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RLI wins complex coverage dispute with AIG units


RLI Insurance Co. has prevailed in a complex coverage dispute with American International Group Inc. units over the issue of whether it must contribute $2.5 million toward settlements reached on behalf of a trucking company.

On Monday, the 7th U.S. Circuit Court of Appeals in Chicago affirmed a lower court’s ruling in Peoria, Illinois-based RLI’s favor, in Lexington Insurance Co. and National Union Fire Insurance Co. of Pittsburgh, PA v. RLI Insurance Co.

RLI and the AIG units had both provided excess coverage to trucking company Springfield, Missouri-based New Prime Inc., with RLI providing the lower layer of coverage.

The litigation in the case focused on an “aggregate corridor deductible” in RLI’s policy, and whether it functioned as a self-insured retention or as a deductible.

According to the ruling, a lawsuit filed by a man who was severely injured by a New Prime truck in 2015 was settled in 2018 for $16 million. In another 2015 incident, a New Prime truck rear-ended a car and killed a couple, and the ensuing lawsuit was settled for $20 million.

The dispute is over how much RLI needed to contribute to both settlements, according to the ruling. New Prime had a self-insured retention of $3 million. The RLI policy provided the next layer of coverage, which included the ACD endorsement. 

The endorsement obligated New Prime to pay an additional $2.5 million above its self-insured retention of $3 million per occurrence before RLI began to pay.

But while the self-insured retention applied to each covered incident, the $2.5 million ACD applied only once per year, so New Prime was obliged to pay that additional amount only once per policy year, according to the ruling.

The dispute “is whether New Prime’s payments toward the Aggregate Corridor Deductible diminished the amount that RLI owed on any claims,” said the ruling.

“RLI argues that the ACD sat within RLI’s $2 million layer, leaving RLI with no responsibility for making any payment on any claim” until New Prime had both paid $3 million per occurrence and paid the year’s ACD total of losses between $3  million and $5 million per occurrence,” said the ruling.

“If that is correct then new Prime and RLI would together owe at most $5 million on any claim: the $3 million self-Insured retention plus the $2 million policy,” said the ruling.

AIG, however, argued the ACD sat below RLI’s $2 million layer. “On this view, RLI had to provide coverage whenever the losses exceeded the sum of the Self-Insured Retention and the remaining ACD balance,” which meant the ACD operated as an additional $2.5 million self-insured retention per policy period.

“If that were correct, then AIG’s duty to pay would not have been triggered until New Prime and RLI had together paid $7.5 million for the first big occurrence (s) of the policy year,” said the ruling.

AIG filed suit against RLI. The U.S. District Court ruling in RLI’s favor was based on the contract language, which it considered unambiguous.

In affirming the lower court’s ruling, the three-judge appeals court panel said, “The text of the RLI Policy is not as clear to us as it was to the district court, but undisputed extrinsic evidence shows that RLI’s position is correct,” said the ruling.

“A summary judgment for RLI was proper because emails and underwriting files show that New Prime, RLI, and AIG itself all intended the combined liability of New Prime and RLI to be capped at $5 million per occurrence so that AIG’s liability would begin at $5 million per occurrence, not at $7 or $7.5 million,” said the ruling in affirming the lower court’s judgment.

Earlier this month, a federal district court refused to reconsider a ruling it issued against RLI in a dispute with an architecture firm over its claims-made policy. 




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