The question presented here is whether the benefits of an excess insurance policy are collectible when claims equal to the limits of the primary policy have been settled, or only when the primary policy limits have actually been paid.
This case arises out of the receivership of McDonnell & Co. Incorporated, a securities brоkerage firm. McDonnell carried a number of insurance policies to protect it against сertain claims for which it might be liable under the provisions of federal or state securities laws. Two of these policies are relevant here: a primary policy, held with The Fidelity & Casualty Company of New York, which contained a $50,000 deductible provision and provided coverage for the next $250,000 of such claims; and an excess policy, held with a group of underwriters organized by Lloyd’s of London, which provided coverage for the next $750,000 of the same claims.
The latter policy explicitly provided only excess coverage. As its third paragraph provided:
The Insurers shall not be liable to indemnify the Assured hereunder to any greater extent than $750,000 (SEVEN HUNDRED FIFTY THOUSAND DOLLARS) . . ., and then only when the Primary Policy in the amount of $250,000 (TWO HUNDRED FIFTY THOUSAND DOLLARS) hаs been exhausted. .
Plaintiff, McDonnell’s receiver, brought this diversity action against both Fidelity and the Lloyd’s grouр to recover benefits allegedly due under the policies. The amended complaint alleged covered losses in excess of $4.5 million. Both defendants denied coverage, and Fidelity asserted a counterclaim in the amount of $650,000. Plaintiff thereafter settled his claim against Fidelity in return for a cash payment of not more than $135,000
The Lloyd’s defendants argue, in effect, that the phrase “only when the primary policy . . . has been еxhausted” should be read to mean “only when the primary policy limits have been actually paid.”
The defendant argues that it was necessary for the plaintiff actually to collect the full amount of the policies for $15,000, in order to “exhaust” that insurance. Such a construction of the policy sued on seems unnecessarily stringent. It is doubtless true that the partiеs could impose such a condition precedent to liability upon the policy, if they chose to do so. But the defendant had no rational interest in whether the insured collected the full amount of the primary pоlicies, so long as it was only called upon to pay such portion of the loss as was in excеss of the limits of those policies. To require an absolute collection of the primary insurance to its full limits would in many, if not most, cases involve delay, promote litigation, and prevent an adjustment of disputes which is both convenient and commendable. A result harmful to the insured, and of no rational advаntage to the insurer, ought only to be reached when the terms of the contract demand it.
Zeig v. Massachusetts Bonding & Insurance Co.,
The settlement under a primary policy of claims equaling the amount of the policy permits recovery on a secondary .policy made applicable only where the primary insurance is exhausted in payment of claims.
If summary judgment is denied herе, it will still be plaintiff’s burden to prove the amounts of McDonnell’s losses and their covered nature. The excess insurers will be liable only for covered losses in excess of $300,000. I believe the reasoning of the Zeig case is correct, and I am confident that the Delaware courts would reach the samе result in this case. Accordingly, summary judgment will be denied.
Notes
. The settlement involved an unallocated cash рayment of $135,000 in satisfaction of claims under four different policies including the one involved here.
. Thus it is not clear that the consideration received by plaintiff for claims under this policy had a valuе of less than $250,000. The defendants, accordingly, have not demonstrated an absence of a genuine dispute of material fact, which it was their burden to show on this motion for summary judgment. See Manufacturers Trust Co. v. Rogers,
. They argue that this is the “plain meaning” of the policy language. It does not seem so to the Court. The plain meaning of “exhausted” is “entirely used up,” and the coverage of the primary policy has been entirely used up by the settlement.
. It has been suggested that the Delaware conflict of laws rule might apply New York substantive law to this question. But no New York law has been cited to the Court either.