Lloyds $25M excess policy not triggered until underlying insurer pays its full limits.

An Arizona trial court held that an excess pollution policy was not triggered until the primary insurer paid its entire underlying limits.   In making its ruling, the court rejected the insured’s argument that the excess policy was triggered when losses exceeded the underlying limit, regardless of whether the primary insurer had actually paid.

Certain Underwriters at Lloyds, London (“Lloyds”) issued a $25 million excess pollution policy to Republic Services Inc. (“Republic”).  Underlying the Lloyds policy, Republic had a $25 million primary policy issued by Illinois Union Insurance Company (“Chubb”).  Republic paid millions of dollars in out-of-pocket costs and expenses in connection with claims against it related to pollution at the Bridgeton Landfill.  Chubb did not pay its $25 million layer.  Lloyds sought a declaration to determine the obligations, if any, it had under the excess policy it issued to Republic for the pollution claims related to the Bridgeton Landfill.  Republic filed a counterclaim for breach of contract against Lloyds.  Lloyds moved to dismiss the counterclaim arguing that it was premature.

The insuring clause of the Lloyds policy required it to “pay on behalf of the Insured excess of the Underlying Policies any claim or loss which triggers coverage under the Underlying Policies, and is not otherwise excluded ….”  Lloyds argued that it had no duty to pay any claim or loss until the primary insurer paid its entire $25 million limits, and because the primary had not yet paid $25 million, Republic did not have a breach of contract claim against Lloyds.  According to Republic, the Lloyds policy was triggered if losses exceed $25 million, regardless of whether the primary insurer had paid.  The parties disputed whether New York or Arizona substantive law applied, but the court found that there was no difference between those two states’ laws on the question before the court: “In either state, the question is one of insurance policy interpretation.  In both states, interpretation of the Excess Policy is a question of law.”

According to the court, the insuring clause was not clear, thus the parties had to look to other provisions of the Lloyds policy to interpret it.  The court held that Lloyds’ interpretation was the most reasonable.  The court looked to other sections of the Lloyds policy and noted that the policy speaks “in terms of the payment of claims, losses or costs by the primary insurer.”  (Emphasis in original.)  For example, Section IV of the policy provides that if the primary insurer fails to pay a claim because of insolvency, the insureds are deemed self-insured for the amount not paid.  Likewise, Section V of the policy addresses what happens if the primary insurer pays part or all of its limits for claims, losses, or costs.  Thus, payment was the key event that triggered coverage under the Lloyds excess policy.

The court held that, even if the insured incurred covered losses that exceed the $25 million primary layer, Lloyds’s duty to pay had not yet risen because the underlying primary insurance was not exhausted by payment.  Thus, Republic’s breach of contract claim was dismissed.  Certain Underwriters at Lloyds London v. Republic Services Inc., No. CV 2017-00589 (Super. Ct. Ariz. Jan. 30, 2018).