The Delaware Superior Court recently held in Pfizer Inc. v. U.S. Specialty Ins. Co. that Pfizer Inc.'s ("Pfizer") settlement with one of its insurers, for less than the policy limit, was not subject to an exhaustion clause in a policy issued by U.S. Specialty Insurance Co. ("U.S. Specialty").
Pfizer holds, absent prejudice, excess insurers will be required to indemnify insureds regardless of whether the policy contains an exhaustion clause or if the insured collected less than the full amount of a primary policy, so long as the insurer's liability begins at its own attachment point. Pfizer obtained a thirteen-policy tower of insurance, including the policy issued by U.S. Specialty, through insurance broker Marsh USA, Inc. ("Marsh"). The U.S. Specialty policy, issued in 2004, was to attach only after all underlying insurance had been exhausted by actual payment of claims or losses thereunder, which was standard in the excess market at the time. Pfizer acquired the policy before court rulings and policies allowed insureds to fill coverage gaps left by settling coverage claims with lower-tier insurers for less than full policy limits. The Delaware court's ruling undermines the parties' expectations as to the applicability of excess coverage and the terms under which it would be provided given the marketplace when U.S. Specialty issued its policy. The court also held Pfizer's tender of related securities litigation did not trigger prior notice exclusions, because the prior claims were not "fundamentally identical" to the claim for which Pfizer sought coverage. The court drew its distinction on the health effects alleged in the lawsuits, even though they all alleged misrepresentations and concealments by Pfizer's directors and officers relating to specific drugs.
Prior litigation and the Pfizer exclusions
U.S. Specialty provided excess coverage to Pfizer for claims alleging wrongful acts by Pfizer's directors and officers on a claims-made basis. Pfizer sought coverage from U.S. Specialty in relation to a lawsuit captioned Morabito v. Pfizer, Inc., et al. ("Morabito"). Pfizer had previously tendered to its insureds' claims for two other lawsuits, Garber v. Pharmacia Corp. et al. ("Garber") and Jewell v. Pharmacia Corp., et al. ("Jewell"). The three lawsuits alleged Pfizer's directors and officers misrepresented and concealed from investors adverse effects of Pfizer drugs. Garber and Jewell alleged issues related to gastrointestinal effects, whereas Morabito involved cardiovascular effects. The U.S. Specialty policy ("Policy") insuring agreement provided in relevant part "[e]xcept as specifically set forth in the terms, conditions, or endorsements of this Policy, coverage hereunder shall apply in conformance with the terms, conditions, limitations, and endorsements of the policy immediately underlying this Policy, except that coverage hereunder shall attach only after all Underlying Insurance has been exhausted by actual payment of claims or losses hereunder." ("Exhaustion Clause")The Policy also incorporated two prior notice exclusions which in relevant part barred indemnification for losses: "directly or indirectly[] based on, attributable to, arising out of, resulting from, or in any matter relating to wrongful acts or any facts, circumstances or situations of which notice of claim or occurrence which could give rise to a claim has been given prior to the effective date of this policy under any other policy or policies" or "alleging, arising out of, based upon, or attributable to the facts alleged or to the same or related Wrongful Acts alleged or contained in any Claim which has been reported, or in any circumstances of which notice has been given, under any policy of which this policy is a renewal or replacement…" ("Prior Notice Exclusions") The policies contained specific exclusions relating to Garber. Pfizer settled Morabito and tendered its claim to its insurers. U.S. Specialty denied coverage on the ground that prior litigation, including Garber and Jewell, triggered policy exclusions and endorsements. Pfizer sued U.S. Specialty in the Delaware Superior Court, alleging breach of contract claims. On prior partial motions for summary judgment, the court held: 1) Delaware law applied to the coverage dispute; and 2) that because Morabito and Garber were not "fundamentally identical," the Prior Notice Exclusions did not bar coverage. Pfizer and U.S. Specialty both moved for summary judgment, presenting two issues for the court to decide: 1) does the D&O Policy attach when another insurer, lower than U.S. Specialty in the tower, settled with Pfizer for less than its policy limit; and (2) do the Prior Notices Exclusions preclude coverage for Morabito.
The Court's Analysis of the Exhaustion Clause and Prior Notice Exclusions Exhaustion Clause Analysis
The court considered whether a settlement in satisfaction of a policy – but for less than the full policy limit – affects attachment of excess insurers' policies higher in a tower. U.S. Specialty argued California authority holding underlying policy settlements below limits bar attachment above when the excess policy requires exhaustion by actual payment of a covered loss should apply. 1 Rejecting U.S. Specialty's argument, the court held Delaware has consistently applied the "Stargatt Rule," which provides excess policies attach irrespective of whether the insured collected the full amount of the primary policies, so long as the excess insurer was only called upon to pay such portion of the loss in excess of the limits of those policies. 2 The court recognized the "strong suggestion" Delaware embraces the Stargatt Rule absolutely, even in the face of an explicitly contrary clause. The court wrote: "simply put, Delaware recognizes no business reason for an excess insurer to care whether the payment in satisfaction of a policy below was for the policy's full dollar value, so long as the protections afforded by all underlying insurance policies are extinguished and the excess insurer's liability begins only at its own attachment point."Ultimately, the Superior Court held an excess carrier cannot avoid coverage under an exhaustion clause due to a settlement below unless that settlement works some additional exposure or prejudice on the excess carrier above the attachment point.
Prior Notice Exclusions Analysis
For the Prior Notice Exclusions to apply, the court next explained that U.S. Specialty was required to show either Morabito: 1) was "based on, attributable to, arising out of, resulting from, or in any matter relating to wrongful acts or any facts, or situations"; or 2) alleged, arose out of, was based upon, or was attributable to the facts alleged or to the same or related Wrongful Acts alleged in Garber or Jewell. Delaware law provides claims must be "fundamentally identical" for a prior notice exclusion to apply. The court cited its ruling on the parties' prior partial motions for summary judgment that Morabito and Garber were not fundamentally identical. 3 The court noted the only distinction U.S. Specialty raised from the prior motions was the Prior Notices Exclusions should apply given Pfizer's tender of Jewell, which U.S. Specialty contended arose out of the same facts and circumstances as Morabito. The court noted Jewell was consolidated with Garber, followed the same litigation trajectory as Garber, and determined its prior ruling on the Prior Notices Exclusion applied. The court held Jewell identified the same actionable misrepresentations and concealments as in Garber, and the claims in Morabito were not fundamentally identical to those in Garber and Jewell.Take Away
The court's ruling creates additional uncertainty and limitations for insurers providing coverage with exhaustion clauses and prior notice exclusions. Delaware's ruling puts excess insurers on notice that they will not be able to avoid coverage if a lower-level insurer settles a claim for less than the policy limit even if the policy contains a contrary clause, absent a showing of additional exposure or prejudice. Delaware's refusal to apply the Prior Notice Exclusions because the claims at issue were not "fundamentally identical" signals that prior notice exclusions will likely not be enforced under most circumstances. Insurers could be compelled to draft broad notice exclusions capturing all prior claims to attempt to satisfy the "fundamentally identical" standard. Insurers should consider including forum litigation clauses or initiating litigation in forums that enforce exhaustion clauses and prior notice exclusions.Michael Zigelman is the Co-Managing Partner of Kaufman Dolowich & Voluck, LLP's New York City office, as well as chair of the General Liability Coverage Practice Group. Mr. Zigelman concentrates his practice on all aspects and lines of insurance coverage. Aaron Cargain is of counsel at Kaufman Dolowich & Voluck. His practice includes defending clients in labor and employment, directors and officers, professional liability, insurance coverage and bad faith disputes.
1 Qualcomm, Inc. v. Certain Underwriters at Lloyd's, London, 161 Cal.App.4th 184, (2008)
2 Stargatt v. Fidelity and Cas. Co. of New York, 67 F.R.D. 689, 691 (D. Del. 1975)
3 See Pfizer Inc. v. Arch Ins. Co., No. CVN18C01310PRWCCLD, 2019 WL 3306043 (Del. Super. Ct. July 23, 2019)