Two of three of Rapid-American Corp.’s excess liability insurers do not have to respond to underlying asbestos claims unless and until all underlying coverage is exhausted by the payment of claims, says Judge Bernstein of the United States Bankruptcy Court for the Southern District of New York in a June 7, 2016 decision. Rapid-American has been involved in asbestos litigation since 1974 and settled disputes with many of its underlying insurers, but an amount sufficient to reach its excess coverage policies has not yet been paid. Rapid-American argued that it was not necessary for the primary policies’ underlying limits to be exhausted by actual payment before insurers’ excess liability coverage attaches.

The court disagreed, siding with the insurers and distinguishing long-standing Circuit precedent in Zeig v. Mass. Bonding & Ins. Co., 23 F.2d 665 (2d Cir., 1928), a decision that has guided the excess attachment issue in New York federal courts and elsewhere for almost 90 years. In Zeig, the Second Circuit held that exhaustion language need 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. In ruling in favor of the insurers, the Court distinguished Zeig and stated that the policies issued to Rapid-American “unambiguously require actual payment before liability attaches.” Judge Bernstein also found, however, that a third policy issued by the former Travelers unit, Aetna, would be required to respond as that policy did not contain the same exhaustion language.

The decision is a significant reminder of how seemingly similar coverages may apply differently based on subtle differences in policy wording. The decision also signifies apparent uncertainty under New York law as to when an excess policy must respond in the absence of payment of full underlying limits. Thus, absent guidance from the New York Court of Appeals, policyholders should be mindful that exhaustion through the actual payment of claims may be necessary, depending on the language of their excess policies. Policyholders, therefore, would be wise to consult with knowledgeable coverage counsel before entering into any liability settlements, to ensure that potentially available excess coverage is not jeopardized by the wording or structure of the underlying settlements.