Eight Million is More Than Enough: Sixth Circuit Orders Excess Insurer to Drop Down and Pay Insured’s Defense Costs

The United States Court of Appeals for the Sixth Circuit recently handed an $8 million defense bill to an excess insurer when the primary carrier denied coverage for an underlying liability claim and settled its liability claim for a mere fraction of the defense costs.  IMG Worldwide, Inc. v. Westchester Fire Ins. Co., Nos. 13-3832, 13-3837, 2014 U.S. App. LEXIS 13703 (6th Cir. July 15, 2014). The coverage dispute arose out of the following circumstances.  The primary carrier, Great Divide Insurance Company, issued a primary CGL policy to IMG with $1 million limits of liability.  Westchester Fire Insurance Company issued an excess CGL policy.  IMG was sued in connection with a failed real estate development project in Orlando, Florida.  The underlying plaintiffs were individuals who had invested in the project that was subsequently abandoned by the developers.  IMG, which was a consultant on the project, was alleged to have violated the Florida Deceptive and Unfair Trade Practices Act.  Both Great Divide and Westchester refused to provide a defense for IMG.  IMG settled the underlying case for approximately $5,000,000 after incurring $8 million in defense costs. IMG the settled with Great Divide for $1.25 million i.e., the $1 million policy limit and $250,000 toward IMG’s defense costs.  The settlement gave Great Divide a release for the remainder of the defense costs.  IMG thereafter filed suit against Westchester.  At trial, the jury returned a special verdict in favor of IMG awarding $3.9 million, finding that Westchester was liable to IMG for part of the underlying settlement.  On post-trial motions, the trial court ruled in favor of Westchester on IMG’s claim for its defense costs.  The Sixth Circuit Court of Appeals reversed, ruling that Westchester, in addition to its indemnity obligations, also owed IMG a duty to defend. With regard to Westchester’s duty to defend, the court focused on the relevant language in the insuring agreement which stated that Westchester has a “duty to defend the insured against any ‘suit’ seeking damages … when the ‘underlying insurance’ does not provide coverage.”  The policy also stated that “If no other insurer defends, [Westchester] will undertake to do so… .”  Westchester contended that since the underlying insurance policy “provides” for coverage, as evidenced by Great Divide’s settlement with IMG, Westchester had no obligation to defend IMG under the excess policy.  The court disagreed and found that the policy language was ambiguous.  Because “provide” means “undertakes to deliver,” the policy language could also encompass instances, as was the case with IMG, where the primary carrier improperly denies coverage under its policy. Even though the Sixth Circuit designated this opinion as not precedential, excess carriers should be keenly aware of this decision.  Should an excess carrier be put in a precarious position like Westchester was here, as a result of a recalcitrant primary insurer’s conduct, this decision clearly indicates that the prudent course of action is to file a declaratory judgment action to proactively ascertain the excess carrier’s potential obligations under the policy.

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