Usually I write an introduction explaining why I chose a decision as one of the year’s ten most significant.  There was no need to do so here.  The message is clear:  even if a provision in an excess policy is unique (in general or vis-à-vis other policies in a tower), insurers that seek to enforce them can find a receptive court.

Twin City sat at the eighth layer and its policy provided $10 million in coverage.  Importantly -- really importantly -- the policy stated: “liability for any loss shall attach to [Twin City] only after the Primary and Underlying Excess Insurers shall have [(1)] duly admitted liability and [(2)] . . . paid the full amount of their respective liability.”  (emphasis mine).
           
The Third Circuit’s decision in Pharmacia Corporation n/k/a Pfizer, Inc. v. Arch Specialty Insurance Company, No. 22-2586 (3d Cir. January 19, 2024) (unpublished) is brief and simple.        

The court set out the background as follows: “In 2003, Pharmacia shareholders filed a putative class action against the company, alleging that it artificially inflated its stock by misrepresenting the results of a clinical drug study.  After ten years of litigation, the case settled, and Pharmacia incurred approximately $207 million in defense and indemnity costs. Pharmacia then provided Twin City [Fire Insurance Company] proof that the excess carriers ahead of it in the insurance tower paid their policy limits and asked Twin City to provide coverage. Twin City declined.”

Here’s where the specifics come in.  Pharmacia had $200 million in D&O insurance provided in a 13-layer tower.  The primary policy provided $25 million and the next twelve layers collectively provided $175 million. 

Twin City sat at the eighth layer and its policy provided $10 million in coverage.  Importantly -- really importantly -- the policy stated: “liability for any loss shall attach to [Twin City] only after the Primary and Underlying Excess Insurers shall have [(1)] duly admitted liability and [(2)] . . . paid the full amount of their respective liability.”  (emphasis mine).

Even though the insurers in the seven layers of the tower beneath it had paid their limits, Twin City argued that no coverage was owed under its policy because those underlying insurers did not admit liability.   

As you can imagine, Pharmacia filed suit.  The New Jersey District Court held as follows [as stated by the Third Circuit]: “The Court found that: (1) the plain language of the Policy required the other excess insurers to admit liability as a condition precedent for coverage to attach; (2) six of them had disclaimed liability, and (3) as a result, a condition for coverage was not satisfied. Pharmacia appeals.”

The Third Circuit affirmed -- and without even breaking a sweat.  Following a discussion of the importance of the plain language of a policy, the court explained its decision. 

“Pharmacia has failed to show that both conditions to trigger Twin City’s coverage were met. Regardless of whether the other insurers in the tower paid their policy limits, the record does not demonstrate that all of those insurers admitted liability.  Because Pharmacia has failed to establish at least one condition precedent, the District Court correctly declined to declare that Twin City owes Pharmacia coverage.”

Of note, while the underlying insurers paid their limits – which Pharmacia, not surprisingly, viewed as an admission of liability – the insurers also denied liability in settlement agreements.

The court addressed this in a footnote (which is the most substantive aspect of the opinion):

“Pharmacia contends that the District Court improperly considered the other insurers’ settlement agreements for the proposition that they disclaimed liability in violation of Fed. R. Evid. 408.  We need not, however, rely on the settlement agreements because, even without consideration of those agreements, Pharmacia has failed to show that all the insurers ahead of Twin City in the insurance tower admitted liability, as required by the Policy’s exhaustion provision. Pharmacia’s assertion that an insurer’s payment of a policy limit alone constitutes an admission of liability is speculative as other reasons may cause a carrier to pay its policy limit, such as avoiding litigation. In addition, to infer that payment of the full policy is a concession of liability would render the admission-of-liability condition superfluous. In any event, the District Court did not err by considering the settlement agreements, as Rule 408 ‘allows evidence of . . . agreements of compromise to prove a consequential, material fact in issue other than validity of the claim or its amount,’ such as disclaimers of liability.”