Aggregate Corridor Deductible Applies Within Limits
The Seventh Circuit, in an opinion written by Judge Hamilton, applied Illinois law and affirmed the District Court’s ruling that an Aggregate Corridor Deductible eroded the limits of the excess policy at issue. The Seventh Circuit used extrinsic evidence to interpret the ambiguous policy provision.
Lexington Insurance Company (“Lexington”) and National Union Fire Insurance Company (“National Union”) (collectively “AIG”), insured New Prime, Inc. (“New Prime”), a trucking company. In the relevant years, New Prime managed and covered its liability without insurance for the first $3 million of exposure per occurrence. RLI issued a $2 million excess policy to New Prime. Lexington issued a $5 million policy excess RLI’s layer. New Prime also had a $25 million policy from National Union sitting above Lexington’s layer. The parties did not dispute that New Prime was required to cover $3 million of costs or losses for each occurrence before it could access any coverage from RLI because of a Self-Insured Retention (“SIR”). The RLI policy also included an annual “Aggregate Corridor Deductible” (“ACD”). The ACD states, “The Insured [i.e., New Prime] shall respond to, investigate, adjust, defend, and dispose of by payment or otherwise all losses and claims for losses covered by the Policy for which the total claim is greater than the $3,000,000 Self Insured Retention (SIR) until the Aggregate Corridor Deductible of $2,5000,000 has been satisfied. Once the Aggregate Corridor Deductible has been exhausted by payment for one or more losses & ‘costs’, the Insured is only responsible for losses and ‘costs’ up to [the] Per Occurrence Self Insured Retention.”
The coverage dispute concerns the threshold of liability at which RLI’s responsibility ended and AIG’s began for two lawsuits stemming from accidents in 2015. One of the lawsuits settled for $16 million and the other $20 million. RLI paid none of the $20 million settlement and $1.5 million of the $16 million settlement. The parties disputed whether New Prime’s payments toward the ACD diminished the amount that RLI owed on any claims. RLI argued that the ACD sat within RLI’s $2 million layer, leaving RLI with no responsibility for making any payment on any claim until New Prime had both (a) paid $3 million per occurrence and (b) paid the year’s ACD total on losses between $3 million (SIR) and $5 million per occurrence (SIR plus $2M policy limits). AIG argued that the ACD sat below RLI’s $2 million layer; thus, RLI had to provide coverage whenever the loss exceeded the sum of the SIR and remaining ACD balance. Under AIG’s position, AIG did not have a duty to pay until New Prime and RLI had together paid $7.5 million for the first big occurrences of the policy year.
AIG sought a declaratory judgment as to the meaning of RLI’s policy. Both sides moved for summary judgment. The District Court granted summary judgment in favor of RLI, relying exclusively on policy language, which it found unambiguous.
The Seventh Circuit disagreed that the policy language was unambiguous. In interpreting the policy language, it determined that trade usage did not provide a “reliable guide” for interpretation of the ACD because New Prime and RLI agreed on the customized policy feature. It also did not find an analysis of the parties’ mutual intent based solely on the text of the RLI policy to be helpful in interpreting the policy language. The policy language was ambiguous because the RLI policy failed to define the “custom-tailored Aggregate Corridor Deductible” feature and failed to describe its mechanics with precision. Therefore, the Seventh Circuit looked to extrinsic evidence of the negotiations between New Prime and RLI and New Prime and AIG to interpret the ACD. Based on emails and underwriting files, the Seventh Circuit found that New Prime, RLI, and AIG all intended the combined liability of New Prime and RLI to be capped at $5 million per occurrence, so that AIG’s limitability would begin at $5 million per occurrence. The court focused on the parties’ use of language such as “in layer above $3,000,000 SIR” and “applies to the $2,000,000 Limit” and “assuming a $2.5MM Corridor Deductible within the $2MM layer above the SIR.” The court also found persuasive the fact that the Lexington policy was “$5MM xs $5MM,” and not excess $7.5 million even though Lexington was aware of the ACD. The language of the RLI policy was ambiguous as to the dispute, but the extrinsic evidence supported RLI’s interpretation, and therefore, summary judgment in favor of RLI was affirmed. Lexington Ins. Co. v. RLI Ins. Co., No. 19-1426 (7th Cir. Jan. 27, 2020).