary coverage due to the lesser risk insured.8
For those states that have ad-opted an exhaustion approach, the majority favors horizontal exhaus-tion, including California,9 Illinois,10
Maryland11 and Oregon.12 Some
states, like Indiana, have shunned the task of determining which theory conforms to its state’s laws and, instead, ground their adop-tion of horizontal exhausadop-tion on the clear insurance policy language.13
Horizontal exhaustion appears
to be the dominant exhaustion the-ory courts apply in continuous loss (a.k.a. “long-tail”) claims. Courts will often ground their adoption of the horizontal exhaustion theory based on the “other insurance” language usually found in excess policies.14 When an excess policy
or policies fail to define their obliga-tions, horizontal exhaustion is also preferred.15
The decision in United States Gypsum v. Admiral Insurance Co.16
illustrates one court’s application of this approach. In that case, U.S. Gypsum manufactured asbestos-containing building materials.17 The
underlying plaintiffs sued for dam-ages caused to their buildings and other properties caused by these materials.18 U.S. Gypsum sued
its insurers for coverage from the 1930s through 1984.19 The court
determined that a continuous trig-ger applied because the property damage occurred over a period of time and could not be linked or confined to one policy period.20
The court also determined that there was only one occurrence for the purpose of the per occurrence deductible.21
Finally, the court addressed whether U.S. Gypsum had to exhaust all primary coverage prior to reaching any excess policy. The plain language of the excess poli-cies stated:
[I]f other valid and col-lectible insurance with any other insurer is available to the insured covering a loss also covered by this Policy, other than insurance that is in excess of insurance afforded by this Policy, the insurance afforded by this Policy shall be in excess of and shall not contribute with such other insurance.22
This language was construed to mean that the excess policies were “excess to all triggered primary policies, regardless of whether they
extend over multiple policy periods or only one.”23
Vertical Exhaustion24
Vertical exhaustion “allows an insured to seek coverage from an excess insurer as long as the insur-ance policies immediately beneath that excess policy, as identified in the excess policy’s declaration page, have been exhausted, re-gardless of whether other primary insurance may apply.”25 Vertical
exhaustion is usually favored by at least one of the primary insurers— when there are multiple towers of insurance coverage—and by the insured. In a continuous loss situ-ation, vertical exhaustion benefits the insured because it allows the insured to select the policy periods in which it has the most available coverage to respond to a loss, thereby maximizing indemnity.26 It
also benefits the insured because it preserves coverage under suc-cessive primary policies, thereby ensuring the insured of a continued defense.27
For those states that have adopted an exhaustion approach, a minority recognizes vertical
exhaustion, including New Jersey,28
Wisconsin,29 and Washington.30
Some courts have applied vertical exhaustion when the limits of a specifically scheduled primary policy are exhausted and the ex-cess policy provides that it shall be excess only to that specific under-lying policy.31
Other courts do not rely on the plain language of the policy—unlike horizontal exhaustion— but, in-stead, rely on public policy consid-erations.32 In adopting vertical
ex-haustion, one court explained that it “is entirely consistent with our belief that ‘any allocation should be in proportion to the degree of the risks transferred or retained during the years of exposure.’”33 The court
in Owens-Illinois expanded on this reasoning by explaining:
[T]he rules that we adopt will attempt to relate the theory of
a continuous trigger causing indivisible inju-ry to the degree of risk transferred or retained in each of the years of repeated exposure to injurious conditions. In the absence of a satisfactory measure of allocation . . . we believe that straight annual progression is not an appropriate measure of allocation. The degree of risk transferred or retained in the early years of an enterprise like O-I’s obviously was not at all comparable to that sought to be insured in later years. Hence, any allocation should be in proportion to the degree of risks trans-ferred or retained dur-ing the years of expo-sure. We believe that measure of allocation is more consistent with the economic reali-ties of risk retention or risk transfer. That later insurers might need to respond to pre-policy occurrences is not fair.34
One court adopted vertical exhaustion, in part, because the adoption of horizontal exhaustion “would create as many layers of additional litigation as there are lay-ers of policies.”35
For example, in 1978, 1979 and 1980, the first policy limit was $5 million. However, in 1981, the first-level policy limit was $51 million, while in 1982 the first-level policy was $100 million, but that policy contained a pollution exclusion. The limits for the first level in 1983 and 1984 were each $25 million,
but again one policy contained a pollution exclusion. Finally, the first-level 1985 policy had a limit of $10 mil-lion. This created a total first-level limit of between $90 million and $215 million, de-pending on the validity of the pollution exclu-sions. The amount of first-level excess cover-age that would have to be exhausted under horizontal exclusion before the second level becomes available would require sepa-rate, complex litigation because of the variety of different first-level policy limits across the years.36
One court has criticized the vertical exhaustion approach by noting that adopting vertical ex-haustion would allow the insured
to effectively manipu-late the source of its recovery, avoiding difficulties encoun-tered as the result of its purchase of front-ing insurance and the liquidation of some of its insurers . . . [and] pursue coverage from certain excess insur-ers at the exclusion of others. Such a practice would blur the distinc-tion between primary and excess insurance, and would allow certain primary insurers to es-cape unscathed when they would otherwise bear the initial burden of providing indemnifi-cation. Likewise, cer-tain co-excess insurers could avoid contributing to the indemnification of the insured when they would otherwise be responsible for any
amount up to the limit of the policy it issued.37
Florida
Florida courts appear to have adopted horizontal exhaustion.38
In United Educators, the Eleventh Circuit recognized in no uncertain terms that “true excess policies only activate after the exhaustion of primary policies.”39 The
cover-age dispute arose from a student’s murder on a college campus and the resulting lawsuit brought by the student’s estate against the college and the campus security compa-ny.40 The college was an additional
insured under the primary policy issued by Everest Indemnity to the security company with limits of $1 million.41 Everest also issued an
excess policy to the security com-pany with limits of $4 million.42 The
college also had a primary policy with Everest with $1 million limits and an excess policy with United Educators with $5 million limits.43
The carriers settled the law-suit for $2,750,000.00 with their contributions as follows: security company primary carrier = $1 mil-lion; college primary carrier = $1 million; security company excess carrier = $375,000; college excess carrier = $375,000.44 Educators,
the college’s excess carrier, sued to recover its $375,000 settlement contribution.45
On appeal, the Eleventh Circuit found that the excess policy “was activated only after the primary policy available to it was exhausted.”46 However, the court’s
analysis did not hinge on exhaus-tion principles but, in part, on an analysis of the policies’ “other in-surance” provisions.47 Specifically,
the court reached its conclusion based on the following facts: (1) the college was an additional in-sured under the security company’s primary policy; (2) the college’s primary policy did not contribute to the security company; and (3) the “other insurance” provisions of the primary policies, from which the college’s primary policy became excess over the security
com-pany’s primary policy.48 Based on
the foregoing, the Eleventh Circuit affirmed the district court’s finding that the settlement never triggered the college’s excess policy, thereby entitling Educators to reimburse-ment of its $375,000.49
In Twin City, a wall unit manu-factured by Trendlines in a J.C. Penney outlet store collapsed, kill-ing a young child.50 Liberty Mutual
provided primary coverage to J.C. Penney in the amount of $2 million subject to a $1 million deductible.51
Twin City afforded J.C. Penney excess/umbrella coverage in the amount of $15 million.52Trendlines
was insured by Fireman’s Fund for $1 million primary coverage and $10 million in excess coverage.53
The underlying case settled for $4,175,000.00 with J.C. Penney contributing its $1 million deduct-ible; Liberty Mutual paying its full $1 million; Twin City paying $2 million of its $15 million total cover-age; and Fireman’s Fund contribut-ing $175,000.00.54
Twin City sued Fireman’s Fund to recover its settlement monies claiming that J.C. Penney was an additional insured under the Fire-man’s Fund policy.55 J.C. Penney
also sought to recoup the $1 million deductible it paid toward the settle-ment before any monies were paid to its excess carrier, Twin City.56
The court held that J.C Penney was not entitled to any recovery, citing the “well-established prin-ciple” that an excess carrier does not pay until the primary coverage,
including the deductible, is ex-hausted.57
When Does “Exhaustion” Occur?
Typically, exhaustion occurs when an insurer pays its entire policy limits to satisfy a judgment or to fund a settlement. However, whether exhaustion is deemed to have occurred in other situa-tions can become contentious. For example, does a primary insurer’s insolvency constitute exhaustion of that policy? What about when a pri-mary insurer settles for less than its
policy limits? Finally, how do courts treat self-insurance, self-insured retentions or deductibles?
In some jurisdictions, whether a primary insurer’s insolvency requires an excess carrier to drop down depends on the language of the excess policy.58 Other
jurisdic-tions have held that the excess carrier has no obligation to “drop down” in the event of the primary carrier’s insolvency.59 It is
appar-ently the majority rule that absent obligatory policy language, an excess insurer is not required to drop down and cover that portion of a loss once within an insolvent pri-mary insurer’s coverage, nor must it drop down to provide the defense that an insolvent primary insurer was obligated to fund.60
On the other hand, a recent opinion from the Wisconsin Su-preme Court suggests that exhaus-tion may occur or “drop down” exposures may exist in cases where the underlying insurance is solvent, but coverage is deemed “unavailable” due to the primary or umbrella carrier’s refusal to accept coverage.61
A primary insurer’s settlement for less than its policy limits also raises an exhaustion issue. Courts generally rule that the insured may recover on the excess policy to the extent the loss exceeds the limits of the primary policy, regardless of the amount of the settlement.62
In some jurisdictions, hori-zontal exhaustion includes any self-insurance.63 In Florida, two
federal decisions have held that a deductible or self-insured retention constitutes “insurance” that must be exhausted.64
Nevertheless, a Florida state district court decision decided in a slightly different context may lead to another conclusion. In State Farm Mutual Automobile Insur-ance Co. v. Universal Atlas Cement Co.,65 the court did not believe a
self-insured retention constituted “other insurance” that would have made State Farm an excess carrier under its policy language, which provided that State Farm’s liability becomes that of an excess carrier,
if “other collectible insurance” is available.”66
In that case, a leased vehicle was involved in an accident with a motorcycle.67 The driver of the
vehicle was insured by State Farm with a $15,000 policy limit.68 The
State Farm policy provided that in the event there was other col-lectible insurance available for the same claim, State Farm would be excess over any such other insur-ance.69 The lessee of the vehicle
was insured under a policy that provided for a $1 million deductible, which the court construed to be a self-insured retention.70 State Farm
contended that the self-insured retention constituted “other collect-ible insurance” within the meaning of its policy and that, accordingly, State Farm would be excess to the lessee’s coverage.71 Citing to
a 1969 Fourth District Court of Ap-peal case,72 the court found that the
term “other collectible insurance” means a contract whereby one party indemnifies another against loss for certain specified perils.73 It
said “self-insurance,” even though it might be administered by a third party, does not fall within the defini-tion of “insurance” and was there-fore not “other collectible insur-ance.”74
Conclusion
It is difficult to predict with any certainty how a particular court will determine the priority among multiple primary and excess poli-cies covering the same risk. While some courts hinge their analysis on the policy language, others take into account policy considerations and what is fair or equitable from either the insured or the carriers’ perspectives. Nevertheless, the best starting point to analyzing such issues is how your jurisdiction has treated similar issues under analogous facts in the past. While such decisions will provide a good guide as to how your court may resolve your issue, be mindful of other approaches and why your court may be tempted to deviate from precedent.
1 A primary policy provides the first layer of
insurance coverage. Primary coverage attaches immediately upon the happen-ing of an “occurrence,” or as soon as a claim is made. The primary insurer is first responsible for defending and indemnify-ing the insured in the event of a covered or potentially covered occurrence or claim. Because most losses are within primary policy limits and therefore create greater exposure for primary insurers, and because primary insurers are generally obligated to defend their insureds, primary insurers charge larger premiums for cover-age than do excess and umbrella carriers.
See Douglas R. Richmond, Rights & Re-sponsibilities of Excess Insurers, 78 Denv. U. L. Rev. 29, 29 (2000).
2 An excess policy provides specific
cover-age above an underlying limit of primary insurance. Excess insurance is priced on the assumption that primary coverage exists; indeed, an excess policy usually requires by its terms that the insured main-tain in force scheduled limits of primary insurance. Excess coverage is generally not triggered until the underlying primary limits are exhausted by way of judgments or settlements. Id. at 30.
3 Appleman on Insurance 2d, Allocation
Among Insurers § 145.4 (2010). These issues often arise with asbestosis claims, silicosis claims, environmental or pollution claims, and cases involving construction and product defects and earth movement.
4 Id.
5 This illustration is loosely adapted from the
decision in Community Redev. Agency v. Aetna Cas. & Sur. Co., 50 Cal. App. 4th 329, 339 (1996).
6 See Richmond, supra note 1, at 79; see
also Kajima Constr. Servs., Inc. v. St. Paul Fire & Marine Ins. Co., 856 N.E.2d 452, 456 (Ill. App. Ct. 2006) (stating that horizontal exhaustion “requires the insured to exhaust all primary policy limits before invoking excess coverage”).
7 See Richmond, supra note 1, at 80. 8 Missouri Pacific R.R. v. Int’l Ins. Co., 679
N.E.2d 801, 809 (Ill. App. Ct. 1997).
9 See, e.g., Padilla Constr. Co. v. Transp.
Ins. Co., 150 Cal. App. 4th 984 (2007);
Community Redev., 50 Cal. App. 4th at 339 (“It is settled under California law that an excess or secondary policy does not cover a loss, nor does any duty to defend the insured arise, until all of the primary insurance has been exhausted.”) (citations omitted); Stonewall Ins. Co. v. City of Pa-los Verdes Estates, 46 Cal. App. 4th 1810, 1850-53 (1996) (“In substance, we adopt the ‘horizontal allocation of the risk’ ap-proach to liability as between primary and excess carriers, rather than the ‘vertical’ approach . . .. That is, if primary policies in force during that period of time cover these occurrences, and all of them are primary to each of the excess policies; and if the limits of liability of each of these pri-mary policies is adequate in the aggregate to cover the liability of the insured, there is no ‘excess’ loss of the excess policies to cover.”); but see Legacy Vulcan Corp. v. Superior Court, 185 Cal. App. 4th 677 (2010) (finding that the “horizontal exhaus-tion” doctrine did not relieve an umbrella carrier of its duty to defend once the poli-cies of insurance directly underlying the umbrella policy had become exhausted).
10 See, e.g.,Kajima Constr., 856 N.E.2d at
456; Missouri Pacific, 679 N.E.2d at 809 (“Under Illinois law, all underlying cover-age must be exhausted before excess coverage may be reached”) (citations omitted); United States Gypsum Co. v. Admiral Ins. Co., 643 N.E.2d 1226, 1261 (Ill. App. Ct. 1994).
11 See Mayor & City Council of Baltimore v.
Utica Mut. Ins. Co., 802 A.3d 1070, 1102 (Md. Ct. Spec. App. 2002) (applying the concept of “horizontal exhaustion . . . because it conforms with the realities of long term property damage . . . and the application of the injury in fact/continuous trigger of coverage”).
12 See Cal. Ins. Co. v. Stimson Lumber Co.,
No. Civ. 01-514-HA, 2005 WL 627624 at *4 (D. Or. Mar. 17, 2005); but see North-west Pipe Co. v. RLI Ins. Co., No. 09-CV-1126-PK, 2010 WL 3220298 (D. Or. Aug. 12, 2010) (rejecting horizontal exhaustion to find that an umbrella carrier’s duty to defend was triggered even though all other underlying insurance had not been exhausted).
13 Trinity Homes LLC v. Ohio Cas. Ins. Co.,
No. 1:04-cv-1920-SEB-DML, 2009 WL 3163108 at *11 (S.D. Ind. Sept. 25, 2009).
14 See, e.g., U.S. Gypsum, 643 N.E.2d 1226. 15 See Richmond, supra note 1, at 80. 16 643 N.E.2d 1261 (Ill. App. Ct. 1994). 17 Id. at 1229. 18 Id. 19 Id. 20 Id. at 1255-57. 21 Id. at 1259. 22 Id. at 1261. 23 Id.
24 See Richmond, supra note 1, at 79.
Vertical exhaustion in the continuous exposure context is conceptualized slightly differently. It is known by “exhaustion by years” or as “spiking” due to its precipitous approach. In this context, vertical exhaus-tion means “the first-in-time primary and excess policies will be exhausted before the next-in-time primary and excess poli-cies will be tapped.” See Mary K. Gogoel & Mitchell A. Orpett, Allocation & Excess Insurance, in Understanding Allocation 135, 138-39 (DRI 1999). Oncea primary policy is exhausted, the remaining obliga-tion shifts upward to the policy at the next level of coverage that was on the risk for the same period. Specifically, vertical exhaustion provides that each excess policy in a triggered year is required to indemnify as soon as its particular underly-ing coverage is exhausted, even if other triggered primary policies (covering other periods) remain “untapped.” Appleman on Insurance 2d, Allocation Among Insurers § 145.4 (2010).
25 Kajima, 856 N.E.2d at 457.
26 Appleman on Insurance 2d, Allocation
Among Insurers § 145.4 (2010).
27 See Richmond, supra note 1, at 79. 28 See, e.g., Benjamin Moore & Co. v. Aetna
Cas. & Sur. Co., 843 A.2d 1094 (N.J. 2004).
29 See Cook v. Cook, 560 N.W.2d 246 (Wisc.
1997); Westport Ins. Corp. v. Appleton Papers Inc., 787 N.W.2d 894 (Wisc. Ct. App. 2010).
30 See Cadet Mfg. Co. v. Am. Ins. Co., 391 F.
Supp. 2d 884, 892 (W.D. Wash. 2005).
31 See Community Redev. Agency v. Aetna
Cas. & Sur. Co., 50 Cal. App. 4th 329, 339
(1996).
32 New Jersey appears to have adopted this
approach. See, e.g., Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., 843 A.2d 1094 (N.J. 2004); Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d 1116 (N.J. 1998); Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (N.J. 1994); see also Chem. Leaman Tank Lines, Inc. v. The Aetna Cas. & Sur. Co., 978 F. Supp. 589 (D.N.J. 1997).
33 Carter-Wallace, 712 A.2d at 1124. 34 Owens-Illinois, 650 A.2d at 993. 35 Westport Ins. Corp. v. Appleton Papers
Inc., 787 N.W.2d 894, 918-19 (Wisc. Ct. App. 2010).
36 Id.
37 U.S. Gypsum, 643 N.E.2d at 1262. 38 See, e.g., United Educators Ins. v.
Ever-est Indem. Ins. Co., 372 Fed. Appx. 928 (11th Cir. 2010); Grife v. Allstate Floridian Ins. Co., 493 F. Supp. 2d 1249 (S.D. Fla. 2007); Twin City Fire Ins. Co. v. Fireman’s Fund Ins. Co., 386 F. Supp. 2d 1272 (S.D. Fla. 2005).
39 372 Fed. Appx. at 931 (citing Chicago Ins.
Co. v. Dominguez, 420 So. 2d 882, 884 (Fla. 2d DCA 1982)). 40 Id. at 929. 41 Id. 42 Id. 43 Id. 44 Id. 45 Id. at 929-30. 46 Id. at 931. 47 Id. at 930-31. 48 Id. at 931. 49 Id. 50 386 F. Supp. 2d at 1274. 51 Id. at 1275. 52 Id. 53 Id. 54 Id. 55 Id. at 1274. 56 Id. 57 Id. at 1280 n.5
58 See, e.g.,Wells Fargo Bank, N.A. v. Cal.
Ins. Guar. Ass’n, 38 Cal. App. 4th 936, 943-46 (1995); Coca-Cola Bottling Co. of San Diego v. Columbia Cas. Ins. Co., 11 Cal. App. 4th 1176, 1182 (1992); Span, Inc. v. Associated Int’l Ins. Co., 227 Cal. App. 3d 463, 476-77 (1991); Reserve Ins. Co. v. Pisciotta, 30 Cal. 3d 800, 814-15 (1982).
59 See, e.g., Alabama Ins. Guar. Ass’n v.
Kinder-Care, Inc., 551 So. 2d 286, 289 (Ala. 1989) (finding that excess policy that applied “by reason of losses paid there-under” “cannot be reasonably interpreted to mean that the [excess carrier] was contracting to insure the solvency of the underlying carrier”); New Process Baking Co. v. Fed. Ins. Co., 923 F.2d 62, 63 (7th Cir. 1991) (“‘Exhaustion’ does not occur until the underlying insurance limits have been met through payment.”) (citation omitted); cf. State Farm Mut. Ins. Co. v. Vines, 193 So. 2d 180, 182 (Fla. 1st DCA 1966) (construing the term “collectible insurance” to refer to an insurance policy, the proceeds of which are collectible as distinguished from uncollectible due to the insurance company’s insolvency).
60 See Richmond, supra note 1, at 87.
The basis for this majority rule has been explained as follows: “Excess insur-ance and umbrella policies are relatively inexpensive because excess insurers are
only obligated to pay claims to the extent they exceed primary coverage. Insureds’ expectations that excess carriers drop down in the event of a primary insurer’s insolvency are objectively unreasonable. Insofar as liability insurance is concerned, the purpose of an excess policy is to protect against third-party claims, not to insure the solvency of a primary carrier.”
Id. at 90 (footnotes omitted).
61 See Johnson Controls, Inc. v. London
Market, 784 N.W.2d 579 (Wisc. 2010).
62 See Koppers Co. v. Aetna Cas. & Sur.
Co., 98 F.3d 1440, 1454 (3d Cir. 1996) (“[S]ettlement with the primary insurer functionally ‘exhausts’ primary coverage and therefore triggers the excess policy– though by settling the policyholder loses any right to coverage of the difference between the settlement amount and the primary policy’s limits.”); E.R. Squibb & Sons, Inc. v. Lloyd’s & Cos., 241 F.3d 154 (2d Cir. 2001); Maryland Cas. Co. v. W.R. Grace & Co., 218 F.3d 204 (2d Cir. 2000) (holding that under equity prin-ciples, later-settling insurers that were not unjustly enriched were not obligated to contribute to defense costs by carriers that settled earlier with the insured); but see Trinity Homes LLC v. Ohio Cas. Ins. Co., No. 1:04-cv-1920-SEB-DML, 2009 WL 3163108 at *11-12 (S.D. Ind. Sept.
25, 2009) (holding that settlements of less than the full underlying policy limits does not constitute “exhaustion” under the language of an excess policy).
63 See, e.g., United States Gypsum v.
Admiral Ins. Co., 643 N.E.2d1226 (Ill. Ct. App. 1994) (concluding that insured was required to exhaust its “fronting” insur-ance before pursuing excess coverage);
Missouri Pacific R.R., 679 N.E.2d at 810 (requiring exhaustion of SIRs “which ef-fectively constituted self-insurance” and a period of no insurance, “which is the equivalent of self-insurance,” to trigger excess coverage); Olin Corp. v. Ins. Co. of N. Am. 221 F.3d 307, 326 (2d Cir. 1999) (“We agree with the district court that . . . the general availability of insurance that would have covered the risk at issue here and [the insured]’s failure to obtain it were all that was necessary to allocate the uninsured years to [the insured].”).
64 Twin City Fire Ins. Co. v. Fireman’s Fund
Ins. Co., 386 F. Supp. 2d 1272, 1280 n.5 (S.D. Fla. 2005); Grife v. Allstate Florida Ins. Co., 493 F. Supp. 2d 1249 (S.D. Fla. 2007); accord Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., 843 A.2d 1094, 1106 (N.J. 2004) (finding that because “[d]eductibles constitute a bargained-for aspect of the insurance contract that af-fects the premiums the insured pays,” the
insured must satisfy the full deductible for each triggered policy prior to triggering the next layer’s indemnity obligation); Missouri Pacific R.R., 679 N.E.2d at 809-10.
65 406 So. 2d 1184 (Fla. 1st DCA 1982). 66 Id. at 1186. 67 Id. at 1185-86. 68 Id. at 1186. 69 Id. 70 Id. 71 Id.
72 Southeast Title & Ins. Co. v. Collins, 226
So. 2d 247, 248 (Fla. 4th DCA 1969).
73 Universal Atlas, 406 So. 2d at 1186. 74 Id. at 1186-87 (citing 8A Appleman,
Insur-ance Law & Practice § 4912 (1981)).
