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INSURANCE - primary insurer insolvency; excess; 'legally obligated to pay' vs paid; settlement

United States Court of Appeals
No. 06-3421
Waste Management of Minnesota, Inc., *
Plaintiff - Appellee, **
Appeal from the United States
v. * District Court for the
* District of Minnesota.
Transcontinental Insurance Company, *
Defendant - Appellant. *
Submitted: May 14, 2007
Filed: September 19, 2007
Before LOKEN, Chief Judge, JOHN R. GIBSON and WOLLMAN, Circuit Judges.
LOKEN, Chief Judge.
A garbage truck loaded by Waste Management of Minnesota, Inc. (WMCo),
and driven by Chad Trenhaile jumped a highway median, rolled over, and struck the
car of Brian and Ellen Ross, injuring the Rosses and Trenhaile. The Rosses
commenced a state court damage action against WMCo, Trenhaile, and additional
parties we will refer to as the trucking defendants. WMCo's primary liability
insurance policy provided coverage of ,000,000 for the accident, but the primary
insurer, Reliance Insurance Company, became insolvent. Other parties, including
WMCo's excess liability insurer, Transcontinental Insurance Company, settled the
Rosses lawsuit with an appeal pending. As the settlement left a separate personal
1The HONORABLE DONOVAN W. FRANK, United States District Judge for
the District of Minnesota.
injury action by Trenhaile unresolved, the primary insurer's insolvency prompted this
declaratory judgment action to determine whether Transcontinental must indemnify
and defend WMCo in that action. Transcontinental now appeals the district court's1
adverse decision. The parties agree that Minnesota law governs the dispute and that
no contested issues of fact remain. Reviewing the interpretation of Transcontinental's
policy and the grant of summary judgment de novo, we affirm. See Travelers Indem.
Co. v. Bloomington Steel & Supply Co., 718 N.W.2d 888, 894 (Minn. 2006) (standard
of review).
The parties to the Ross lawsuit agreed to binding arbitration. The arbitrator
found that Trenhaile and WMCo were each 50% at fault and that the Rosses were
entitled to damages of approximately ,050,000. The Rosses sought confirmation
of the award. The Minnesota trial court entered judgment for the full amount against
Trenhaile and WMCo jointly and also decided priority of coverage issues between the
trucking defendants' liability insurer (Tri-State), the Rosses underinsured motorist
insurer (MSI), Transcontinental, and the Minnesota Insurance Guaranty Association
(MIGA), which was obligated by statute to pay certain claims against the insolvent
primary insurer, Reliance. See MINN. STAT. 60C.01 et seq. Tri-State then paid the
Rosses its policy limit of 0,000 on account of Trenhaile's fault, leaving
approximately ,300,000 unpaid. Three other parties appealed the trial court's
judgment -- WMCo, Transcontinental, and MIGA.
With the appeal pending, the parties entered into a settlement agreement, and
the Minnesota Court of Appeals dismissed the appeal. Pursuant to a Stipulation of
Dismissal, the trial court then entered an order dismissing all claims with prejudice.
The settlement agreement provided that no party admitted liability or coverage, and
the dismissal order left unaffected WMCos statutory right to collect from Trenhaile
amounts WMCo paid to the Rosses in excess of its 50% share of the joint liability.
See MINN. STAT. 548.19. One month after the dismissal, the Rosses filed a
satisfaction of judgment. As a result of these actions, the parties to the settlement paid
the portion of the Rosses judgment not paid by Tri-State as follows:
MIGA 5,000
MSI 250,000
WMCo 150,000
Transcontinental 1,320,731
Ross Judgment Reduction 30,000
Total ,305,731
WMCo tendered defense and indemnity of the separate Trenhaile suit to
Transcontinental as its excess liability insurer. Transcontinental denied a duty to
defend or indemnify, explaining:
Transcontinental's . . . obligation is triggered only when the obligation
of underlying insurers ceases solely through exhaustion of underlying
limits through payment of covered . . . settlement or judgments. Here,
Reliance . . . is the scheduled underlying insurer, with limits of
million. . . . [T]he payments of Waste Management and MIGA in the
Ross case total 5,000. MSI's payment of 0,000 does not count .
. . because it was . . . . the Rosses' own first-party coverage. . . . [N]o
portion of Tri-State's payment satisfies the million . . . . At most, Tri-
State provided Waste Management with unscheduled underlying
This declaratory judgment lawsuit followed. The district court held that the payments
pursuant to the Ross settlement exhausted the Reliance policy limit, triggering
Transcontinental's duties to defend and indemnity WMCo in the Trenhaile lawsuit.
Transcontinental issued WMCo a commercial umbrella liability policy
providing coverage of ,000,000 per incident after exhaustion of WMCo's primary
insurance coverage. Section III(3) provided that Transcontinental was liable for the
'ultimate net loss' in excess of: [t]he applicable limits of scheduled underlying
insurance . . . plus the limits of any unscheduled underlying insurance. The
Reliance policy with a limit of ,000,000 for a single accident was listed in the
Schedule of Underlying Insurance. Ultimate net loss was defined as actual
damages the insured is legally obligated to pay, either through: (1) final adjudication
on the merits; or (2) through compromise settlement.
Section IV(1) of Transcontinental's policy specifically addressed the problem
of a primary insurer's insolvency:
1. Financial Impairment
Bankruptcy . . . or other financial impairment of . . . an underlying
insurer shall neither relieve nor increase any of our obligations under
this policy. In the event there is diminished recovery or no recovery
available to [WMCo] as a result of . . . financial impairment of an insurer
providing scheduled underlying insurance, the coverage under this
policy shall apply only in excess of the limits of liability stated in the
scheduled underlying insurance. Under no circumstances shall we be
required to drop down and . . . assume the obligations of a financially
impaired insurer.
As insurer insolvencies have become more common, the issue of whether an excess
insurer is obligated to drop down and assume the responsibilities of an insolvent
primary insurer has been frequently litigated. Employing various theories, some
jurisdictions have required excess insurers to insure the full loss when the primary
insurer is insolvent. Minnesota has not. See Am. Hoist & Derrick Co. v. Employers
of Wausau, 454 N.W.2d 462, 466-67 (Minn. App. 1990); Seaway Port Auth. of
Duluth v. Midland Ins. Co., 430 N.W.2d 242, 248-50 (Minn. App. 1988). Thus, it is
undisputed that the no drop down provision in Section IV(1) of Transcontinental's
policy would be enforced according to its terms under Minnesota law. The essential
term of that provision is that Reliance's insolvency shall neither relieve nor increase
Transcontinental's obligations under the excess policy.
On appeal, Transcontinental argues at length that the district court's decision
violates the policy's no-drop-down provision. We disagree. When the Ross litigation
was settled, Tri-State had paid the Rosses 0,000, and WMCo was jointly liable for
the unpaid ,300,000 balance of the trial court's judgment, subject to the pending
appeal. If solvent, Reliance would have been obligated to pay that judgment up to its
,000,000 policy limit, and Transcontinental as WMCos excess insurer would have
been obligated to pay the ,300,000 balance. Then, with the Reliance policy limits
exhausted by the Ross litigation, Transcontinental would have been obligated to
defend and indemnify WMCo in the separate lawsuit by the other party injured in the
accident, Trenhaile.
That, in substance, is what the Ross settlement and the district court's decision
have accomplished. Under the settlement, various parties contributed the ,000,000
that Reliance otherwise would have paid, and Transcontinental paid the rest of the
,300,000. It is true that ,000 of the ,320,000 paid by Transcontinental
constituted a portion of the first ,000,000 that would otherwise have been paid by
Reliance. But the trial court judgment on appeal had imposed a significant drop
down, requiring MIGA to pay the first 0,000 of the remaining ,300,000, and
Transcontinental to pay the rest. Transcontinental had good reason to voluntarily pay
,000 to resolve this potential liability; it does not violate a no-drop-down provision
to settle a potential drop-down exposure. Thus, the district court's decision is true to
the mandate in Section IV(1) of the policy that Reliance's insolvency neither relieve
nor increase Transcontinental's obligations as excess insurer. We still must consider
whether that decision was true to other policy provisions, but Transcontinental's nodrop-
down argument is a red herring.
Transcontinental argues that its obligations as excess insurer do not arise until
the Reliance ,000,000 policy limit is exhausted and that only payments made by
Reliance or by WMCo itself count toward exhaustion of that limit. Therefore,
Transcontinental argues, its duties to defend and indemnify WMCo in the Trenhaile
action have not yet attached because the first ,000,000 of the Ross settlement
included payments from four sources that did not count toward exhausting the
Reliance policy limit -- 5,000 from MIGA, 0,000 from MSI, ,000 from
Transcontinental, and the Rosses' agreement to reduce their judgment by ,000.
Our problem with this argument is that the policy obligates Transcontinental to
pay any ultimate net loss in excess of the Reliance policy limit. Ultimate net loss
is defined, not as the amounts paid by Reliance or WMCo, but as the damages WMCo
is legally obligated to pay by reason of a final adjudication on the merits or a
compromise settlement (emphasis added). This is not an unusual way to define the
point at which a primary insurer's coverage has been exhausted. As we said in a case
governed by Missouri law, exhaustion did not require an insurer to pay the full dollar
value of a policy. Rather, an insurance policy is exhausted when the insured proves
that claims aggregating the full amount of the specific policy have been settled
thereunder and full liability of the insurer discharged. Reliance Ins. Co. in
Liquidation v. Chitwood, 433 F.3d 660, 664 (8th Cir. 2006) (quotation omitted).
Minnesota law is not to the contrary, at least when, as here, there is no hint of
collusion between the insured, the primary insurer, and the plaintiff whose lawsuit is
being settled. See Drake v. Ryan, 514 N.W.2d 785, 788-89 (Minn. 1994).
In its reply brief, Transcontinental finally identifies a policy provision that
allegedly supports its payments theory of primary policy exhaustion. Section III(4),
described by Transcontinental as an Exhaustion Clause, provided in relevant part:
In the event of . . . exhaustion of the aggregate limits of liability under
scheduled underlying insurance solely by reason of payments of a
combination of covered [settlements or judgments] paid thereunder as a
result of incidents . . . this policy shall, subject to this limit of liability
provision and to the remaining terms and provisions and conditions of
this policy . . . apply in place of the exhausted amount of scheduled
underlying insurance. (Emphasis added.)
Under Section III(4), Transcontinental asserts, only amounts paid by Reliance toward
the Ross settlement or judgment count toward exhausting its policy limit.
This contention has all the earmarks of an afterthought, and we are inclined to
reject it for that reason alone. Even considering the argument on the merits, however,
we find it unpersuasive. This interpretation of Section III(4) contradicts the plain
meaning of provisions declaring that Transcontinental's duties to defend and
indemnify arose when WMCo became legally obligated to pay more than
,000,000. As the Fifth Circuit said in applying a comparable policy provision,
This does not mean that underlying insurers must actually pay before excess policies
are triggered. It means that their obligation to do so must be finally determined. Fed.
Ins. Co. v. Srivastava, 2 F.3d 98, 103 n.5 (5th Cir. 1993). Moreover, Section III(4)
refers to incidents, in the plural, and to aggregate limits of liability, all of which
strongly suggests that the provision applies when there are multiple covered accidents
occurring during the policy period. In that situation, the limitation, solely by reason
of payments . . . paid thereunder, ensures that the primary insurer's policy limit would
not be deemed exhausted solely by its insolvency, which would impose a form of
drop-down liability on the excess insurer. Finally, Transcontinental's construction of
Section III(4) would relieve it of policy obligations on account of Reliance's
insolvency, contrary to the Financial Impairment Clause, Section IV(1).
For these reasons, we conclude that the critical question is whether WMCo
became legally obligated to pay the ,300,000 unpaid balance of the Ross
judgment. In our view, this question has a simple answer. The policy defined
ultimate net loss as damages WMCo is legally obligated to pay through final
adjudication on the merits. An order or judgment becomes final after the appellate
process is terminated. Dixon v. Depositors Ins. Co., 619 N.W.2d 752, 755 (Minn.
App. 2000) (quotation omitted). Accordingly, the Ross judgment became an ultimate
net loss when the Minnesota Court of Appeals dismissed the pending appeal from the
trial court's final judgment in the Rosses favor. Transcontinental objects that the
Ross lawsuit was really ended by settlement. But after the appellate court's dismissal,
if everyone except WMCo and Transcontinental had reneged on the settlement
agreement and their statutory and contractual obligations, WMCo would have been
liable to the Rosses for ,000,000, the Reliance policy limit, and Transcontinental
would have been liable to indemnify WMCo for the remainder of the judgment.
Under this view of the Ross litigation, Transcontinentals duties to defend and
indemnify WMCo in Trenhaile are not measured by who paid what in the Ross
settlement. Rather, they are measured by the ,300,000 WMCo became legally
obligated to pay as a result of the final adjudication of the Ross suit on the merits.
Thus, Ross shattered the ,000,000 Reliance policy limit, and Transcontinental must
defend and indemnify WMCo in the Trenhaile lawsuit, which arose out of the same
The district court concluded that it need not decide whether the Ross lawsuit
ended by final adjudication on the merits because, in any event, the settlement
agreement exhausted the Reliance policy limit. On appeal, Transcontinental argues
at length why settlement contributions by MIGA, MSI, Transcontinental, and the
Rosses toward the first ,000,000 of the total settlement payments did not count
toward exhausting the Reliance policy limit. On these issues, we agree with the
district court. No matter how each of these payors is described in relation to the
Transcontinental policy, each contributed to the Ross settlement as a result of
Reliance's insolvency after Waste Management was found to be liable. MIGA's
statutory obligation to pay any portion of the Rosses' claims arose entirely because of
Reliance's insolvency. The exposure of MSI as the Rosses' underinsured motorist
insurer arose only because Reliance's insolvency caused the defendants in the Ross
litigation to be partially underinsured. And of course the Rosses would not have
reduced their judgment by ,000 and Transcontinental would not have paid ,000
of the first ,000,000 had a solvent Reliance been available to pay its policy limit.
In these circumstances, we agree with the district court that the payments made to
satisfy the Ross settlement, individually and in total, resulted in exhausting the
Reliance policy limits, thereby triggering Transcontinental's duties to defend and
indemnify WMCo in the Trenhaile lawsuit. A contrary ruling would result in the
Reliance insolvency relieving Transcontinental of its preexisting contractual duties as
an excess insurer, contrary to the Financial Impairment policy provision.
The judgment of the district court is affirmed. Appellee's motion to strike is


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