A New York bankruptcy court, applying New York law, addressed the issue of whether underlying insurance limits must be exhausted by actual payment before excess liability coverage attaches.  The insured, Rapid-American Corporation (“Rapid”), argued that having accrued (but unpaid) liabilities reach the level of the excess insurer’s coverage is a sufficient trigger of coverage and that actual payment of the underlying limits is unnecessary.  The bankruptcy court disagreed and held nothing short of actual payment of underlying limits triggers an excess policy when required by the policy language.

Rapid is the successor to the liabilities of a company that manufactured and distributed products containing asbestos.  After settling asbestos claims for nearly 30 years, Rapid filed for Chapter 11 Bankruptcy.   Rapid had numerous primary and excess liability insurance policies during the relevant time period and over time had reached settlements with most.  Additionally, a number of insurers that issued policies to Rapid became insolvent and unable to pay the full limits of those policies.  For purposes of deciding the issue before it, the bankruptcy court assumed that Rapid had accrued liabilities that reached the level of excess coverage provided under each excess policy at issue and it was undisputed that neither Rapid nor anyone else had actually paid through settlement, judgment or otherwise an amount sufficient to reach the level of excess coverage provided under the policies.

Rapid sought a declaratory judgment that the underlying limits of the excess policies were exhausted and thus coverage under those excess policies has attached.   The excess insurers denied liability and alleged that coverage under the excess policies is not triggered because Rapid did not exhaust the applicable underlying insurance through payment.   Rapid urged the court to follow the 1928 Second Circuit case Zeig v. Mass. Bonding & Ins. Co. which according to Rapid, “mandates that the exhaustion language not be read literally, and is satisfied if the insured settles with and releases the underlying insurer, even though that insurer did not pay the full policy limits in cash.”

The bankruptcy court declined to follow Zeig and questioned its continuing application in light of the Second Circuit’s decision in Ali v. Fed. Ins. Co. and New York state case Forest Labs., Inc. v. Arch Ins. Co.  In making its ruling, the court interpreted the following policy language: “[T]his Policy shall not attach until the amount of the applicable underlying limits has been paid by or on behalf of the Insured…” and   “In the event of reduction or exhaustion of the aggregate limits of liability under said underlying limits by reason of losses paid thereunder, this policy subject to all of its terms and conditions, shall (1) In the event of reduction pay the excess of the reduced underlying limit or, (2) In the event of exhaustion continue in force as underlying insurance.”   The bankruptcy court held that the exhaustion language of the excess policies unambiguously required actual payment of the underlying limits before the excess policies attached.

Rapid also argued that the Maintenance Clause and Bankruptcy Clause found in the excess policies conflicted with the exhaustion clause or, at a minimum, created an ambiguity.  The court disagreed stating that neither clause eliminated the exhaustion requirement found in the policies.   In Re Rapid-American Corp., No. 13-10687(SMB) (Bankr. S.D.N.Y. June 7, 2016).