Excess insurance plays a vital role in mitigating the risk of large losses, but excess insurers often contend they have no obligations and are entitled to sit on the sidelines of a lawsuit against their policyholder until underlying insurers have fully paid their limits.  This position harms policyholders, particularly when settlement of a lawsuit requires contribution from these excess insurers.

While courts universally acknowledge the value of pre-trial resolution and settlement, some jurisdictions have discouraged settlement of large losses by holding that excess insurers have no duty to the policyholder until primary policies have completely exhausted their limits.  When excess insurers refuse to come to the settlement table, settlements often fall through, exposing policyholders to high risk verdicts.

Fortunately, some courts do acknowledge that excess insurers have pre-exhaustion obligations.  The recent decision by the Ninth Circuit in Teleflex Med. Inc. v. Nat’l Union Fire Ins. Co., 851 F.3d 976 (9th Cir. 2017) is the leading case in holding that excess insurers must participate in settlement negotiations, even prior to exhaustion of underlying layers.

In Teleflex, the policyholder agreed to mediate an IP infringement lawsuit early in discovery, but excess insurer National Union refused to attend.  The parties reached a proposed settlement, contingent on contributions from National Union.  However, National Union refused to consent to the settlement despite the fact that policyholder risked exposure from a verdict well in excess of the underlying carrier’s $1m limit.  The policyholder finalized the settlement anyway and proceeded to sue National Union for breach of contract and bad faith for the amount of its settlement contribution, and was successfully awarded over $6m by the United States District Court for the Southern District of California.

On appeal to the Ninth Circuit, the critical issue raised by National Union was the continued applicability of the so-called “Diamond Heights rule,” taken from a 1991 California Court of Appeals case.  The Diamond Heights rule says that where an excess insurer is presented with a proposed settlement of a covered claim approved by policyholder and primary carrier, the excess insurer has three options:

  1. approve the proposed settlement;
  2. reject the proposed settlement and take over the defense; or
  3. reject both proposed settlement and defense, but face a potential lawsuit by the policyholder seeking contribution toward the settlement.

After finding the Diamond Heights rule was still good law, the Ninth Circuit rejected National Union’s attempts to distinguish that case based on the fact that the Telexflex litigation was still in relatively early stages. The Ninth Circuit countered that there are good reasons to settle during discovery rather than on the eve of trial.  The Ninth Circuit proceeded to criticize National Union for months-long “foot-dragging” rather than expediently settling, and ultimately upheld the District Court’s award for breach of contract and bad faith.

Policyholders should take note.  While the Diamond Heights holding may be decades-old, it takes on new force in light of the Teleflex decision.  In particular, it clarifies that foot-dragging by an excess carrier, delaying the execution of a proposed settlement, is not appropriate at any stage of litigation.  Where a good-faith proposed settlement is on the clock, excess insurers must either approve, agree to defend, or face a potential lawsuit for contribution.


The information contained in this document is provided to alert you to legal developments and should not be considered legal advice. It is not intended to and does not create an attorney-client relationship. Specific questions about how this information affects your particular situation should be addressed to one of the individuals listed. No representations or warranties are made with respect to this information, including, without limitation, as to its completeness, timeliness, or accuracy, and Lathrop Gage shall not be liable for any decision made in connection with the information. The choice of a lawyer is an important decision and should not be based solely on advertisements.

In late 2017, in a move favoring policyholders, the Missouri Court of Appeals for the Eastern District applied the “all-sums” approach to allocating and exhausting insurance coverage for a continuous asbestos harm in Nooter Corp. v. Allianz Underwriters Ins. Co., 536 S.W.3d 251 (Mo. App. 2017). Although Nooter has sparked significant chatter in the insurance world, Lathrop Gage is dedicated to educating its clients on what Nooter means to you.

In Nooter, plaintiff Nooter Corporation was in the business of designing, installing, and distributing pressure vessels for refiners and chemical plants. Some of Nooter’s sites had become contaminated with asbestos over the course of many years, and Nooter began receiving claims for asbestos-related bodily injuries in the late 1990s. Nooter sued eight of its excess insurers for coverage spanning from 1949 to 1985 to cover the defense costs and liabilities associated with defending these claims. One of the many battles taken up by the parties at the trial court was, assuming the policies were triggered, whether the court should allocate the losses among the insurance companies using the “all sums” approach or the “pro-rata” approach, the two leading methods of allocation in American courts. The trial court applied the “all sums” approach, and the excess insurers appealed. The Missouri Court of Appeals affirmed the trial court on this issue and the Missouri Supreme Court subsequently denied the insurers’ appeal.

So what is the “all sums” approach to allocation and exhaustion and why does it matter?

Many companies, just like Nooter, are facing claims or allegations of different types of “long-tail” liabilities, i.e. allegedly continuous or escalating damage over a range of time and implicating several policies and insurance companies. Examples of long-tail liabilities include asbestos claims (like in Nooter), mass products litigation, or toxic tort. Because the damage cannot be traced to a single incident or event, it can be difficult to identify which policies are implicated, and even more difficult, how the losses will be allocated among the insurers.

Many insurers, like the insurers in Nooter, advocate for a “pro-rata” approach to allocation of losses. Under this theory, losses are allocated proportionally across all triggered policies for each year of damage or exposure, and accordingly, policies are exhausted “horizontally” across each layer of coverage. However, the policyholder would be responsible for any losses that are apportioned to an uninsured or under-insured year of exposure.

In contrast, the “all-sums” approach essentially makes the insurers’ liability to the policyholder joint and several. The result is that the policyholder is entitled to select a triggered policy, exhaust the policy completely, and move onto the next, regardless of whether the losses actually occurred during that policy period. The insurers are then left to allocate the losses between themselves by seeking contributions from each other. This is consistent with the theory of “vertical exhaustion,” i.e. policies are exhausted up the stack of coverage.

Nooter is part of a growing trend of courts applying the “all sums” theory of allocation and exhaustion. The approach has received significant consideration since the New York Court of Appeals’s 2016 decision in Viking Pump[1], and the trend does not appear to be slowing down.[2] In addition, early last month a federal judge sitting in the Eastern District of Missouri held that Nooter required application of the “all sums” theory to long-tail liabilities in Missouri. Zurich American Insurance Co. v. Ins. Co. of N. America, No. 4:14 CV 1112 CDP, 2018 U.S. Dist. LEXIS 77061 (E.D. Mo. May, 8, 2018). While the court had previously predicted that the Missouri Supreme Court would apply the “pro rata” approach, it reversed its prior ruling because post-Nooter it was clear that “the Missouri Supreme court would apply an ‘all sums’ method to allocate the [] loss.” Id. at *14.

While application of the “all sums” doctrine is no guaranty, the Nooter decision shows Missouri’s willingness to apply the “all sums” doctrine in appropriate scenarios. The Lathrop Gage insurance recovery team is willing and able to assist you as you navigate the intricacies of your post-Nooter, insurance recovery needs.

[1] In the Matter of Viking Pump, Inc. and Warren Pumps, LLC Insurance Appeals, 52 N.E.3d 1144 (N.Y. 2016)

[2] See ALI’s Proposed Final Draft of the Restatement of Law, Liability Insurance, § 41 cmt. d, and recognizing a “split of authority regarding the allocation rule.”


The information contained in this document is provided to alert you to legal developments and should not be considered legal advice. It is not intended to and does not create an attorney-client relationship. Specific questions about how this information affects your particular situation should be addressed to one of the individuals listed. No representations or warranties are made with respect to this information, including, without limitation, as to its completeness, timeliness, or accuracy, and Lathrop Gage shall not be liable for any decision made in connection with the information. The choice of a lawyer is an important decision and should not be based solely on advertisements.

In 2017, the Missouri Supreme Court handed down its Doe Run decision, where it interpreted, as a matter of first impression, an insurance policy’s so-called “absolute pollution exclusion,” holding that it barred coverage for environmental-degradation claims arising from the release of toxic industrial byproducts. We believe this policyholder-adverse decision is limited by its facts and reasoning, and thus policyholders can still invoke the earlier and more favorable Hocker Oil and Wyatt decisions when seeking insurance coverage in other contexts.

Continue Reading The Absolute Pollution Exclusion: The Missouri Supreme Court Weighs In

UPDATE on May 23, 2018: Yesterday, ALI voted to approve these rules and many more contained in a 488-page document containing guidelines intended to aid courts in resolving coverage complex disputes. It remains to be seen how and whether courts across the country actually follow these guidelines. Lathrop Gage will be following the effect of this project on the law over the next several years and will keep you updated.

The American Law Institute (ALI) is voting tomorrow on new guidelines that may affect the complex rules adopted and applied by courts in insurance coverage disputes.  Here are three of the hotly debated rules:

1)         Use of extrinsic evidence in coverage disputes.       Under ALI’s current approach referred to as the “Corbin rule” or “contextual approach,” courts may interpret policy terms in light of “all the circumstances surrounding the drafting, negotiation and performance of the insurance policy.”  The proposed rule advances a “plain meaning” rule to policy interpretation. Under that rule, courts must construe an insurance policy term on the basis of its plain meaning, if it has one.  Extrinsic evidence regarding an insurer’s negotiations and course of dealing with a policyholder “may be considered only if the court first makes the threshold determination that the insurance policy term is ambiguous when applied to the facts of the claim at issue,” the restatement says. This rule may ultimately be unfavorable to policyholders because courts today almost uniformly construe ambiguous terms against the insurers.

2)         Insurer’s right to recoup defense costs.       One issue that is often litigated is an insurer’s right to recoup defense costs if a claim is ultimately determined not to be covered.  The restatement establishes a “default rule” that defense costs cannot be recouped absent explicit policy language or recoupment has been “otherwise agreed to” by the policyholder.  This rule is decidedly favorable to policyholders.

3)         Policyholder’s right to settle without consent.        If an insurer is defending under a “reservation of rights,” may a policyholder settle the underlying case without the insurer’s consent?  The new rules say yes. A policyholder may unilaterally settle an action without violating its “duty to cooperate” or other policy restrictions if the insurer has a “reasonable opportunity” to participate in the settlement process and “reasonable effort” is made to obtain the insurer’s consent.  This rule is decidedly favorable to policyholders.

We will keep you updated as the vote progresses.

*Article released by the Policyholder team.


The information contained in this document is provided to alert you to legal developments and should not be considered legal advice. It is not intended to and does not create an attorney-client relationship. Specific questions about how this information affects your particular situation should be addressed to one of the individuals listed. No representations or warranties are made with respect to this information, including, without limitation, as to its completeness, timeliness, or accuracy, and Lathrop Gage shall not be liable for any decision made in connection with the information. The choice of a lawyer is an important decision and should not be based solely on advertisements.

The attorney-client privilege is one of the oldest and most widely-known—if generally misunderstood—common law doctrines. In its broadest outline, it’s a rule that’s fairly easy to grasp and apply: a communication between a lawyer and a client for a legal purpose that is held in confidence is protected from disclosure by privilege. The rule ensures that clients can be candid with their lawyers without fear that their candor is discoverable (and ultimately harmful to their case).  But don’t miss the important caveat: the communication must be held in confidence, meaning when there’s another, non-client party in on the conversation, there is no privilege.

This presents an obvious but often missed dilemma, as modern litigation often involves four critical parties sharing communications: the person or entity being sued, their attorney, their liability insurer(s), and their broker. This situation is so ubiquitous that it may be easy to forget that under the traditional rule, when you share information with your insurer or your broker, you’re breaking privilege.

Continue Reading We’re Not Afraid to Talk About Privilege

Thirty-two years ago, a major California newspaper urged Californians to vote “no” on a ballot initiative commonly referred to as “Prop 65,” which would require certain businesses to include warning labels on products that contained a compound known to the State of California to cause cancer, birth defects or reproductive harm. However, the editorial board dismissed what it viewed as “exaggerated” claims by other opponents of Prop 65, reassuring voters that even if the measure passed, it would “not lead to the banning of ordinary table salt or require warning labels on every apple sold or cup of coffee served in California.” But last month, a California Superior Court judge ruled that businesses may have to do just that – require warning labels on cups of coffee served in California.

The complaint in the case, Council for Education and Research on Toxics v. Starbucks Corporation, et al., alleges that dozens of companies in the coffee business violated Prop 65 in failing to warn consumers that brewed coffee contains acrylamide, a substance believed to be a carcinogen by the State of California. Defendants in the case were previously unsuccessful in persuading the court that Prop 65’s warning requirements were unnecessary because the alleged acrylamide exposure posed “no significant risk.”

Continue Reading Coffee and Cancer Warnings in California

Montrose v. Superior Court and the Future of Exhaustion Under California Law.

When a policyholder faces a “long-tail” claim (i.e., a claim involving injury that remains undetected for some time after the alleged wrongdoing, and the harm may have been sustained over a number of years—even decades), like property damage and bodily injury claims arising out of alleged environmental contamination or asbestos exposure, there are often multiple years and layers of primary and excess insurance policies that provide coverage. However, there are also many issues that may arise, making it difficult for insureds to collect all relevant coverage. For example, the insured may have trouble finding all applicable policies that were in place at relevant times, there may have been mergers and acquisitions that complicate matters, some coverage may have become insolvent, etc.

A key legal issue that impacts the manner in which policyholders may collect all relevant coverage is whether the insured must first exhaust all underlying primary coverage in place during the time of alleged harm before it is allowed to tap into valuable excess coverage (often called “horizontal” exhaustion), or whether it may choose to first collect the primary and excess coverage in any given year before seeking to collect other years of coverage (often called “vertical” or “all sums” exhaustion). While horizontal v. vertical exhaustion (or some variant thereof) is a state-by-state issue, the Supreme Court of California in Montrose Chemical Corp. v. Superior Court, 406 P.3d 327 (Cal. 2017) recently set the stage for potentially one of the most impactful coverage decisions on this issue in decades. There, the California Supreme Court recently granted the policyholder, Montrose’s, request to decide whether it must exhaust all its primary policies on the risk before recovering under any of its excess policies for environmental damages.

The Montrose coverage dispute began in 1990 and arose out of the policyholder, Montrose’s, long-running efforts to procure coverage for over $100 million in damages incurred in a CERCLA action. The action arose out of Montrose’s production of the pesticide DDT at its facility in Torrance, California, between 1947 and 1982 and implicates nearly two dozen insurers that issued both primary and excess policies to Montrose.

Continue Reading Must Policyholders Exhaust All Underlying Policies Before Pursuing Excess?

In a recent webinar, Lathrop Gage Partner Mike Abrams and Hays Companies Vice President and Cyber Liability Practice Leader Dave Wasson covered several common pitfalls to avoid in buying cyber liability risk policies. In summary, the cyber insurance market is not a mature one, and policies differ significantly. It’s important to be working with a broker or lawyer who is familiar with potential issues and terms that can be negotiated.

Continue Reading Cyber Insurance – What You Don’t Know COULD Hurt You!

The modern accessibility of DNA testing has led to an unprecedented rise in exonerations of the wrongfully imprisoned and a surge in civil rights lawsuits against public officials and municipalities for suppressing exculpatory evidence. These lawsuits present complex liability issues including qualified immunity, Monell liability, statute of limitations bars, etc.

One of the most complex ancillary issues is whether these public entities are protected for civil rights claims under their insurance programs. Particularly for financially distressed municipalities, the availability of insurance proceeds is often the most critical issue because of the potentially enormous liabilities these entities face resulting from law enforcement misconduct claims.

More often than not, the dispute over coverage hinges on the “trigger issue.” “Trigger” is a shorthand insurance concept used to describe what event must occur before a particular liability policy applies to a given loss. What events “trigger” coverage wholly depend upon the language of each particular insurance contract, just like any other private contract negotiated between two parties. If there is a governing rule in insurance jurisprudence (or Contracts 101), it’s that an insurance contract should be construed as written. 

Continue Reading Insurance Coverage for Civil Rights Abuse Cases: an Introduction to the “Trigger Issue”

From the “Bomb Cyclone” winter storm that roared across the East Coast; to Hurricanes Harvey, Irma, Maria and Jose that exacted an enormous human, financial and business toll; to the California wildfires that killed 43 people, consumed 10,000 structures and devastated numerous wineries – it seems that we cannot escape news these days of disasters that have a deep and wide-ranging impact on lives, property, and commercial activity. We begin the New Year with a hope that we will see fewer, less severe disasters but also with the question in mind: “What can I do today to be prepared for a disaster that could affect my business?”  Of course, a critical component of preparing for disasters is taking the necessary precautions to avoid or limit losses in the first place. But some losses may be unavoidable, so companies should also prepare ahead of time to maximize their recovery of insurance for the losses that do arise. Some steps to take that will help:

  • Take the time to assess the types of catastrophic events to which your company might be vulnerable. Speak to those responsible for day-to-day operations and ask which type of losses or disruptions would be most costly not only to the immediate bottom line, but also in terms of intermediate or long-term displacement of the company’s competitive advantage or its reputation. Think outside of the box and do not constrain your assessment to the types of disasters that come easily to mind. It is those that we did not see coming, or the severity of which we underestimated, that we are least prepared for.

Continue Reading Natural Disasters in 2017 Caused Billions in Losses: Are Companies Ready for 2018?