UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

FEDERAL HOME LOAN MORTGAGE CORPORATION,

Plaintiff, Case No. 23-cv-1758-CRC v.

TWIN CITY FIRE INSURANCE COMPANY, et al.,

Defendants.

MEMORANDUM OPINION AND ORDER

Since 2007, the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “Freddie”)

has spent millions on the legal fallout from its connection to the subprime mortgage crisis. In

this case, it seeks to recover some of those costs from certain of its “excess” insurers (“the

Defendant Insurers”), whose coverage responsibilities kick in only when Freddie Mac’s prior

levels of insurance have been exhausted. Freddie now moves under Federal Rule of Civil

Procedure 12(c) for partial judgment on the pleadings on two issues of contract interpretation. It

asks the Court to hold as a matter of law, first, that a Freddie employee’s receipt of an SEC

subpoena is sufficient to trigger coverage under the applicable policy provisions regardless of

whether the SEC is investigating the company or the employee individually, and second, that the

Defendant Insurers cannot challenge a lower-layer insurer’s coverage determination. The Court

will deny Freddie’s motion on the first issue. Recognizing coverage based solely on an SEC

subpoena of a Freddie employee would ignore the differences in how the relevant policies cover

costs stemming from claims against Freddie employees on the one hand and costs associated

with claims against Freddie the entity on the other. But the Court will grant the motion on the second issue. Excess insurers generally may not challenge an underlying insurer’s payment, and

the policies provide no exception to this default rule.

I. Background

A. Factual Background

Freddie Mac is a shareholder-owned, government-sponsored enterprise that buys and

sells mortgages in the U.S. secondary mortgage market. See Compl. ¶¶ 5–6. This case is about

the interpretation of several excess directors and officers (“D&O”) liability policies Freddie

obtained during the mid-2000s financial crisis when it faced civil lawsuits, shareholder demand

letters, and an SEC investigation and lawsuit stemming from its exposure to subprime loans.

1. The Insurance Coverage

D&O policies generally cover losses incurred when a company or its directors, officers,

and employees are sued or investigated for actions taken by those individuals in their official

capacities. Freddie Mac’s primary D&O policy for the period between June 1, 2007, and June 1,

2008, was issued by National Union Fire Insurance Company of Pittsburgh, Pennsylvania

(“National Union”). Id. ¶ 15. The policy covered $25 million in losses after Freddie had paid

$25 million in losses. Id. Freddie also purchased additional layers of “excess” D&O insurance.

See id. ¶¶ 16–20. Under an excess insurance policy, the insurer must provide coverage only after

the limits of the policies layered below it have been exhausted. Relevant here, Freddie had third-

layer coverage from American Casualty Company of Reading, Pennsylvania (“American

Casualty”), for $15 million of losses exceeding $80 million; fourth-layer coverage from St. Paul

Mercury Insurance Company for $15 million of losses exceeding $95 million; fifth-layer

coverage from Twin City Fire Insurance Company (“Hartford”) for $15 million of losses

exceeding $110 million; sixth-layer coverage from AXIS Reinsurance Company (“AXIS”) for

2 $10 million of losses exceeding $125 million; seventh-layer coverage from Houston Casualty

Company (“HCC”) for $10 million of losses exceeding $135 million; and eighth-layer coverage

from certain underwriters at Lloyd’s of London (“Lloyd’s”) for $10 million of losses exceeding

$145 million. Pl.’s Mot. Partial J. on the Pleadings (“Mot.”), Ex. 1 (June 2007–2008 D&O

Coverage Tower). So, within this scheme, Lloyd’s would have to provide coverage only if

Freddie had incurred more than $145 million in losses and already exhausted its policies with

American Casualty, St. Paul Mercury Insurance Company, Hartford, AXIS, and HCC.

These excess policies were “follow form” policies, which means they were subject to the

terms and conditions of the underlying National Union policy. That policy provides two types of

coverage. See Compl. ¶ 15. “Coverage A”—called “Executive Liability Insurance”—covers

costs incurred by Freddie employees in defending claims against them that were not indemnified

(i.e., reimbursed) by the company. Id., Ex. 1 (“National Union Policy”), at 6 (page numbers

designated by CM/ECF). Coverage A is not implicated by Freddie’s motion. At issue is

“Coverage B”—called “Organization Insurance”—which covers costs incurred by Freddie itself

in two different situations. Id. Specifically, Coverage B of the policy provides:

(i) Organization Liability: This policy shall pay the Loss of any Organization arising from a Securities Claim made against such Organization for any Wrongful Act of such Organization.

(ii) Indemnification of an Insured Person: This policy shall pay the Loss of an Organization arising from a Claim made against an Insured Person (including an Outside Entity Executive) for any Wrongful Act of such Insured Person, but only to the extent that such Organization has indemnified such Insured Person.

Id. (boldface in original, italics added). An “Insured Person” is an executive or employee of the

organization or an outside entity executive (collectively, “employees”). Id. at 9. Therefore, to

simplify, the “Organization Insurance” section of the National Union Policy and the excess

policies (collectively, “the Policies”) provide two types of coverage: (1) coverage for costs

3 incurred by Freddie directly arising from securities claims against the company (Coverage B(i))

and (2) coverage for costs incurred by Freddie to indemnify its employees for costs arising from

claims, not limited to securities claims, against those employees for their own wrongful acts

(Coverage B(ii)).

The Policies define a “Claim” as:

(1) a written demand for monetary, non-monetary or injunctive relief;

(2) a civil, criminal, administrative, regulatory or arbitration proceeding for monetary, non-monetary or injunctive relief which is commenced by: (i) service of a complaint or similar pleading; (ii) return of an indictment, information or similar document (in the case of a criminal proceeding); (iii) receipt or filing of a notice of charges; or

(3) a civil, criminal, administrative or regulatory investigation of an Insured Person:

(i) once such Insured Person is identified in writing by such investigating authority as a person against whom a proceeding described in Definition (b)(2) may be commenced; or

(ii) in the case of an investigation by the SEC or a similar state or foreign government authority, after the service of a subpoena upon such Insured Person.

Id. at 7 (boldface in original, italics added). And they define a “Securities Claim” as “a

Claim, other than an administrative or regulatory proceeding against, or investigation of

an Organization, made against any Insured” alleging a securities violation. Id. at 10.

The Policies further provide that “[n]otwithstanding the foregoing, the term ‘Securities

Claim’ shall include an administrative or regulatory proceeding against an

Organization, but only if and only during the time that such proceeding is also

commenced and continuously maintained against an Insured Person.” Id. (boldface in

original, italics added). In other words, the Policies cover an administrative or regulatory

4 investigation of Freddie—including an SEC investigation—only if there is also an

ongoing investigation of a Freddie employee.

Finally, the Policies define a “Wrongful Act” as:

(1) any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act or any actual or alleged Employment Practices Violation:

(i) with respect to any Executive of an Organization, by such Executive in his or her capacity as such or any matter claimed against such Executive solely by reason of his or her status as such;

(ii) with respect to any Employee of an Organization, by such Employee in his or her capacity as such, but solely in regard to any: (a) Securities Claim; or (b) other Claim so long as such other Claim is also made and continuously maintained against an Executive of an Organization; or

(iii) with respect to any Outside Entity Executive, by such Outside Entity Executive in his or her capacity as such or any matter claimed against such Outside Entity Executive solely by reason of his or her status as such; or

(2) with respect to an Organization, any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act by such Organization, but solely in regard to a Securities Claim.

Id. at 10–11.

2. The Insurance Dispute

In November 2007, a securities class action was filed against Freddie Mac and several of

its employees in the Southern District of New York. Compl. ¶ 36. Freddie asserts that, in

response, it immediately began incurring costs to retain outside counsel, collect and store

documents, and establish a Special Litigation Committee. Id. ¶ 37. Over the next four years,

Freddie became the subject of eleven other civil suits, all arising from alleged misrepresentations

Freddie and its employees were said to have made about its exposure to subprime mortgages,

5 risk management controls, underwriting standards and practices, capital adequacy, and loan loss

reserves. Id. ¶ 36. Freddie has now resolved all but one of these lawsuits. Id. ¶ 44.

In September 2008, the SEC opened an investigation into Freddie, which Freddie says

focused on the same allegations as the civil lawsuits and shareholder demand letters. Id. ¶ 38.

That month, the SEC sent Freddie a letter, which Freddie quotes as saying that the SEC was

“conducting an inquiry to determine whether there has been any violation of the federal

securities laws in connection with the accuracy of the financial statements and other public

disclosures made by [Freddie Mac] for the period July 1, 2007 through September 7, 2008.” Id.

(alteration in original). In early 2009, the SEC issued an Order related to this investigation. Id.

¶ 39. Freddie asserts that the Order was titled “Order Directing Private Investigation and

Designating Officers to Take Testimony in the Matter of Freddie Mac” and stated that “Freddie

Mac” and “its officers, directors, employees, partners, subsidiaries, and/or affiliates, and/or other

persons or entities” may have violated securities laws. Id.

Later that year, Freddie recounts, the SEC began serving subpoenas on its employees,

ultimately demanding that 36 of them produce documents and submit to sworn interviews. Id.

¶ 40. Freddie asserts that, pursuant to these 36 subpoenas, between June 2009 and December

2010, its employees made at least 27 document productions and appeared for 44 interviews. Id.

In March 2011, Freddie states that the SEC issued “Wells Notices” to Freddie the entity

and three of its employees informing them that the SEC’s Enforcement Division was

recommending an SEC enforcement proceeding for their alleged violations of securities laws.

Id. ¶ 41.

In December 2011, the SEC ended its investigation. Id. ¶ 41. It reached a

nonprosecution agreement with Freddie and then filed suit against three Freddie employees who

6 had been subpoenaed as part of the investigation. Id. ¶ 43 (citing SEC v. Syron, No. 11-cv-

09201 (S.D.N.Y.)).

Freddie claims to have spent over $145 million defending the civil lawsuits, the SEC

investigation, and the SEC lawsuit. Mot. at 5. It asserts that it indemnified its employees for

their costs arising from the SEC investigation and lawsuit. Mot. at 8. And it alleges that,

because there was so much overlap between the subject matter, witnesses, and documents

involved in the civil lawsuits, the SEC investigation, and the SEC lawsuit, the same counsel

represented it in all three matters, and work done on one matter served the others. Id.; Compl.

¶ 42.

Freddie naturally sought coverage for these costs. See Compl. ¶¶ 44–45. Freddie’s

primary and first through fourth-level excess insurers all paid to their policy limits, which

amounted to approximately $85 million in coverage. Id. ¶¶ 46–49; see also June 2007–2008

D&O Coverage Tower. Freddie applied $14 of the $15 million it received from American

Casualty, its third-layer insurer, to its “earliest incurred costs,” see Compl. ¶ 48, some of which

predated the SEC subpoenas, Opp. at 9.

After the primary and first four excess policies had been exhausted, certain e-discovery

costs, legal fees, and other defense costs—including those associated with the SEC subpoenas—

remained. Compl. ¶¶ 50–51. Almost all these costs were incurred during the pendency of the

SEC investigation. Id. Hartford, the fifth-layer insurer, paid Freddie $7.3 million for costs

incurred after the SEC investigation ended but refused to acknowledge coverage for costs

incurred while the SEC investigation was ongoing (“the Unreimbursed Costs”). Id. ¶¶ 17, 52.

AXIS, HCC, and Lloyd’s similarly refused coverage for the Unreimbursed Costs. Id. ¶ 53. They

argue that the Unreimbursed Costs were incurred in connection with an SEC investigation of

7 Freddie the entity, but their “narrow insuring agreement[s]” only “provide[] coverage . . . for

investigations of individuals.” Opp. at 1.

B. Procedural Background

Freddie Mac filed suit against Hartford, AXIS, HCC, and Lloyd’s seeking a declaratory

judgment ordering them to pay the Unreimbursed Costs and damages for breach of the duty of

good faith and fair dealing, as well as damages against Hartford for breach of contract. Compl.

¶¶ 55–73. As of October 2023, the Unreimbursed Costs totaled $33.6 million. Mot. at 4 n.4.

AXIS, HCC, and Lloyd’s answered and denied Freddie Mac’s claims. See ECF Nos. 17 (AXIS

Answer), 21 (HCC Answer), 19 (Lloyd’s Answer). Hartford answered, denied the claims, and

counterclaimed for a declaratory judgment that any costs related to Freddie alone were outside

the scope of coverage; recoupment of costs it had already paid; and breach of an allocation

provision in the Policies, which states:

With respect to: . . . Defense Costs Jointly incurred by . . . any Organization and any Insured in connection with any Claim other than a Securities Claim, any such Organization and any such Insured and the Insurer agree to use their best efforts to determine a fair and proper allocation of the amounts as between any such Organization, any such Insured and the Insurer.

See ECF No. 23 (Hartford Answer & Countercl.) ¶¶ 56–83 (citing National Union Policy at 11).

Freddie subsequently settled with Hartford, see ECF No. 40 (Notice of Settlement Between

Plaintiff and Twin City Fire Insurance Company), and AXIS, see ECF No. 45 (Notice of

Settlement Between Plaintiff and AXIS Reinsurance Insurance Company), so only HCC and

Lloyd’s remain in the case.

Freddie now moves for partial judgment on the pleadings under Rule 12(c). Mot. at 1. It

contends that, first, receipt by an Insured Person of an SEC subpoena triggers coverage under the

Policies, and second, the Defendant Insurers cannot contest the exhaustion of American

8 Casualty’s third-layer excess policy. Id. The Defendant Insurers retort that a subpoena from the

SEC is not enough to obligate coverage—instead, Freddie must show that the subpoena recipient

was the subject of an SEC investigation for his or her wrongful act. Opp. at 1–2. And they

maintain they can challenge whether American Casualty’s policy was properly exhausted as

necessary to trigger their coverage duties. See Opp. at 3.

II. Legal Standards

“After the pleadings are closed—but early enough not to delay trial—a party may move

for judgment on the pleadings.” Fed. R. Civ. P. 12(c). To prevail, the movant must prove that

there is no material fact in dispute and they are entitled to judgment as a matter of law. Samuels

v. Safeway, Inc.,

(D.D.C. 2019) (Cooper, J.) (citing Schuler v.

PricewaterhouseCoopers, LLP,

(D.C. Cir. 2008)). “When evaluating a

motion for judgment on the pleadings, inferences should be drawn and facts should be viewed in

the light most favorable to the non-moving party.”

(citing Peters v. Nat’l R.R. Passenger

Corp.,

(D.C. Cir. 1992)).

The parties agree that, under a choice-of-law clause, Virginia law applies to interpreting

the D&O policies. See Compl., Ex. 2 (National Union Policy Endorsements) at 33 (page

numbers designated by CM/ECF); Compl. ¶ 34; Opp. at 10, n.6. Like other contracts, insurance

policies must be construed as a whole. Premier Pet Prods., LLC v. Travelers Prop. Cas. Co. of

Am.,

(E.D. Va. 2010). And, because insurance policies are generally

drafted by insurers, ambiguities in them are generally construed in favor of the insured. TravCo

Ins. Co v. Ward,

, 325 (Va. 2012).

9 III. Analysis

The Court has jurisdiction under Freddie Mac’s governing statute,

(f).

A. Coverage for SEC Subpoenas

The first dispute here is about what requirements are necessary to establish coverage for

Freddie’s costs associated with an SEC subpoena issued to an indemnified Freddie employee.

Freddie contends that the issuance of an SEC subpoena to a Freddie employee alone triggers

coverage; the Defendant Insurers disagree, arguing that Freddie must also show that the

subpoena recipient was the subject of an SEC investigation for his or her wrongful act. The

Defendant Insurers have the better of the argument.

As described above, the “Organization Insurance” section of Policies provide Freddie two

types of coverage: entity coverage (coverage for “a Securities Claim made against such

Organization for any Wrongful Act of such Organization”) and indemnified employee coverage

(coverage for indemnified costs resulting from “a Claim made against an Insured Person . . . for

any Wrongful Act of such Insured Person”). National Union Policy at 1 (boldface omitted).

Taking entity coverage first, the parties agree that, under the Policies’ definition of a Securities

Claim, costs associated with an investigation of Freddie the entity are covered only if a Freddie

employee is also being investigated at the same time. See Mot. at 1–2; Opp. at 5. In dispute here

is the scope of indemnified employee coverage—in particular, what exactly constitutes a

“Claim,” which the Policies define as:

a civil, criminal, administrative or regulatory investigation of an Insured Person:

(i) once such Insured Person is identified in writing by such investigating authority as a person against whom a proceeding described . . . [elsewhere] may be commenced; or

10 (ii) in the case of an investigation by the SEC or a similar state or foreign government authority, after the service of a subpoena upon such Insured Person.

National Union Policy at 2 (boldface omitted).

Freddie lasers in on the fact that indemnified employee coverage begins “in the case of an

investigation by the SEC . . . after the service of a subpoena upon such Insured Person.” See

(boldface omitted). It reads this language to establish that an SEC subpoena of an employee is

per se a claim. Mot. at 12. But this language must be read in the context of the entire policy,

including its distinction between SEC investigations of Freddie employees, which are covered,

and SEC investigations of Freddie the entity, which are covered only if the SEC is also

simultaneously investigating a Freddie employee. When viewed in this light, the Defendant

Insurers’ interpretation prevails.

Receipt of an SEC subpoena may indicate an ongoing investigation by the SEC. But,

absent the subpoena itself or any evidence of its surrounding circumstances, it is unclear whether

that investigation is of a Freddie employee or Freddie the entity. And if that investigation is

against Freddie the entity, and there is no simultaneous investigation of a Freddie employee, then

there is no coverage.

The Defendant Insurers sharpen the point by positing a hypothetical subpoena served on

an employee that states: “The SEC is not investigating you personally; rather, it is investigating

Freddie Mac and requests any relevant documents in connection with its investigation of Freddie

Mac.” Opp. at 13. This subpoena would trigger coverage under Freddie’s interpretation of the

Policies. Yet that result would be contrary to the Policies’ different coverage for employees and

entities and therefore inconsistent with the policy as a whole.

11 Freddie responds that “SEC investigations of companies do not have to be conducted via

employee subpoenas” because “[t]he SEC possesses (and often exercises) the power to issue

subpoenas to the company itself.” Reply at 9. But just because the SEC can investigate the

company through a corporate subpoena does not mean that the SEC would not also do so

through subpoenas to the company’s employees. At this stage, when the only materials before

the Court are the parties’ pleadings, which do not attach the subpoenas at issue, the Court has no

way to assess whether the subpoenas related to an investigation into Freddie employees or

Freddie itself.

Freddie also points to the Policies’ special treatment of SEC investigations: While, for

other claims, an employee must be “identified in writing” as the subject of a proceeding, in the

case of an SEC investigation, Freddie argues, a subpoena is enough.

at 12–13. Freddie

maintains that this differential treatment makes practical sense because the SEC “does not

actually identify specific, individual targets” in its investigations “beyond issuing such orders

and subpoenas.”

at 15 n.14. But, even if a subpoena did not “identify [a] specific[] target,”

it could contain facts that would shed light on the nature of the investigation at issue.

Absent the content of the subpoenas, moreover, it remains unclear whether there is

evidence of an alleged “Wrongful Act” as necessary to establish coverage under the Policies.

BioChemics, Inc. v. AXIS Reinsurance Co.,

(1st Cir. 2019), is instructive on this

point. There, the First Circuit affirmed summary judgment in favor of a defendant insurer in part

on the ground that a subpoena was a “component” of a claim within the meaning of the policy,

not a claim in and of itself.

at 640–41. The policy language at issue in BioChemics

specifically required SEC subpoenas to “identify[] [the] Insured” in writing, whereas these

Policies do not.

. But the First Circuit also noted that “even if [it] assumed that

12 subpoenas are ‘Claims’ in their own right, that conclusion does not, on its own, imbue them with

‘actual or alleged’ ‘errors’ such that they state ‘Wrongful Acts’ . . . under the Policy.”

at 641

n.5. Likewise, on the pleadings before the Court, it is unclear whether the subpoenas (or other

documents arising from the SEC investigation) allege a “Wrongful Act” as necessary to make

out a “Claim” under the Policies.

Finally, Freddie advances an alternative argument that, even under the Defendant

Insurers’ interpretation, “undisputed evidence confirms that the SEC was investigating Insured

Persons who received subpoenas.” Reply at 13; see also Mot. at 14–16. But this issue is better

adjudicated after discovery, when Freddie will have the opportunity to show, through actual

evidence, that the subpoenas of its employees were part of an investigation into its employees,

not just Freddie. As of now, the SEC letter, subpoenas, Order, and Wells Notices are not before

the Court. And, tellingly, the central case Freddie cites, Office Depot, Inc. v. National Union

Fire Insurance Co. of Pittsburgh,

(S.D. Fla. 2010), was decided on

summary judgment, with the court having actual evidence of the subpoenas and investigative

materials at issue.

, 1311–12.

Accordingly, the Court agrees with the Defendant Insurers’ interpretation of the relevant

policy provisions. Discovery will determine whether the SEC was investigating Freddie

employees for their wrongful acts as necessary to establish coverage for Freddie’s

indemnification of the employees’ costs.

B. Challenging an Underlying Payment

Freddie Mac also seeks a judgment declaring that the Defendant Insurers cannot

challenge the third-layer insurer American Casualty’s $15 million tender, $14 million of which

13 Freddie allocated to losses the Defendant Insurers claim were uncovered. See Opp. at 21. The

Court will grant judgment in Freddie’s favor on this issue.

Whether an excess insurer can challenge an underlying insurer’s payment as outside the

scope of coverage appears to be a matter of first impression in this Circuit and under Virginia

law. “[T]he limited caselaw that has addressed this issue,” however, has consistently held that

“excess insurers generally may not avoid or reduce their own liability by contesting payments

made at prior levels of insurance, unless there is an indication that the payments were motivated

by fraud or bad faith” or there is “specific language in [the] policies reserving a right to

challenge prior payments[.]” AXIS Reinsurance Co. v. Northrop Grumman Corp. (“Northrop

Grumman”),

(9th Cir. 2020); see also, e.g., Costco Wholesale Corp. v.

Arrowood Indem. Co.,

(W.D. Wash. 2019) (“[T]he weight of

authority holds that an excess insurer may not challenge the underlying insurers’ payment

decisions in order to argue that their policy limits were not (or should not have been)

exhausted.”); Edward E. Gillen Co. v. Ins. Co. of Pennsylvania, No. 10-C-564,

, at *4 (E.D. Wis. May 3, 2011) (“[A]n excess liability insurer cannot avoid or reduce

liability under its own policy by challenging a separate insurer’s decision to settle or pay out

claims at a prior layer of insurance.”).

The Court agrees with these authorities that excess insurers cannot avoid their obligations

by arguing that underlying coverage was improperly eroded. This rule promotes finality and

settlement. It also makes sense given the nature of a layered insurance structure, within which

each insurer is independent. Cf. Allmerica Fin. Corp. v. Certain Underwriters at Lloyd’s,

, 426 (Mass. 2007) (“[P]rimary and excess insurers act independently of each other

with respect to decisions about their policies, including coverage determinations and

14 settlements,” and are not bound “to a form of joint liability should coverage at a prior layer fail”

because “[t]he layer of risk each insurer covers is defined and distinct.”).

The Defendant Insurers suggest that they do not fall under this rule because American

Casualty likely made “an unallocated compromise payment,” which Freddie “then applied . . . to

fees and costs that do not constitute covered Loss and thus do not erode the underlying

insurance.” Opp. at 21. In other words, the Defendant Insurers assert that they are not second-

guessing American Casualty’s payment decision because American Casualty never made a

specific determination to cover certain costs. Instead, Freddie decided how to allocate the

payment.

The caselaw is less clear on whether an excess insurer can challenge a payment by a

lower-level carrier to settle a claim by the insured without an agreement as to which types of

losses the payment would cover. But the Court concludes that the same policy justifications bear

on that situation as where an underlying insurer designates a specific purpose for a payment, so

the same prohibition on excess-insurer challenges to such payments should also apply. In both

instances, allowing higher-layer excess carriers to challenge these payments would encourage

litigation, delay the resolution of claims, and undermine the discretion of lower-layer carriers to

settle claims within their limits. Moreover, as the Ninth Circuit articulated in Northrop

Grumman, absent fraud or bad faith, it is unlikely “that there are many instances where an

insurance company will pay out claims—let alone its policy’s limit—when it is not obligated to

do so[.]”

. But “even if . . . insurers sometimes choose to settle claims that fall

outside their scope of coverage ‘for what they perceive[] as legitimate business reasons,’ nothing

prevents . . . [an] excess insurer from raising and leveraging this concern during contractual

negotiations with their policyholders.”

(second alteration in original). So, an excess carrier

15 can price this risk into its policy with the insured by charging a higher premium or specifically

contracting for the right to challenge underlying payments.

The Defendant Insurers alternatively suggest that they took such precautions, as reflected

in “specific language in their policies reserving a right to challenge prior payments.”

.

Namely, the Defendant Insurers argue, the Policies provide that the excess insurers would be

liable only after the primary and underlying excess insurers had paid the full amount of their own

liability limits for covered “Loss.” Opp. at 22–23. Of the two Defendant Insurers left in this

case, only HCC’s policy actually uses the term “[l]oss[]” when explaining its obligation; it states

that “coverage hereunder shall attach only after all Underlying Insurance has been exhausted by

actual payment of claims or losses thereunder.” Compl., Ex. 5 (HCC Policy), at 7 (page numbers

designated by CM/ECF). However, the Lloyd’s policy contains a substantively similar

provision: “The Underwriters’ liability to pay under this Policy shall attach only when the

Underlying Insurer(s) shall have paid or have been held liable to pay, the full amount of the

Underlying Limit(s)[.]” Compl., Ex. 6 (Lloyd’s Policy), at 6 (page numbers designated by

CM/ECF). The Court therefore will consider the Defendant Insurers’ argument that, given these

provisions, Freddie bears the burden of showing that the American Casualty policy was properly

exhausted.

Other courts presented with similar arguments have found this type of language

insufficient to alter the default rule that excess insurers cannot challenge underlying insurers’

payments. In Northrop Grumman, for example, the policy at issue required the excess insurer

“to ‘drop down’ to provide coverage only when the . . . liability limit of the underlying insurance

policies was exhausted for ‘covered loss.’”

. But the Ninth Circuit determined

16 that there was “no indication” that this “‘covered loss’ provision” indicated the parties’ intent to

“contract around th[e] general rule.”

.

Likewise, the court in Costco considered a policy establishing an excess insurer’s

coverage obligations “[i]n the event and only in the event of the reduction or exhaustion of the

Underlying Limit by reasons of the insurers of the Underlying Policies paying in legal currency

Loss.” 387 F. Supp. 3d at 1173–74. The court acknowledged that unpublished decisions from

Minnesota had interpreted such language to require the insured “to show that the payments that

were made fit within the policy definition of ‘Loss[.]’”

at 1174 (quoting Royal Indem. Co. v.

C.H. Robinson Worldwide, Inc., No. A08-0996,

, at *2 (Minn. Ct. App. July

21, 2009)). But it eschewed this approach, concluding instead that the “Loss” language at issue

was ambiguous and therefore should be construed in favor of the insured.

Here, the Court also sees no indication that the parties mutually intended to contract

around the default rule. The language requiring exhaustion of the underlying levels of insurance

is likely standard fare in most excess insurance contracts, which by their nature obligate

coverage only when the underlying limits have been paid. Nothing more specific in the Policies

suggests that the parties intended these provisions to have the broader effect the Defendant

Insurers advance. And, even if these provisions were ambiguous, the interpretive tie would go to

Freddie under the default rule that ambiguities in contracts are construed against the drafter. See

TravCo Ins. Co., 736 S.E.2d at 325. Accordingly, the Court will grant Freddie’s motion on this

second issue and hold that the Defendant Insurers cannot challenge American Casualty’s

payment.

17 IV. Conclusion

For these reasons, it is hereby

ORDERED that [ECF No. 31] Plaintiff’s Motion for Partial Judgment on the Pleadings

is GRANTED in part and DENIED in part. It is further

ORDERED that the parties shall submit, by November 22, 2024, a Joint Status Report

on the need for further proceedings in this matter.

SO ORDERED.

CHRISTOPHER R. COOPER United States District Judge

Date: November 8, 2024

18