Ohio Federal Court Applies Exhaustion Language Against Goodyear
On September 19, 2011, the U.S. District Court for the Northern District of Ohio granted summary judgment for Federal Insurance Company, rejecting Goodyear’s argument that Federal’s excess policy’s exhaustion language (requiring payment of the full amount of underlying insurance by the underlying insurer) was unenforceable. This advisory explains the decision in The Goodyear Tire & Rubber Company v. National Union Insurance Company of Pittsburgh, Pa., et al.
Goodyear sought reimbursement from its insurers of its legal and accounting costs, which amounted to about $30 million, incurred in connection with numerous securities class actions, derivative lawsuits and an SEC investigation. National Union Insurance Company of Pittsburgh, Pa., provided insurance under a $15 million primary D&O policy, subject to a $5 million retention, and Federal Insurance Company had issued a $10 million first excess policy. Ultimately, Goodyear settled its coverage dispute with National Union for $10 million (and certain non-monetary considerations) but continued to seek coverage for the remaining costs from Federal under its first excess policy.
According to the insuring agreement of Federal’s first excess policy, coverage thereunder attached “only after the insurers of the Underlying Insurance shall have paid in legal currency the full amount of the Underlying Limit.” In light of that language, Federal argued that its policy was not implicated because National Union’s primary policy had not fully exhausted. Goodyear countered that, under Ohio law, a policy condition requiring exhaustion of the limits of another policy before the insurer pays cannot result in a forfeiture of coverage, at least where the insurer has not been prejudiced by the other policy’s failure to pay limits. Because Goodyear claimed to have incurred losses exceeding the limits of the policies, it argued, Federal would only ever have to pay the amount it agreed to pay. Goodyear insisted that, in light of the strong Ohio public policy favoring settlements, Federal’s exhaustion provision was unenforceable.
The court rejected Goodyear’s public policy argument, stating: “[A]lthough there is a substantial public interest in encouraging settlements, the Court finds an equally potent interest in fostering freedom of contract and holding parties to the agreements they make.” The court further rejected Goodyear’s contention that Federal was not prejudiced, noting the “significant litigation efforts” necessitated by the years-long coverage dispute brought about by Goodyear’s insistence that the “plain language” of the exhaustion language was inapplicable.
In this regard, the court remarked:
As a final matter, the court observed that a highly sophisticated commercial enterprise, such as Goodyear, could have negotiated with Federal or “shopped around” to other excess insurance providers for a broader exhaustion clause.Placing itself in the shoes of an insurer for a moment, the Court recognizes the realities of defining the scope of coverages and setting premiums accordingly. Certainly, the potential exposure of an excess insurance provider and the triggering point of that exposure inform the calculus used in setting the premiums the insured will be charged. Will coverage be triggered by losses amounting to $20 million…$15 million…or $10 million? An excess insurer, in the Court’s opinion, is entitled to at least that degree of certainty.