“No Costs” language unambiguously excludes defense costs from exhausting retained limits

The Ninth Circuit affirmed the lower court’s ruling and held that the City of Phoenix (the “City”) was not entitled to coverage for defense or indemnity under various insurance policies because the settlement fell within the retained limit of the policies and the defense costs did not erode the retained limit.

The coverage dispute arose after the City settled a personal injury and wrongful death lawsuit which alleged asbestos exposure for $500,000, after incurring $1.4 million in defense costs.  The City then sought coverage from First State Insurance Company, Twin Fire Insurance Company, New England Reinsurance Corporation, and Nutmeg Insurance Company (collectively, “Hartford”) for the settlement and for reimbursement of the defenses costs related to the underlying asbestos lawsuit.

Hartford issued four excess liability policies (“Excess Policies”) and three umbrella policies (“Umbrella Policies”) to the City.  Hartford denied coverage for the underlying asbestos lawsuit because, according to Hartford, the settlement amount was within the Excess Policies’ self-insured retention (“SIR”) of $500,000 and defense costs were excluded under the policy.

The Excess Policies required Hartford to indemnify the City for “ultimate net loss” excess of the $500,000 SIR.  “Ultimate net loss” is defined by the Excess Policies to exclude all loss adjustment expenses, i.e. defense expenses.  The City settled the underlying asbestos lawsuit for $500,000, and thus, the settlement was within the retained limit and the City was not entitled to indemnification under the Excess Policies.

In addition to excluding loss adjustment expenses, the Excess Policies included a “No Costs” provision: “Should any claim arising from such occurrence be adjusted prior to trial court judgment for a total amount not more than the retained limit, then no loss expenses or legal expenses shall be payable by the Company(s).”  The City argued that the “No Costs” provision was ambiguous and that both liability and defense costs should be applied to the $500,000 SIR, thereby satisfying the SIR.  The court rejected this argument because it found that the policy language clearly stated Hartford’s duty to indemnify existed when the SIR was exhausted by liability costs, not defense costs.

The City argued in the alternative, that even if the Excess Policies did not provide coverage for the underlying asbestos lawsuit, Hartford was required to provide coverage under the Umbrella Policies.  The court rejected this argument finding that because the underlying asbestos lawsuit fell within the scope of the Excess Policies, the City was only entitled to coverage under the Umbrella Policies excess of the underlying limit.  The underlying limit of the Excess Policies was not exhausted, and therefore, the Umbrella Policies were not triggered.  City of Phoenix v. First State Ins. Co., No. 16-16767 (9th Cir. Apr. 4, 2018).