Exhaustion requirement in excess policy ambiguous
Yaffe v. Great American, Case No. 06-7057 (10th Cir. 8/27/07);
www.ca10.uscourts.gov/opinions/06/06-7057.pdf
This case involved a dispute between an insured, Yaffe, and its excess carrier, Great American. As a result of an explosion at Yaffe’s scrapyard in Muskogee, Oklahoma. Yaffe incurred $1,785,986.89 in liability on claims by numerous parties. Yaffe had two insurance policies – a commercial general-liability policy issued by ACE with limits of $1,000,000 per occurrence; and a commercial umbrella policy issued by Great American with limits of $25,000,000. The ACE policy, however, had a per claim deductible, rather than a per occurrence deductible. Since most of the claims were under $10,000, ACE paid just under $500,000 of Yaffe’s total liability of over $1,785,000. Yaffe wanted Great American to pay the difference between what Yaffe paid out in claims and the ACE policy limits – about $785,000. Great American claimed it had no liability because the ACE policy had not been exhausted. The trial court granted summary judgment to Great American, holding that the Great American policy is unambiguous and that Great American is only liable after the ACE policy is exhausted. The Tenth Circuit reversed, finding that the Great American policy was ambiguous. The Tenth Circuit refused, however, to grant summary judgment to Yaffe, since Great American had not had an opportunity to respond to Yaffe’s motion for summary judgment in the trial court.
The Tenth Circuit discussed three different clauses of the Great American policy: the loss payable clause and the retained limit definition; the other insurance clause and the defense clause. Under the loss payable clause, the Great American policy applied to damages in excess of the retained limit– defined as the total amounts stated as the applicable limits of the underlying policies (e.g., the $1 million dollar limit of the ACE policy). Great American claimed that it had no duty to pay until the underlying ACE policy limits were exhausted. But the Tenth Circuit said that under the policy terms, Great American was obligated to pay once Yaffe incurred liabilities exceeding $1,000,000.
Under the loss payable clause, the policy states:
Coverage under this policy will not apply unless and until [Yaffe] or [Yaffe’s] underlying insurer is obligated to pay the “[R]etained [L]imit.”
The court discussed three reasonable constructions of this clause: 1. When the loss payable clause refers to what Yaffe “is obligated to pay,” it refers to Yaffe’s legal liability, regardless of whether Yaffe is protected by insurance coverage for that liability. Since Yaffe had to pay more than $1 M, there could be coverage, but the reference to Yaffe’s “underlying insurer” becomes superfluous. 2. Since umbrella policies are designed to fill gaps in coverage, the loss payable clause could mean that Great American only pays when either Yaffe (in the case of an event not covered by insurance) or Yaffe’s underlying insurer (in the case of a covered event) is obligated to pay the retained limit. Since the accident was covered in part by insurance, this would mean that Great American was not required to pay until the ACE policy limits were exhausted. 3. The reference to Yaffe in the loss payable clause is merely to protect Yaffe in the event of a default by its primary insurer, ACE.
The Tenth Circuit also found that other clauses were open to more than one reasonable interpretation, including the “other insurance” clause and the “defense” clause. The court found there could be a reasonable expectation of coverage under the other insurance clause. And, while defense was not an issue in the case, Yaffe argued successfully that the defense clause showed that the drafters of the policy could unambiguously require exhaustion of coverage when they wanted to.
This case is notable because the Court rests its finding, in part, on the fact that Great American could define its obligations precisely when it wanted to; and its failure to be specific in the loss payable clause was highlighted by its greater specificity in other parts of the policy.
www.ca10.uscourts.gov/opinions/06/06-7057.pdf
This case involved a dispute between an insured, Yaffe, and its excess carrier, Great American. As a result of an explosion at Yaffe’s scrapyard in Muskogee, Oklahoma. Yaffe incurred $1,785,986.89 in liability on claims by numerous parties. Yaffe had two insurance policies – a commercial general-liability policy issued by ACE with limits of $1,000,000 per occurrence; and a commercial umbrella policy issued by Great American with limits of $25,000,000. The ACE policy, however, had a per claim deductible, rather than a per occurrence deductible. Since most of the claims were under $10,000, ACE paid just under $500,000 of Yaffe’s total liability of over $1,785,000. Yaffe wanted Great American to pay the difference between what Yaffe paid out in claims and the ACE policy limits – about $785,000. Great American claimed it had no liability because the ACE policy had not been exhausted. The trial court granted summary judgment to Great American, holding that the Great American policy is unambiguous and that Great American is only liable after the ACE policy is exhausted. The Tenth Circuit reversed, finding that the Great American policy was ambiguous. The Tenth Circuit refused, however, to grant summary judgment to Yaffe, since Great American had not had an opportunity to respond to Yaffe’s motion for summary judgment in the trial court.
The Tenth Circuit discussed three different clauses of the Great American policy: the loss payable clause and the retained limit definition; the other insurance clause and the defense clause. Under the loss payable clause, the Great American policy applied to damages in excess of the retained limit– defined as the total amounts stated as the applicable limits of the underlying policies (e.g., the $1 million dollar limit of the ACE policy). Great American claimed that it had no duty to pay until the underlying ACE policy limits were exhausted. But the Tenth Circuit said that under the policy terms, Great American was obligated to pay once Yaffe incurred liabilities exceeding $1,000,000.
Under the loss payable clause, the policy states:
Coverage under this policy will not apply unless and until [Yaffe] or [Yaffe’s] underlying insurer is obligated to pay the “[R]etained [L]imit.”
The court discussed three reasonable constructions of this clause: 1. When the loss payable clause refers to what Yaffe “is obligated to pay,” it refers to Yaffe’s legal liability, regardless of whether Yaffe is protected by insurance coverage for that liability. Since Yaffe had to pay more than $1 M, there could be coverage, but the reference to Yaffe’s “underlying insurer” becomes superfluous. 2. Since umbrella policies are designed to fill gaps in coverage, the loss payable clause could mean that Great American only pays when either Yaffe (in the case of an event not covered by insurance) or Yaffe’s underlying insurer (in the case of a covered event) is obligated to pay the retained limit. Since the accident was covered in part by insurance, this would mean that Great American was not required to pay until the ACE policy limits were exhausted. 3. The reference to Yaffe in the loss payable clause is merely to protect Yaffe in the event of a default by its primary insurer, ACE.
The Tenth Circuit also found that other clauses were open to more than one reasonable interpretation, including the “other insurance” clause and the “defense” clause. The court found there could be a reasonable expectation of coverage under the other insurance clause. And, while defense was not an issue in the case, Yaffe argued successfully that the defense clause showed that the drafters of the policy could unambiguously require exhaustion of coverage when they wanted to.
This case is notable because the Court rests its finding, in part, on the fact that Great American could define its obligations precisely when it wanted to; and its failure to be specific in the loss payable clause was highlighted by its greater specificity in other parts of the policy.
