Following in the footsteps of Ali v. Federal Insurance Company, the Pennsylvania Superior Court recently borrowed the Second Circuit’s approach to excess coverage in holding that a carrier’s duty to defend is triggered only when an “underlying insurer” has exhausted its policy by satisfying a judgment or settlement.

In the case of Lexington Insurance Company v. Charter Oak Fire Insurance, the City of Philadelphia contracted with CMX, Inc. in 2005 to perform engineering services on a flood control project in Fairmount Park.  In turn, the City and CMX outsourced construction work on the project to the JPC-Jay Dee joint venture that, as a condition of the subcontract, was required to maintain CMX as an additional insured on its various liability policies.  By all accounts, JPC-Jay Dee complied with this condition, procuring commercial general liability and excess insurance through Charter Oak Fire Insurance and North River Insurance Company.  In respect of North River’s excess coverage, the policy provided that the duty to defend would apply when “the applicable limits of ‘Underlying Insurance’ and ‘Other Insurance’ have been exhausted by payment of judgments or settlements.”

Shortly after construction commenced in 2007, a bicyclist was struck and killed by a motorist at the site of the project.  In the survivor action that followed, the bicyclist’s wife named the City, CMX, and JPC-Jay Dee as defendants for numerous acts or omissions of negligence.  With the exception of CMX, the remaining parties ultimately settled the claim out of court in 2009 for approximately $10 million.  Later, CMX independently settled the plaintiff’s claims for roughly $2 million, with payment tendered by its own insurer, Lexington Insurance Company.

Given that CMX had unsuccessfully tendered its defense to North River prior to reaching settlement with the plaintiff, Lexington eventually commenced its own lawsuit against North River claiming that it violated its duty to defend and indemnify CMX as an additional insured under the policy.  North River, in turn, responded to the suit by arguing that the duty to defend had not been triggered because CMX’s tender preceded Charter Oak’s actual payment of settlement funds.  The trial court sided with North River and granted summary judgment in its favor.

On appeal to the Superior Court, Lexington argued that the trial court’s interpretation of North River’s exhaustion clause was impermissibly strict insofar as it vitiated the insurer’s duty to defend simply because Charter Oak had yet to disburse the policy limits at the time of tender.  In considering this argument, however, the Superior Court noted that Pennsylvania law had traditionally failed to address the relationship between exhaustion clauses and an excess carrier’s duty to defend.  Rather, the Superior Court turned directly to the Second Circuit’s recent decision in Ali and adopted its reasoning that “an excess insurer does have a relevant interest in actual payment of a settlement by the primary insurer” because it dissuades insureds from agreeing to inflated settlements.  As a result, the Court gave effect to the clear and unambiguous language in North River’s exhaustion clause and affirmed summary judgment on the basis that CMX had prematurely tendered its defense.

In addition to further defining the excess carrier’s duty to defend in Pennsylvania, the Superior Court’s decision in Lexington serves as a reminder that clear policy language is paramount to successful coverage litigation.

Thanks to Adam Gomez for his contribution to this post.  If you have any questions, please email Paul at