“Exhaustion” Occurs When Underlying Insurer Settles Its Liabilities

In a case similar to State Farm v. Mendoza, which I posted about a few days ago, the Eighth Circuit has held that a primary insurer exhausts its policy under certain circumstances when it settles its liabilities in a case for less than its policy limits.
In Reliance v. Chitwood, WL 44085 (January 10, 2006), the primary insurer, Continental Western, settled its liabilities regarding its insured’s truck accident for $600,000, less than its $750,000 policy limits. The settlement agreement called for the plaintiff to collect on a judgment only from Reliance’s $1 million excess policy, but to collect only to the degree the judgment exceeded $750,000. Reliance then settled the remainder of the case for $250,000 and sought non-contractual indemnity from Continental Western for amounts it paid below $750,000. The court found that Continental Western fulfilled its obligation to protect Reliance from liability for amounts below $750,000, which was what Reliance had bargained for as excess insurer. It was Reliance’s choice to settle and pay the amount between $600,000 and $750,000.

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