Opinion ID: 2292704
Heading Depth: 2
Heading Rank: 1

Heading: Settlement as Exhaustion

Text: The parents claim that the equitable garnishment court erred in finding that their settlement with Virginia Surety did not constitute exhaustion, as required by the Great American policy. It has been long recognized that parties to an insurance contract are free to define when an underlying insurance policy is exhausted so that the excess carrier's obligation to pay is triggered. See Handleman v. U.S. Fidelity & Guaranty Co., 223 Mo.App. 758, 18 S.W.2d 532, 534 (1929). The parties dispute whether Great American's duty to indemnify arises when Virginia Surety actually pays the full amount of its policy. Instead, the parents argue, the plain language of the Great American policy creates the liability to pay once the underlying insurance is obligated to pay the full amount of the underlying insurance. To support their argument, the parents rely on the provision in the Great American policy that describes When `Loss' is Payable, which states: Coverage under this policy will not apply unless and until the Insured or the Insured's underlying insurance is obligated to pay the full amount of the Underlying Limits of Insurance. [5] When the amount of loss has finally been determined, we will promptly pay on behalf of the insured the amount of loss falling within the terms of the policy. This provision indicates that Great American will pay the amount of loss falling within the terms of the policy as long as two requirements are met: (1) the insured or the insured's underlying coverage is obligated to pay the full amount of its underlying limits of insurance; and (2) the amount of loss must be finally determined. Once those requirements are met, Great American will promptly pay the amount of loss falling within the terms of the policy. The equitable garnishment court erred in determining that the Great American policy did not cover the parents' claim because the Virginia Surety policy was not exhausted. The Great American policy clearly states that its coverage will apply when the underlying insurer is obligated to pay the full amount of the underlying limits of insurance. Obligated to pay has a different meaning than has already paid. Further, contrary to Great American's arguments, there are no other provisions in its insurance policy that require exhaustion of the underlying insurance. Great American relies on the provision that sets forth how its limits of insurance will apply. That provision provides, in relevant part: 4. Subject to Paragraphs B.2. and B.3. above, if the Underlying Limits of Insurance. . . are either reduced or exhausted solely by payment of loss, such insurance provided by this policy will apply in excess of the reduced underlying limit or, if all underlying limits are exhausted, will apply as underlying insurance subject to the same terms, conditions, definitions and exclusions of the first underlying insurance, except for the terms, conditions, definitions of exclusions of this policy. However, we will not pay that portion of a loss that is within the Underlying Limits of Insurance which the insured has agreed to fund by self-insurance or means other than insurance. It argues that exhausted solely by payment of `loss' mandates that the underlying limits of insurance must be fully exhausted by cash payment before Great American is obligated to pay. This argument ignores that the complete phrase is if the Underlying Limits of Insurance. . . are either reduced or exhausted solely by payment of `loss.' (emphasis added). The portion of the policy on which Great American relies contemplates that the underlying limits of insurance may be reduced rather than exhausted. Further, the second paragraph of the provision refers to `loss' that is within the `Underlying Limits of Insurance' which the insured has agreed to fund by self-insurance or means other than insurance.  (emphasis added). That phrase indicates that the policy recognized that the underlying limits of insurance may be fulfilled by something other than insurance. Here, the underlying limits of insurance were met by a settlement that consisted of a $700,000 payment and a $300,000 release, totaling $1 million. The phrase means other than insurance expressly contemplated the situation at hand. Great American also incorrectly relies on cases from other jurisdictions that have rejected settlements that stipulate exhaustion without paying the full underlying limits. The policy language in each case that it relies on is distinguishable from the policy language at issue in this case and is not persuasive authority. [6] Courts must interpret an insurance policy as written, not as the insurance company wishes it were written. Here, the policy was unambiguousGreat American's obligation to pay claims was not dependent on the underlying insurer exhausting its limits. The two requirements for Great American to promptly pay occurred once Virginia Surety was obligated to pay the full amount of the underlying limits of insurance and the amount of loss was finally determined. The policy contains no requirement that the underlying limits of insurance must be exhausted. The equitable garnishment court erred in finding otherwise.