Interstate Fire & Casualty Co. v. Apartment Mgmt Consultants

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT August 27, 2020
_________________________________
Christopher M. Wolpert
Clerk of Court
INTERSTATE FIRE & CASUALTY
COMPANY,
Plaintiff - Appellant,
v. No. 18-8058
(D.C. No. 2:13-CV-00278-ABJ)
APARTMENT MANAGEMENT (D. Wyo.)
CONSULTANTS LLC,
Defendant - Appellee.
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before BRISCOE, LUCERO, and McHUGH, Circuit Judges.
_________________________________
Interstate Fire & Casualty Company (“Interstate”) appeals the district court’s
grant of summary judgment in favor of Apartment Management Consultants, Inc.,
(“AMC”) declaring that Interstate must provide insurance coverage and indemnify
AMC under Interstate’s primary and excess insurance policies for compensatory and
punitive damages adjudged in an underlying lawsuit against AMC. Exercising
jurisdiction under 28 U.S.C. § 1291, we affirm.
*
This order and judgment is not binding precedent except under the doctrines
of law of the case, res judicata, and collateral estoppel. It may be cited, however, for
its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
I
This case involves a dispute over who must pay a $1,950,000 punitive
damages award to Amber Lompe. Lompe was a young college student living in an
apartment managed by AMC in Casper, Wyoming, when she was injured by a
malfunctioning furnace in her apartment that exposed her to carbon monoxide gas.
See Lompe v. Sunridge Partners, LLC, 818 F.3d 1041, 1047, 1076 (10th Cir. 2016).
She prevailed in a lawsuit against her landlord, Sunridge Partners, LLC (“Sunridge”),
and its management company, AMC, and was awarded $3,000,000 in compensatory
damages and $25,500,000 in punitive damages, of which $22,500,000 was allocated
against AMC.1 Id. at 1046.
Interstate provided primary and excess liability insurance coverage2 to AMC
and Sunridge. First, Interstate issued a general liability insurance policy (“Policy” or
“Primary Policy”) to Commercial Industrial Building Owner’s Alliance, Inc.
(“CIBA”) with $1 million per occurrence and $2 million aggregate policy limit for
1
The jury reduced the $3,000,000 compensatory damages award by 10% to
$2,700,000 to reflect Lompe’s share of fault for her injury, allocating $1,950,000 of
the remainder to AMC and $750,000 to Sunridge. Id. at 1053. Compensatory
damages are not at issue in this appeal. In the 2016 appeal, we vacated the punitive
damage award against Sunridge, which is not a party to this appeal, and reduced the
award against AMC to $1,950,000, which is the amount in dispute in this appeal.
2
“[P]rimary insurance potentially attaches immediately upon the happening of an
occurrence or accident that gives rise to liability on the part of the insured”; whereas
excess insurance “is secondary insurance coverage that attaches only after a
predetermined amount of primary insurance . . . has been exhausted.” Scott M.
Seamana & Charlene Kittredge, Excess Liability Insurance: Law and Litigation, 32
Tort & Ins. L.J. 653, 655-56 (1997); see also Union Indem. Ins. Co. v. Certain
Underwriters, 614 F. Supp. 1015, 1017 (S.D. Tex. 1985).
2
the period at issue. CIBA, in turn, issued Certificates of Insurance to AMC and
Sunridge as named insureds. This policy contained an explicit exclusion for punitive
or exemplary damages.3 Next, Interstate issued an Excess Liability Policy (“Excess
Policy”) with a $10 million per occurrence and $10 million aggregate limit, listing
CIBA, AMC, and Sunridge as named insureds. The Excess Policy followed the form
of the underlying Primary Policy,4 but did not include a specific punitive damages
exclusion.
3
The Primary Policy states:
EXCLUSION - PUNITIVE OR EXEMPLARY DAMAGES
This endorsement modifies Insurance provided under the following:
COMMERCIAL GENERAL LIABILITY COVERAGE PART
PRODUCTS/COMPLETED OPERATIONS COVERAGE PART
This insurance does not apply to fines, penalties, punitive damages,
exemplary damages, treble damages or the multiplication of
compensatory damages.
4
A “following form” excess insurance policy “incorporates by reference the
terms, conditions, and exclusions of the underlying policy.” Douglas R. Richmond,
Rights and Responsibilities of Excess Insurers, 78 Denv. U. L. Rev. 29, 30 (2000).
“An excess policy that follows form is designed to match the coverage provided by
the underlying policy . . . .” Id. The “follows form” provision of Interstate’s Excess
Policy states:
The definitions, terms, conditions, limitations, exclusions and
warranties contained in the “underlying insurance” polic(ies) that are in
effect at the inception date of this policy apply to this policy unless they
are inconsistent with provisions of this policy, or relate to premium,
subrogation, other insurance, an obligation to investigate or defend, the
amount or limits of insurance, payment of expenses, cancellation or any
renewal agreement.
3
Lompe filed her complaint against Sunridge and AMC on May 2, 2012, and
Interstate assumed the defense of Lompe’s claim on May 12, 2012. Although
Lompe’s complaint sought punitive damages at its inception, Interstate did not
reserve its right to disclaim coverage for punitive damages until November 20,
2013—eighteen months after the complaint was filed, one month after the district
court denied AMC and Sunridge’s motion for summary judgment, and just eleven
days before the jury trial began. Further, in the summary judgment briefing, the
counsel retained by Interstate on behalf of AMC and Sunridge advanced only a
single-sentence argument to dismiss the punitive damages claim as a matter of law:
“A claim for punitive damages is not a separate cause of action and cannot stand
without an underlying claim.”
During the eighteen-month period between Lompe filing her complaint and
Interstate’s reservation of its rights, Lompe made a clear and unequivocal offer to
settle within the limits of the Primary Policy. AMC made three separate demands
that Interstate settle the case, but Interstate refused. After trial, the jury awarded
Lompe compensatory damages above the limits of the primary policy as well as
significant punitive damages. Interstate provided counsel for AMC and Sunridge to
appeal the jury verdict, and on appeal we vacated the punitive damages award against
If any “underlying insurance” does not pay a loss, for reasons other than
exhaustion of an aggregate limit of insurance, then we will not pay such
loss.
4
Sunridge and reduced the punitive damages award against AMC to $1,950,000.
Lompe, 818 F.3d at 1046.
On December 24, 2013, two days before judgment was entered in the
underlying Lompe action against AMC and Sunridge, Interstate sued for relief under
28 U.S.C. § 2201, seeking a declaration that Interstate had no coverage obligation
under either the Primary Policy or the Excess Policy “concerning any award of
punitive damage, and no duty to indemnify either AMC or Sunridge for any punitive
damages awards in the Lompe Action.” Interstate subsequently moved for judgment
on the pleadings, and AMC cross-moved for partial summary judgment, asking the
court to find that Interstate was estopped from relying on the Primary Policy’s
punitive damages exclusion. In opposition to AMC’s summary judgment motion,
Interstate argued that: (1) estoppel was inapplicable, (2) that AMC had failed to show
prejudice, and (3) that a ruling on the issue would be premature. The district court
disagreed and held that Interstate was estopped from relying on the Primary Policy’s
punitive damages exclusion because Interstate unconditionally assumed the defense
of AMC and did not reserve its right to disclaim coverage until shortly before trial.
As a result, the court determined that “Interstate under the Primary Policy must
provide coverage and indemnification, having failed to defend with a timely
reservation of rights, for sums the insured is legally obligated to pay.”
Next, the district court held that, because the Excess Policy did not include a
specific exclusion for punitive damages, once the policy limits of the Primary Policy
were exhausted, “the excess insurers’ obligations are triggered and they must provide
5
the agreed-upon excess liability coverage.” Interstate’s obligation under the Primary
Policy to provide coverage and indemnification for the damages owed to Lompe—
both punitive and compensatory—were damages that the insured was “legally
obligated to pay.” As a result, absent a specific exclusion within the Excess Policy,
Interstate was required to provide the agreed-upon excess liability coverage. After
further proceedings not relevant here, the district court reiterated its findings and
entered judgment for AMC on the coverage and indemnification issue.5 Interstate
appealed to challenge the district court’s ruling that it was estopped from denying
coverage to AMC.
II
“We review de novo the district court’s grant of summary judgment and apply
the same legal standard used by the district court.” Cornhusker Cas. Co. v. Skaj, 786
F.3d 842, 849 (10th Cir 2015) (quotation omitted). Summary judgment is
appropriate if “the movant shows that there is no genuine dispute as to any material
5
In its July 2018 order the district court held:
[T]hat Interstate under the Primary Policy must provide coverage and
indemnification, having failed to defend with a timely reservation of
rights, for all sums the insureds are legally obligated to pay, which
encompasses compensatory and punitive damages. If policy limits
under the Primary Policy are exhausted, the excess insurers’ obligations
are triggered under the applicable “follow form” policies and the excess
insurers must provide the agreed-upon excess liability coverage. The
excess policies contain no specific exclusion that is applicable to facts
here. Interstate and the excess insurers (if necessary) must provide
coverage and indemnification, as previously ordered. (footnote
omitted).
6
fact and the movant is entitled to judgment as a matter of law.” Id. at 850 (quoting
Fed. R. Civ. P. 56(a)). “We examine the record and all reasonable inferences that
might be drawn from it in the light most favorable to the non-moving party.” Berry
& Murphy, P.C. v. Carolina Cas. Ins. Co., 586 F.3d 803, 808 (10th Cir. 2009)
(quotation omitted).
“Because this is a diversity action, we apply the substantive law of the forum
state, which, for purposes of this appeal, is Wyoming. In addition, we review the
district court’s interpretation and determination of state law de novo.” Cornhusker,
786 F.3d at 850 (citation and quotation omitted).
III
Interstate contends that the district court erred when it found that Interstate
was equitably estopped from denying coverage because it assumed the defense of the
underlying Lompe action without timely reserving its rights. Interstate asserts that
equitable estoppel is not available to expand insurance coverage under Wyoming law
and that the district court erroneously applied the doctrine. Finally, Interstate argues
that the district court erred when it determined that Interstate was liable under the
Excess Policy for any portion of the punitive damages award.
A
Interstate agrees with the district court’s statement of the general rule under
Wyoming law that “estoppel and waiver cannot be employed to expand policy
coverage.” It contends, however, that the court erred by recognizing an exception to
this default rule when an insurer—with full knowledge of noncoverage under the
7
policy—assumes defense of a claim without reserving its right to deny coverage
under an existing exclusion. Interstate replows the same legal ground we considered
in Cornhusker to no avail—that decision controls this question.6
As we have explained, “[i]n cases arising under a federal court’s diversity
jurisdiction, the task of the federal court is not to reach its own judgment regarding
the substance of the common law, but simply to ascertain and apply the state law.”
Wankier v. Crown Equip. Corp., 353 F.3d 862, 866 (10th Cir. 2003) (quotation
omitted). When a federal court predicts what a state’s highest court would do, it is
“performing [a] ventriloquial function . . . . Thus, when a panel of this Court has
rendered a decision interpreting state law, that interpretation is binding on district
courts in this circuit, and on subsequent panels of this Court, unless an intervening
decision of the state’s highest court has resolved the issue.” Id. Interstate points to
no such intervening cases, nor have we discovered any.
In Cornhusker, we recognized that “[t]he Wyoming Supreme Court has not
addressed whether an insurer, having previously assumed the defense of an action
without a reservation of rights, may subsequently be estopped from asserting the
defense of noncoverage.” Id. at 852. To formulate our best Erie-guess on what the
Wyoming Supreme Court would decide, we evaluated our own precedent, other
6
Interstate’s motion to certify questions to the Wyoming Supreme Court is
denied. See Cornhusker, 786 F.3d at 852 (“Under our own federal jurisprudence, we
will not trouble our sister state courts every time an unsettled legal question in a
diversity action comes across our desks. When we see a reasonably clear and
principled course, we will seek to follow it ourselves.”) (quotation and alterations
omitted).
8
federal precedent to determine the “general weight and trend of authority,” and
Wyoming case law. Id. at 852–54. After this extensive analysis, we concluded that
the Wyoming Supreme Court would recognize and apply an exception to the default
rule under the facts in Cornhusker. Id. at 854-55.
Cornhusker considered and rejected the fundamental premise Interstate
advances in this appeal—that under Wyoming law equitable estoppel cannot be
employed to expand policy coverage. Id. at 855-57. Key to this was an examination
of Pendleton v. Pan American Fire and Casualty Co., 317 F.2d 96 (10th Cir. 1963),
and Braun v. Annesley, 936 F.3d 1005 (10th Cir. 1991), as well as Wyoming case
law concerning its default rule and equitable estoppel. In Cornhusker, we discussed
Pendleton’s consideration of an equitable-estoppel exception to the general rule
against expansion of insurance coverage under New Mexico law. We explained that
this exception applies when:
a liability insurance carrier, which assumes and conducts the defense of
an action . . . with knowledge of a ground of forfeiture or noncoverage
under the policy, and without disclaiming liability or giving notice of a
reservation of its right to deny coverage, is thereafter precluded in an
action upon the policy from setting up the ground of forfeiture or
noncoverage as a defense. In other words, the insurer’s unconditional
defense of an action . . . constitutes a waiver of the terms of the policy
and an estoppel of the insurer to assert the defense of noncoverage. . . .
It is not necessary for the defended party to show prejudice in such a
situation because he is presumed to have been prejudiced by virtue of
the insurer’s assumption of the defense.
Cornhusker, 786 F.3d at 852-53 (quoting Pendleton, 317 F.2d at 99) (alterations
adopted). We also noted that we had applied the same exception in Braun under
9
Oklahoma law despite Oklahoma’s rule that “estoppel cannot be used to create a
contract.” Id. at 854; see also Braun, 936 F.3d at 1110–11. Further explaining the
underlying rationale for applying the exception, we wrote:
[I]n Pendleton we concluded that the insurer was estopped from denying
coverage to the ostensible insured by its conduct in unconditionally
assuming the defense without a reservation of rights, and that prejudice
was presumed to flow from the insurer’s actions. . . . Notably, we
reached this conclusion notwithstanding our agreement with the insurer
that there was not in fact coverage under the policy. . . . We seemed to
reason that, irrespective of the actuality of noncoverage, the insurer
must accept the equitable consequences of its deliberate choice to
assume full control of the litigation, without a reservation of rights,
because the ostensible insured was induced to, and did, relinquish
control of his defense . . . to the insurer. And those equitable
consequences involved shouldering the burdens of any liability arising
from the litigation that it deliberately elected to control.
Cornhusker, 786 F.3d at 853 (emphasis added) (citations and quotations omitted).
We concluded, “insurers should bear a specific consequence of such conduct: viz.,
they should be estopped from later denying coverage to an ostensible insured to
escape liability stemming from litigation over which they deliberately assumed
control without a reservation of rights.” Id. at 854. In so concluding, we also
recognized that the relinquishment of control over the defense was inherently
prejudicial to the defendant if the reservation of rights was untimely. Id. at 853.
Because Cornhusker specifically decided the legal issue raised by Interstate in this
appeal, the district court did not err when it followed Cornhusker to apply a
Pendleton-type estoppel exception to Wyoming’s general rule.
The district court correctly determined that the facts here exemplify the
concerns that animated the equitable-estoppel exception applied in Pendleton, Braun,
10
and Cornhusker. In its order, the district court held that AMC was “lulled into a false
sense of security when Interstate defended without a reservation of rights, although it
could have made an explicit reservation of rights and agreed to provide a conditional
defense as early as May of 2012.” This is apparent from the facts. Shortly after
AMC notified and tendered the defense of the Lompe claim to Interstate in May
2012, Interstate unconditionally assumed the defense of the case and hired counsel to
defend AMC and Sunridge. Throughout 2012 and 2013 Interstate did not reserve its
rights to deny coverage based on the punitive damage exclusion in the Primary
Policy, despite being on clear notice that Lompe’s suit sought punitive damages. In
March 2013, counsel filed a motion for summary judgment on all claims, including
Lompe’s punitive damages claims. However, rather than mount a full-bore assault on
the claims for punitive damages under Wyoming law, which creates significant
obstacles for obtaining a punitive damages award,7 counsel moved for their dismissal
with a one-sentence argument: “A claim for punitive damages is not a separate cause
of action and cannot stand without an underlying claim.”
7
For example, counsel did not argue in his motion that Wyoming law
disfavors punitive damages, allowing them only “in circumstances involving
outrageous conduct, such as intentional torts, torts involving malice and torts
involving willful and wanton misconduct”; Mayflower Rest. Co. v. Griego, 741 P.2d
1106, 1115 (Wyo. 1987); see also id. (“Punitive damages are not a favorite of the law
and are to be allowed with caution within narrow limits.”), nor that “punitive
damages are not appropriate in circumstances involving inattention, inadvertence,
thoughtlessness, mistake, or even gross negligence,” id. (quotation omitted). Counsel
also did not so much as mention that under Wyoming law “punitive damages are to
be awarded only for conduct involving some element of outrage, similar to that
usually found in crime.” Cramer v. Powder River Coal, LLC, 204 P.3d 974, 979
(Wyo. 2009).
11
Only after the district court denied AMC’s motion for summary judgment did
Interstate send a belated reservation of rights to disclaim coverage based on the
punitive damages exclusion in the Primary Policy: eighteen and one-half months
after the lawsuit began and only eleven days before the jury trial commenced.
Interstate argues that because AMC knew of the punitive damages exclusion no
prejudice resulted from its belated reservation of rights. But this argument ignores
the inherent nature of the prejudice that results from relinquishing control of the
defense to the insurer. As the district court found, even if punitive damages were
discussed in correspondence between Interstate and AMC, AMC did not know
Interstate’s intentions concerning reliance on the punitive damages exclusion.
Though the facts here differ slightly from those in Cornhusker—where the
insurance company waited to disclaim coverage until sixteen months after default
judgment had been entered—the prejudice is the same. Id. at 848-49. In Cornhusker,
we concluded that the insurance company’s delayed disclaimer of coverage
had the effect of lulling [the ostensible insured] into the belief that
Cornhusker was representing him pursuant to the Policy. Cornhusker
specifically retained counsel to represent him in state court and
subsequently rendered a defense. During that time period, when
Cornhusker had a plausible basis for reserving its rights . . . , it never took
that critical step.
Id. at 855. In this case, it is uncontested that Interstate failed to reserve its rights
until eleven days before trial, past the point where AMC could have hired
independent counsel to represent its interests on the purportedly uncovered claims,
have them dismissed as a matter of law at summary judgment, or to attempt to settle
12
them prior to trial. Both Cornhusker and this case implicate the same prejudice that,
as Pendleton recognized, flows when an ostensible insured “relinquish[es] control of
his defense . . . to the insurer.” Id. at 853; see also Pendleton, 317 F.2d at 99. And,
as recognized by the district court, “the prejudice to AMC . . . in these circumstances
cannot be missed and is writ large in the Judgment against the two defendants in the
Lompe action.”8 We see no error in the district court’s determination of prejudice or
its order requiring Interstate to “shoulder[] the burdens of any liability arising from
the litigation that it deliberately elected to control.” Cornhusker, 786 F.3d at 853; see
also Boston Old Colony Ins. Co. v. Lumbermens Mut. Cas. Co., 889 F.2d 1245, 1248
(2d Cir. 1989) (“In our view, notice [disclaiming liability] first provided on the verge
of trial . . . is untimely and prejudicial as a matter of law.”).9
8
Similarly, in its July 2018 order, the district court clearly articulated the
prejudice to AMC: “The facts that remain before this Court disclose that Interstate
controlled the defense of this litigation in its entirety through trial to the prejudice of
AMC and Sunridge, knowing that the policy contained language excluding coverage
for punitive damages and notwithstanding AMC’s and Sunridge’s several demands to
settle the litigation within the primary policy limits.”
9
We similarly reject Interstate’s assertion that the district court’s citation to
Doctors’ Co. v. Ins. Corp. of Am., 864 P.2d 1018 (Wyo. 1993), indicates that it failed
to distinguish between promissory estoppel, which it acknowledges is permissible
under Wyoming law, and equitable estoppel, which it asserts is not. The district
court’s order clearly shows it was analyzing AMC’s claims under the equitable
estoppel doctrine recognized in Cornhusker. Interstate’s contention that the district
court erred in its prejudice analysis is equally without merit. In its equitable estoppel
analysis, the district court clearly recognized the specific prejudice to AMC caused
by Interstate’s late reservation of rights and correctly determined that it arose from
the relinquishment of control of the defense during the relevant time frame when
AMC could have protected its interests. As it recognized, “It is equally plain that
Interstate exercised full control of the Lompe litigation, even to the extent that it
refused to settle within the policy limits contrary to the insureds’ repeated requests to
13
B
Interstate also argues that the district court erred when it found that Interstate
had a duty to reserve its rights under the Excess Policy. But the district court made
no such finding. Instead, the district court determined that because Interstate had
failed to timely reserve its rights to disclaim coverage under the Primary Policy, it
was required to provide coverage and indemnification for the damages owed to
Lompe—both punitive and compensatory. These were damages that the insured was
“legally obligated to pay” under the Primary Policy. As to the excess coverage, the
district court determined that after the limits of the Primary Policy were exhausted,
the excess insurers’ obligations were triggered and “they must provide the agreed-
upon excess liability coverage.” The district court held that because the Lompe
judgment exhausted coverage under the Primary Policy, Interstate, as the first level
excess insurer, was required to provide coverage pursuant to the Excess Policy for
amounts in excess of the underlying Primary Policy limits. We agree.
Under Wyoming law, “[w]hen summary judgment is based upon interpretation
of an insurance policy, the rules of contract interpretation apply.” Hurst v. Metro
Prop. & Cas. Ins. Co., 401 P.3d 891, 895 (Wyo. 2017). “Interpretation of the
contractual language is a matter of law for the court, provided the language is clear
and unambiguous.” Id. “The language of an insurance policy is ambiguous if it is
capable of more than one reasonable interpretation.” N. Fork Land & Cattle, LLLP
do so.” These determinations only underscore the prejudice suffered by AMC in the
relinquishment of its control of the defense to Interstate.
14
v. First Am. Title Ins. Co., 362 P.3d 341, 346 (Wyo. 2015) (quotation omitted).
Finally, “[b]ecause insurance policies represent contracts of adhesion where the
insured has little or no bargaining power to vary the terms, if the language is
ambiguous, the policy is strictly construed against the insurer.” Hurst, 401 P.3d at
895 (quotation omitted).
The Excess Policy coverage language states:
I. EXCESS INSURING AGREEMENT
Subject to the other provisions of this policy, we will pay on behalf of
any “insured”, the “insured’s” “ultimate net loss” if such loss arises
from:
a. Injury or damage that occurs; or
b. An offense committed
during our Policy Period and is insured by “underlying insurance”
designated in the Schedule of Underlying Insurance in ITEM SIX of the
Declarations.
The insurance afforded by this policy will apply only in excess of all
“underlying insurance”; and only after all “underlying insurance” has
been exhausted by payment of the limits of such insurance.
The amount we will pay is limited as described in section II. B. and
section III. LIMITS OF INSURANCE.
The definitions, terms, conditions, limitations, exclusions and
warranties contained in the “underlying insurance” polic(ies) that are in
effect at the inception date of this policy apply to this policy unless they
are inconsistent with provisions of this policy, or relate to premium,
subrogation, other insurance, an obligation to investigate or defend, the
amount or limits of insurance, payment of expenses, cancellation or any
renewal agreement.
If any “underlying insurance” does not pay a loss, for reasons other than
exhaustion of an aggregate limit of insurance, then we will not pay such
loss.
...
IV. DEFINITIONS
15
A. “Ultimate net loss” means all sums actually paid or which an
“insured” is legally obligated to pay, as damages in settlement or
satisfaction of claims or “suits” for which insurance is afforded under
this policy, after proper deduction for all recoveries, or salvage.
The language of this insurance contract is clear. As the district court noted,
the Excess Policy provides that the excess insurer “will pay on behalf of any insured
those sums in excess of all underlying insurance that the insured becomes legally
obligated to pay as damages after the primary policy of insurance has been
exhausted.” Under the Excess Policy’s express terms, Interstate contracted to
provide coverage for the insured’s “ultimate net loss” arising from an injury, damage
or offense committed during the Policy period that “is insured by ‘underlying
insurance’ designated in the Schedule of Underlying Insurance in ITEM SIX of the
Declarations.” The Primary Policy is the designated underlying insurance. The loss
occurred during the Policy period and was “insured by the underlying insurance.”
Once Interstate was equitably estopped from disclaiming coverage under the Primary
Policy (because of its untimely reservation of rights), the entire judgment in the
Lompe action became “sums . . . which an ‘insured’ is legally obligated to pay, as
damages in settlement or satisfaction of claims or ‘suits’ for which insurance is
afforded under this policy.” Thus, the full Lompe judgment fell within the Excess
Policy’s unambiguous definition of “ultimate net loss” to be covered by the Excess
Policy when the Primary Policy was “exhausted by payment of the limits of such
16
insurance.”10 The district court did not rely on any purported duty to defend as an
excess insurer to impose excess insurance liability on Interstate, but instead
determined that the terms of the Excess Policy had been met when the Primary Policy
limits were exhausted.11 We see no error in this determination under the
circumstances of this case.
Finally, Interstate attempts to rely upon the “follows form” provision of the
contract to incorporate the Primary Policy’s punitive damages exclusion into the
Excess Policy because that exclusion was “in effect at the inception date of th[e
Excess] policy.” However, this “follows form” provision explicitly states that the
underlying policy’s exclusions apply to the Excess Policy “unless they are
inconsistent with provisions of this policy.” See also Ostrager & Newman,
Handbook on Insurance Coverage Disputes, § 13.01 (18th Ed. 2016) (“It is well
settled that the obligations of the following form excess insurers are defined by the
10
Supporting this conclusion is the additional language in the Excess Policy
that “[i]f any ‘underlying insurance’ does not pay a loss, for reasons other than
exhaustion of an aggregate limit of insurance, then we will not pay such loss.” Here,
the reason for the non-payment of the portion of the Lompe judgment in excess of $1
million was exhaustion of the Primary Policy’s aggregate limit of insurance, not the
punitive damages exclusion. In this case there was only one occurrence, resulting in
both the occurrence and aggregate limits being met when the $1 million per
occurrence limit in the Primary Policy was exceeded.
11
Its July 2018 order was clear: “The Court finds and concludes that Interstate
under the Primary Policy must provide coverage and indemnification, having failed
to defend with a timely reservation of rights, for all sums the insureds are legally
obligated to pay, which encompasses compensatory and punitive damages. If policy
limits under the Primary Policy are exhausted, the excess insurers’ obligations are
triggered under the applicable ‘follow form’ policies and the excess insurers must
provide the agreed-upon excess liability coverage.”
17
language of the underlying policies, except to the extent that there is a conflict
between the two policies, in which case, absent excess policy language to the
contrary, the wording of the excess policy will control.”); 4 New Appleman on
Insurance Law Library Edition § 24.02 (2020) (“In the uncommon situation in which
the language of a primary policy and a following form excess policy differ, the terms
of the excess policy control where the excess coverage is implicated.”). Allowing a
retrograde application of the Primary Policy’s punitive damages exclusion to cancel
the clear coverage obligations of the Excess Policy to pay AMC’s “ultimate net loss”
above the Primary Policy’s aggregate limit would be inconsistent with the provisions
of the Excess Policy that explicitly agreed to provide such coverage. Therefore,
Interstate must indemnify AMC under the Excess Policy for the portion of the Lompe
judgment in excess of the payment limit of the Primary Policy.
IV
AFFIRMED.
Entered for the Court
Carlos F. Lucero
Circuit Judge
18