Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

The case of The Yaffe Companies v. Great American Ins. Co.,  arose out of an explosion at Yaffe’s scrap yard in Muskogee, Illinois which caused significant property damage and bodily harm.  Ultimately, Yaffe paid $1.8 million to settle the various claims brought against it.  It sought coverage from Ace, which had issued a CGL policy to it with a $1 million per occurrence limit but a deductible of $10,000 per claim.  Owing to the numerous underlying claims, Ace ultimately paid only half a million dollars for the losses with the Yaffe Companies absorbing the rest. 

Yaffe sued Great American contending that its umbrella liability policy, which was issued excess of the Ace $1 million policy was responsible for the difference between its total loss and $1 million.  Great American denied the claim arguing that it was only liable for that portion of the loss that remained after the underlying insurer had exhausted its limits. 

An Oklahoma district court granted summary judgment for Great American but the Tenth Circuit reversed.  Construing the various provisions of the umbrella policy together, the court found ambiguity and declared that the fortuity that the insured had chosen to purchase primary insurance on a “per claim” basis was irrelevant to the construction of the language of the Great American policy.  Since Yaffe had clearly paid more than $1 million, the court ruled that Great American was responsible for the remaining $800,000 in loss.

A dissenting judge argued that the language was, in fact, unambiguous and was keyed to the underlying limits of coverage, not the amount of the insured’s loss.  Judge Briscoe rejected the majority’s conclusion that the umbrella language referring to the “applicable limits of the underlying policies” merely set a dollar threshold at which point the excess carrier should pay, declaring instead that the language was clear that it was only intended to imply in excess of the retained limit, being the greater of the total amount of the limits of the underlying policies or the self-insured retention.

This case illustrates the trouble that excess underwriters can get into when their policies are not written on all fours with the primary coverage.  In this case, the underwriting file merely stated that the primary policy had a $10,000 deductible.  It is unclear whether the underwriter was aware that this was a “per claim” deductible that could have profound consequences in the event of mass tort incidents such as the Muskogee plant explosion giving rise to these claims. 

At the same time, it appears that the majority’s analysis did considerable violence to the manner in which umbrella carriers are conventionally called upon to pay and contorted the language of the policy in an effort to contrive coverage for the unfortunate and expensive consequence of the bargain that The Yaffe Companies had struck with its primary insurer.  Without saying so, the majority has in effect created a third form of umbrella coverage.  Whereas the policy itself only provides coverage for payments in excess of the primary limits or for cases outside the scope of the primary insurance, the Tenth Circuit’s analysis now creates an intermediate form of coverage requiring the umbrella carrier to also pay for that portion of an otherwise insured loss that is not owed by the primary insurer by reason of features such as deductibles or self-insured retentions.