Washington Court of Appeals Refines Rules Relating to the Allocation of a Continuing Loss Among Insurers

By: Nicholas A. Nardi and Marc A. Johnston

Fall 2008


The Washington Court of Appeals recently decided an important case regarding the allocation of a loss among insurers in a continuing damages scenario.


In Polygon Northwest Co. v. American Nat. Fire Ins. Co., 143 Wash. App. 753, 189 P.3d 777 (2008), a developer settled a construction defect lawsuit for $7.8 million. The developer had four primary policies in effect during successive years, each of which had liability limits of $1 million. The latter two polices were unavailable, because the insurer which issued them became insolvent. The developer also had four excess policies overlaying each of the four primary policies. The latter two excess policies were issued by Great American Insurance Company.


Great American argued that its two excess policies were not triggered, because the underlying primary policies were insolvent. The court disagreed, and explained its holding as follows. The insuring agreement in the Great American policies provided that Great American is obligated to pay “those sums in excess of ‘underlying insurance’ . . . that the ‘Insured’ becomes legally obligated to pay . . . . ” According to the court, nothing in this portion of the insuring agreement relieved Great American of its obligations in the event of insolvency. Rather, the provisions only required that the insured sustain liability in excess of the limits of the underlying primary policy.


The court also noted that Great American’s polices provide that: “In the event of reduction or exhaustion of the [underlying policies] by reason of losses paid thereunder, this policy shall” continue as underlying insurance. The court observed that this provision only relieved Great American of its duty to drop down to the primary level in the event that insolvency prohibited the “reduction” or “exhaustion” of the underlying primary limits. The court also observed that none of the parties had argued that Great American should drop down to the primary level.  The provision did not, according to the court, relieve Great American of its coverage obligations altogether in the event that the primary insurer became insolvent.


The court held that policies issued by all excess insurers, including Great American, were triggered by the loss. The court then reiterated that all excess insurers which issued triggered policies were jointly and severally liable for the entire loss. Gruol Constr. Co. v. Ins. Co. of N. Am., 11 Wash. App. 632 (1974). However, because this was an action for equitable contribution among those insurers, the court proceeded to analyze how the loss should be allocated among them.


The court noted that each of the four excess policies contained “other insurance clauses,” which provided that the insurance afforded by the policies “is excess over any other valid and collectible insurance available to the ‘Insured’ . . . .” The court held that these other insurance clauses were unenforceable as between the excess policies, because they were mutually repugnant. Mission Ins. Co. v. Allendale Mut. Ins. Co., 95 Wash. 2d 464 (1981). The other insurance clauses, however, were enforceable as between the excess policies and the primary policies. Therefore, for the purposes of an inter-insurer allocation, the other insurance clauses imposed the requirement that the loss exceed the limits of all “valid and collectible” primary policies (the first two primary policies).


In addition, the Great American policies contained the following insolvency provision: “In the event of . . . insolvency of any underlying insurer, the insurance afforded by this policy shall not replace such ‘underlying insurance,’ but shall apply as if the ‘underlying insurance’ was valid and collectible.” The policies issued by the other excess insurers did not contain this provision. The court held that this provision transformed insolvent and uncollectible policies into “valid and collectible” policies for the purposes of Great American’s other insurance clause.


Accordingly, the court held that Great American’s coverage obligation (for the purposes of allocation) incepted after the loss exceeded the limits of both of the solvent primary policies, plus one of the insolvent primary policies. According to the court, the loss did not need to exceed the limits of both insolvent policies, because Great American could be liable under either of its excess policies.


In a separate aspect of the case, the court held that attorneys’ fees awarded against the insured in the underlying construction defect case were not “costs taxed against the insured” for the purposes of the supplementary payments provision in one of the primary insurers’ policies. The court reasoned that the term “costs” should be interpreted in accordance with its ordinary legal definition in Washington, which does not include attorneys’ fees.


It is not certain how a court would apply Polygon in a situation in which certain primary policies have lower limits of liability than others. Would a court require that all primary policies be exhausted before any excess policy is triggered? Or would the court instead apply a “rising waters” approach, pursuant to which an excess policy is triggered once the primary policy under it has been exhausted and an equivalent amount of the loss has been allocated to the other remaining primary policies? Similarly, there may be more than one way to apply Polygon in a situation in which there are several levels of excess policies with differing limits of liability.


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