No Way Gasquet!
Policy language considerations to prevent a Gasquet issue.
When determining an insurer’s duty to its insured, one must first determine what type of coverage the policy provides. An underlying primary policy provides the first layer of insurance coverage and is triggered immediately upon the happening of an occurrence, or when a claim is made. In contrast, an excess policy provides coverage above the underlying policy’s limit. While an excess policy increases the amount of coverage available for an insurable loss, it does not increase the scope of coverage. Further, an excess insurer’s limits do not become exposed unless the underlying insurers limits are exhausted by judgment or settlement. While these principles appear simple on their face, they are called into question when an insured and its underlying insurer have settled a claim for less than the policy’s limits.
This raises a significant question: would the underlying policy be considered “exhausted,” such that the obligation of the excess insurer may be called upon? In Louisiana, this type of settlement, which effectively releases the insured and its underlying insurer from any further obligations under the claim, allowing the claimant to pursue additional claims against the excess carrier, is often referred to as a “Gasquet Release.”
Gasquet v. Commercial Union Ins. Co.
In Gasquet v. Commercial Union Ins. Co., 391 So.2d 466 (La. Ct. App.1980), the court found that settlement with the primary insurer was of no consequence to the excess insurer, whose liability was fixed as the time of the loss, as long as the excess insurer received a credit for the full amount of the underlying limits, regardless of the actual settlement amount. Similarly, in Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir.1928), the court did not require that the insured actually collect the limits of its primary policy before triggering the excess layer. Instead, the court reasoned that the word “payment” in the exhaustion clause was not limited to payment in cash, but could include settlement of the claim as well. Essentially, both the Gasquet court and the Zieg court addressed the same concern: the language in the excess insurer’s exhaustion clause was ambiguous, and subject to multiple interpretations. Of course, this calls into question the effectiveness of policy language imposing a condition precedent within the excess insurer’s policy requiring actual payment of underlying policy limits to trigger coverage by the excess policy.
An examination of the legal doctrines espoused in Zeig, Gasquet and their progeny suggest that this is far from becoming a well settled issue of law. Although many courts throughout the United States still follow the holdings in Zeig and Gasquet, a host of cases in recent years have reinforced the basic principles of contracting: that the parties are free to impose conditions precedent to payment of excess policies. These cases provide some insight into how exhaustion requirements may be phrased, such that excess policies would not be triggered where below limit settlements have been entered into with underlying insurers.
For example, in Great American Ins Co v Bally Total Fitness Holding Corp, No 06 C 4554, 2010 US Dist LEXIS 61553 (ND Ill June 22 2010), the insureds sought coverage from their third and fourth level excess insurers after having settled below limits with their primary, first and second level excess insurers. In ruling in favor of the third and fourth level excess insurers, the court held that based on the policy language, coverage under the policy would apply only if all underlying insurance had been exhausted by payment of the total underlying limit of insurance. The holding in JP Morgan Chase & Co v Indian Harbor Ins Co, 947 NYS2d 17, 21 (NY App Div 2012) also provides insight into policy language that may be sufficient to require payment of underlying limits in full to effectively trigger coverage under the excess policy. JP Morgan Chase & Co involved multiple policies, all of which contained differing terms and conditions in their exhaustion clause. While one stated it would apply only in the event the underlying limit was “exhausted by actual payment,” a second policy required the total underlying limit be “paid in legal currency”, and the third policy stated it would attach only when the underlying insurer has “paid or ha[s] been held liable to pay, the full amount of the underlying limit.”
While this issue remains far from settled, it is becoming clear that courts throughout the country are finding that an excess insurer may craft specific language within the exhaustion requirement of its overlying policy which could eliminate that insurer’s obligation to pay under the policy. Of course, this may lead to unintended consequences as an insured and its underlying insurers, who might otherwise settle a claim for less than full limits to avoid costly litigation, may find they have no choice but to litigate the matter to judicial conclusion to thwart the possibility of the insured losing the benefit of the excess insurance it bargained for.
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This article is provided as an educational service for general informational purposes only. The material does not constitute legal advice or rendering of professional services.