Comerica Inc. v. Zurich American Insurance
2007 U.S. Dist. LEXIS 54517, 498 F.Supp.2d 1019, 2007 WL 2178392 (2007)
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Rule of Law:
An excess insurance policy that requires the underlying primary policy to be exhausted 'solely as a result of actual payment of loss thereunder by the applicable insurers' is not triggered when the primary insurer settles a claim for less than its policy limit and the insured pays the remaining difference to reach the limit.
Facts:
- Comerica, Inc. held a primary insurance policy from Federal Insurance Company with a $20 million liability limit.
- Comerica also had a 'following form' excess insurance policy from Zurich American Insurance Company, which attached only after the Federal policy was 'exhausted by payments for losses.'
- Comerica was named as a defendant in five securities fraud class action lawsuits, which were consolidated into two actions.
- Comerica agreed to a global settlement of the class action lawsuits for $21 million.
- Federal, the primary insurer, disputed coverage and asserted various defenses, including potential rescission of the policy.
- Comerica and Federal settled their coverage dispute, with Federal agreeing to pay $14 million of the $21 million settlement.
- Comerica paid the remaining $7 million of the settlement out of its own funds.
- Comerica then sought payment from Zurich for the $1 million that exceeded the primary policy's limit, plus $2.6 million in defense costs.
Procedural Posture:
- Comerica, Inc. filed a four-count complaint against Zurich American Insurance Company in the U.S. District Court for the Eastern District of Michigan, alleging breach of contract and seeking declaratory judgment.
- Defendant Zurich filed a motion for summary judgment, arguing its coverage obligations were not triggered.
- Plaintiff Comerica filed a cross-motion and an amended cross-motion for partial summary judgment, arguing that certain damages were covered under the policy.
- The matter came before the District Court on these cross-motions for summary judgment.
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Issue:
Does an excess insurer have a duty to pay when the primary insurer pays less than its full policy limit in a settlement, and the insured pays the difference to exhaust the primary policy's limit, if the excess policy requires exhaustion by 'actual payment of loss' by the primary insurer?
Opinions:
Majority - Lawson, District Judge
No. The excess insurer does not have a duty to pay because the plain and unambiguous language of the excess policy requires exhaustion of the primary insurance's liability limits by actual payment of losses by the primary insurer, not by a combination of payments from the primary insurer and the insured. The Zurich policy explicitly states that coverage attaches 'only after all such ‘Underlying Insurance’ has been reduced or exhausted by payments for losses' and specified that depletion must occur 'solely as a result of actual payment of loss thereunder by the applicable insurers.' The court rejected Comerica's argument that public policy favoring settlement, as articulated in cases like Zeig v. Massachusetts Bonding & Ins. Co., should override the clear contract language. The court distinguished Zeig by noting that the policy here contained specific, unambiguous language requiring 'actual payment' by the primary insurer, which was not present in Zeig. Since Federal only paid $14 million, not its full $20 million limit, the condition precedent for triggering Zurich's excess coverage was not met, regardless of Comerica paying the difference.
Analysis:
This decision reinforces the principle that unambiguous contract language in an insurance policy will be strictly enforced, even if it leads to a result that may seem to discourage settlement. It establishes a clear precedent that 'functional exhaustion'—where an insured fills the gap between a primary insurer's settlement payment and its policy limit—is not sufficient to trigger an excess policy that specifically requires 'actual payment' by the primary carrier. This ruling highlights the critical importance of specific policy wording and places a heavier burden on insureds when negotiating coverage settlements with primary insurers, as a discounted settlement may foreclose any access to excess coverage. Future cases will likely distinguish between policies with general 'exhaustion' language versus those with specific 'actual payment' requirements.
