Excess Insurer Not Notified Of Lawsuit

Commercial Umbrella/Excess	No Liability to Underlying Carrier
Conditions	No Duty to Defend

A primary general liability insurer settled a lawsuit involving false imprisonment against a large retail firm operating nationwide. The insurer negotiated a $1 million settlement following a $2.25 million verdict against the insured retailer. It then sought reimbursement from the insured's excess liability insurer for the amounts paid in excess of the aggregate insurance limit.

The record indicated that the primary insurer appeared to have raised awareness of an aggregate limit only after settling the case. It explained that a $1 million aggregate limit was mistakenly omitted during policy preparation due to a clerical error, and the parties had agreed to this provision. The policy originally specified a "per occurrence" limit of $1 million, which was the amount settled for the claim. The primary insurer then sought reimbursement from the excess insurer for amounts paid above the aggregate limit, as well as to defend open claims it claimed were still pending against the insured. At the same time, it "corrected" its policy to include the $1 million aggregate limit.

The excess insurer filed a lawsuit for declaratory judgment, asserting that it had no liability to the primary insurer. Both parties agreed that the insured did not notify the excess insurer about the false imprisonment claim until the $2.25 million verdict. The insurer claimed this was a clear breach of its policy condition: "....If claim is made or suit is brought against the Insured, the Insured shall immediately forward to the Corporation (the Insurer) every demand, notice, summons or other process received by him or his representative."

The record indicated that in the false imprisonment case, the claimants initially demanded $125,000, while the primary insurer had only offered $25,000 just before the trial. During proceedings, the claimants reduced their demand to $90,000, and the primary insurer increased its offer to $75,000. The U.S. District Court clearly determined that, given these facts, the excess insurer was prejudiced due to the lack of notice. It "deserved an opportunity to evaluate the claim and protect its interests, a right it explicitly reserved in its contract with (the Insured)."

Judgment was entered in favor of the excess insurer, stating that it was not responsible to the primary insurer for the amounts exceeding the limits of the primary insurance policy.

Safety Mutual Casualty Corp., Plaintiff v. Liberty Mutual Ins. Co., Defendant. U.S. District Court, District of Massachusetts. Civil Action No. 89-2636-Z. September 4, 1991. CCH 1991-92 Fire and Casualty Cases, Paragraph 3379.