The underlying loss involved a construction site injury claim by plaintiff Jin Ming Chen, who obtained a judgment against general contractor Kam Cheung Construction Inc. (hereinafter Kam) for $2.3 million, plus about $400,000 in pre-judgment interest.

To summarize a lengthy opinion and two dissents, Kam had a $1 million primary CGL with Arch Specialty Insurance Company (hereinafter Arch) and a $4 million excess policy with The Insurance Company of Pennsylvania (hereinafter AIG). Arch previously obtained a declaration that its policy was properly rescinded and void due to material misrepresentations made by Kam.

In this coverage action, Chen sought payment from AIG for the judgment amount plus pre-and post-judgment interest, less $1 million representing the Arch layer of coverage.

The Policies

Unfortunately, as tedious and technical as insurance policy language may sometimes seem, coverage analysis often requires careful examination of policy terms since the precise wording can prove decisive as was the case in Chen.

The Arch primary policy contained the standard pre- and post-judgment coverage grant found in the Insurance Service Office (ISO) CGL Common Conditions "SUPPLEMENTARY PAYMENTS – COVERAGES A and B":

1) We will pay, with respect to any claim we investigate or settle, or any "suit" an insured we defend …

f) Prejudgment interest awarded against the insured on that part of the judgment we pay. If we make an offer to pay the applicable limit of insurance, we will not pay any prejudgment interest based on that period of time after the offer.

g) All interest on the full amount of any judgment that accrues after entry of the judgment and before we have paid, offered to pay, or deposited in the court the part of the judgment that is in the applicable limits.

The AIG excess policy contained an "Ultimate Net Loss" provision defined as "the amount payable in settlement of liability of the Insured after making deductions for all recoveries and for other valid and collectible insurance excepting the Underlying Insurance [scheduled Arch primary $1M]."

Chen argued that this language and standard "follow form" wording made AIG responsible for all of the interest.

The Holding

The Court of Appeals interpreted the primary and excess policies, when read together, to mean that AIG covered only the amount of pre- and post-judgment interest in excess of that which would have been paid under the Arch policy's Supplementary Payments as quoted above.

The court also relied on the excess policy's "Maintenance of Underlying Insurance" wording providing that Kam's failure to maintain primary coverage would not affect AIG's coverage and rejected the argument that "follow form" wording meant that AIG dropped down to owe all interest.

The dissents distinguished between pre- and post- judgement interest obligations, described the primary and excess policies as "interlocking" in providing overlapping joint and several coverages for the interest and stressed the strong preference by courts to find coverage where policy terms are open to interpretation.

The court ultimately determined that Kam was responsible to Chen for the coverage gap of $1 million, plus interest representing the amount which the Arch policy would have paid if not voided.

Impact

The frequency of verdicts over $20 million in 2019 was more than 300% higher than the annual average verdict from 2000 to 2010, as reported by the Wall Street Journal on Dec. 27, 2019, in "The Specter of Social Inflation Haunts Insurers" by Telos Demos.

As more claims reach the lead, or first layer, excess and higher layers of insurance, understanding how the various layers interact particularly on coverage for interest will be increasingly important to all parties and their insurers trying to evaluate and settle cases.

The interest rate in New York generally is set by CPLR §5004 at 9% per annum. As reflected by the number of reported decisions each year, construction site accidents drive much of the litigation valued into excess layers of insurance towers and these cases often involve significant interest.

In Labor Law cases interest starts when summary judgment is granted and, in property damage claims, interest runs from the date of loss. Thus, by the time many of these cases are mediated or negotiated, several years of interest may have accrued.

Accordingly, for multi-million-dollar claims, the interest component alone can be substantial. However, too often, interest and coverage for it are overlooked during settlement negotiations until it the eleventh hour.

Mind the Gap

As the court emphasized in Chen, the interest paid by primary policies under Supplementary Payments, quoted above, do not erode limits. This unlimited coverage obligation, along with the unlimited duty to pay defense costs, can easily exceed policy limits.

Thus, a related issue is that insurers can be motivated to cap their exposure by offering policy limits or attempting to tender the limits to the court early in the life of the claim. Counsel should be mindful as to whether such efforts create uncovered exposure for their clients or other parties. Similarly, counsel may need to advise the court that accepting policy limits may complicate settlement.

Conclusion

As underscored by the multiple opinions in Chen, interplay of coverage among layers in a tower and, in particular for interest obligations, can be difficult to resolve. Moreover, coverage gaps can threaten policyholders balance sheets, leave claimants empty handed and impede settlement negotiations.

While ISO issues excess policies, they are not as commonplace as the well-worn ISO primary CGL policy. More often, excess wording is customized or manuscripted.

Thus, excess policy terms, conditions and exclusions, particularly as to "follow form" wording, cannot be relied upon to automatically always provide coverage as broad as the primary policy particularly if there is more specific excess wording which excludes coverage.

Chen highlights the cautionary adage that "follow form" means the excess covers what the primary covers … except where it doesn't.

Julian D. Ehrlich is Senior Vice President, Claims with Aon's Construction Risk Services Group in New York.