Ninth Circuit Holds Excess Policy Unambiguously Required Exhaustion of Underlying Limits by Insurers Under Either New York or California Law

The United States Court of Appeals for the Ninth Circuit has held that a New York choice of law provision in a policy issued by an international insurer is enforceable and that, under either New York or California law, an excess policy was not triggered when the underlying policy limits were not exhausted through payments by the underlying insurers.  Cooper v. Certain Underwriters at Lloyd’s, 2018 WL 1548208 (Mar. 30, 2018).

Assignees to rights under an excess policy instituted this coverage action against the excess carrier, seeking to recover under the policy and seeking a declaration that California law applied to their claims despite a New York choice of law provision in the excess policy.  The district court granted the excess carrier’s motion to dismiss, holding that the New York choice of law provision was enforceable, that the excess policy required exhaustion of the underlying limits by payment of the insurers (and not the insureds), and that it was undisputed that the underlying insurer had not paid its full limits.

On appeal, the Ninth Circuit affirmed the dismissal.  The court held that the New York choice of law provision applied, taking into account the geographic proximity of the excess carrier to the chosen state as well as the excess carrier’s interest in contracting under the laws of a given state for reasons of uniformity and predictability.  Further, the Ninth Circuit noted that the assignees failed to show that New York law is contrary to fundamental California public policy or that there are any material differences in the laws of the two states.  Indeed, the court held that, under either New York or California law, the policy unambiguously required exhaustion of the underlying policy limits through payment by the insurers, thus foreclosing the possibility of exhaustion through payment by any party other than the underlying insurers.

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