I don’t often address cases in Coverage Opinions concerning the relationship between a primary and excess insurer. Frequently driven by their unique facts and policy language, they can be, at best, a Gala to Red Delicious comparison. At worst -- apples to washing machines. As a result, they do not offer takeaways that can be applied to other situations.

But Hunter v. AIG Property Casualty Co., No. 17-81020 (S.D. Fla. July 20, 2018) is a primary-excess case that I believe is suitable for discussion here as it offers a lesson to be learned. It involves coverage arising out of the following circumstances. In July 2012, Kara Walker was injured when she was struck by a firework caused by Kenneth Hunter’s alleged negligence. [The case does not address how this happened.]

Hunter was an insured under two policies. He had a homeowner’s policy with Tower Hill Insurance that was subject to a $100,000 liability limit. He was also insured under a group personal excess liability policy, issued by an AIG predecessor, to his employer. The policy’s limits were excess of $300,000 up to $5,000,000. You can see where this is going.

In January 2013, Tower Hill paid its $100,000 limit and negotiated a limited release for Hunter. In June 2016, Ms. Walker sued Mr. Hunter for negligence. AIG retained counsel, John Lurvey, to represent Hunter and instructed Mr. Lurvey to settle the action.

Hunter advised Lurvey that he did not agree to settling the claim. He made clear that he wanted to go to trial and requested that both he and his personal attorney be included in any settlement discussions. In May 2017, Hunter was informed that AIG settled the action for $750,000. Hunter and his personal counsel were not involved in the settlement. Hunter never consented to or signed any settlement agreement.

Next AIG demanded that Hunter reimburse it $200,000, representing the gap in coverage between Tower Hill’s $100,000 limit and the required $300,000 in required underlying limits under the AIG Policy. Hunter refused and filed the action seeking a determination that he is not legally obligated to reimburse AIG.

The court held that Hunter was not obligated to reimburse AIG. In doing so it set out a lot of policy language from the AIG policy. I’ll discuss what was critical in the context of the court’s decision.

First, the court noted that, pursuant to numerous aspects of the policy, AIG was liable only for amounts in excess of the required underlying limits of $300,000. The court also cited to several policy provisions making clear that Hunter “was required to maintain a minimum of $300,000 in underlying homeowners personal liability insurance or else run the risk of no excess coverage.” Reading all of this together, the court stated that “the intention is clear. Hunter was required to maintain $300,000 in underlying primary insurance limits or else forfeit his right to excess coverage under the [AIG] Policy.”

Clearly Hunter had not done so. Yet the court still held that Hunter was not obligated to reimburse AIG.

The court’s decision was tied to the language of the AIG Policy that addressed defense. Under the policy, AIG had a “duty” to defend and a “right” to defend: “The [AIG] Policy includes two distinctly different provisions regarding AIG’s duty to defend versus AIG’s right to defend. The first provision gave AIG the ‘right and duty to defend’ only once the underlying $300,000 limits were exhausted, whereas the second provision gave AIG ‘the right and...opportunity’ to participate in the defense of any claim ‘in all other instances’ which may create liability for AIG.”

With this distinction firmly in mind, the court held that “AIG had the right, but not the duty, to participate in Hunter’s defense in the state court lawsuit given that the underlying $300,000 limit was not yet exhausted. When the state court lawsuit began, $100,000 of the applicable $300,000 limit had already been paid out by Hunter’s only primary insurer to Ms. Walker. A fact AIG well knew. And while AIG may have had the right to then participate in and settle the state court lawsuit as AIG deemed expedient to protect its own interests under the [AIG] Policy, AIG does not now have the right to seek reimbursement from Hunter for a settlement that Hunter vociferously refused to take part in. (several citations and parentheticals omitted). Such an outcome would run contrary to the plain, ordinary, and proper reading of the [AIG] Policy. AIG, which acted to orchestrate the settlement with Ms. Walker without Hunter’s consent, plainly did not have the authority to bind Hunter. In the absence of such authority, Hunter never became obligated to pay the $200,000 gap in coverage. Thus, AIG is not entitled to the reimbursement it seeks.”

While primary-excess cases are frequently driven by their unique facts and policy language, this one involves policy language that is seemingly not unusual: numerous aspects of the excess policy state that the insurer is only liable for amounts in excess of the required underlying limits; several policy provisions state that the insured is required to maintain a certain minimum underlying limit; and the excess insurer’s “right and duty to defend” kicks-in only after the underlying limits are exhausted, as opposed to “the right and...opportunity” to participate in the defense in all other instances which may create liability for the insurer.

Thus, the decision offers a takeaway, for excess insurers, confronted with the opportunity to settle a case – and thereby limit its own exposure – but in the face of a known gap in underlying limits.