The interplay between primary and excess insurance is often litigated, especially in the context of settlements. On April 26, 2017, the First Circuit in Salvati v. Am. Ins. Co., 16-1403, 2017 WL 1488238, at *1 (1st Cir. Apr. 26, 2017) considered whether the settlement agreement entered into between plaintiff and the insureds/primary insurer was sufficient to trigger excess insurance coverage under the insured’s policy with American Insurance Company.
In June 2010, Gerardo Salvati fell to his death while inspecting the brick facade at the Lovejoy Wharf building in Boston, after a “sizeable chunk of brickwork came loose and suddenly fell from the building.” In 2011, Salvati’s wife sued the building’s owners for wrongful death, alleging that “the building had been in a state of disrepair for years, and the owners of the property were aware that the building’s loose and decaying brickwork was in need of repair.”
The defendants had two insurance policies: a primary policy through Western World Insurance Company (“Western World”) in the amount of $1 million and an excess policy through the American Insurance Company (“AIC”) in the amount of $9 million (the “Excess Policy”). The defendants informed both insurance companies of Salvati’s claims. AIC informed defendants that it would not defend or indemnify them for damages from Salvati’s suit.
Salvati and the defendants reached a settlement agreement for $6 million in 2014. The Settlement Agreement had three key components: (1) it “provided for the total payment of $6,000,000 to Salvati;” (2) in exchange for tendering the full $1 million of the Western World primary insurance policy, the Agreement released both Western World and the defendants from any further liability; and (3) the Agreement assigned all rights previously held by the defendants against AIC to Salvati, allowing her to seek recovery of the remaining $5 million from the Excess Policy. Importantly, the Agreement also stipulated that the settlement was not contingent on the ultimate availability of the excess coverage, and that the defendants did not represent that excess coverage was necessarily available. Also, the defendants expressly disclaimed wrongdoing in the Agreement. Upon settlement, Salvati’s case against defendants was dismissed with prejudice.
In 2015, Salvati, as assignee, sued AIC for the remaining $ 5 million, claiming breach of contract. The AIC policy provided that AIC would “pay on behalf of any Insured those sums in excess of the Primary Insurance that any Insured becomes legally obligated to pay as damages.” AIC defended, first arguing that the settlement did not trigger coverage because only a judgment can “legally obligate[ ]” a party to pay “damages.” While the trial court agreed with this reasoning, the First Circuit disagreed. Applying Massachusetts contract law, the First Circuit held that the term “damages” did not require a judgment, and also that the remaining provisions of the policy (including its definition of “suit” and use of the term “settlement”) supported the reading that a settlement may constitute a “legal obligation to pay” under the policy.
AIC also argued that even if a settlement could trigger coverage, the settlement at issue did not because it did not actually obligate the insureds to pay anything other than the $1 million Western World policy. The First Circuit agreed with AIC on this point, and held that Salvati had failed to explain how the terms of the settlement at issue actually obligated the insureds to pay any additional sum. However, the First Circuit went out of its way to state that a settlement agreement in this case could have been structured in a way to trigger excess coverage under the AIC policy, noting that the Massachusetts Supreme Court has approved the practice of reducing a settlement to a judgment, along with a separate agreement releasing the insured from liability. The First Circuit noted that “[t]he difference between this approach and the Settlement Agreement may seem technical, but it is significant.”
The Salvati case serves as a reminder of the issues that can arise between primary and excess insurance and the significant impact that an imprecisely worded settlement agreement can have on the availability of insurance for the settlement. Experienced coverage counsel can help navigate these wording issues and help ensure that primary and excess policies work together to achieve their intended purpose.