Read all about it: big easy paper beats Zurich on matters of intent: narrowly interpreted, a recent federal appeals court case could be seen as a disagreement over excess fidelity insurance. More broadly, it could also be celebrated as a victory of aggrieved insureds over powerful insurers

Risk & Insurance, Oct 1, 2005 by Matthew Brodsky

In August, a federal appeals court found that Zurich was bound to the plain language of its excess fidelity policy and liable for its insured's claimed losses. The ease, The Times-Picayune v. Zurich American Insurance Company, fortifies the legal position that courts must decide in favor of the intent of coverage, not the insurer's close--some would say ambiguous--reading of it.

"The court is attempting to give effect to broader policy intentions to provide coverage in circumstances where there clearly is coverage," says Neal R. Brendel, a partner at the Pittsburgh office of Kirkpatrick & Lockhart Nicholson Graham LLR "The court is rejecting very technical textural--very narrow parsing of policy language--by the insurer in order to give fulfillment to legitimate expectations of the policyholder."

The dispute between Zurich and New Orleans' The Times-Picayune stems from an embezzlement that occurred between January 1995 and December 2000. Arthur Anzalone, an employee of the company, stole more than $2.2 million during that period.

The Times-Picayune had coverage for that very risk. Beginning on Jan. 1, 1995, to July 1, 2001, it purchased primary coverage with a $1 million limit through Federal Insurance Co. It also invested in excess coverage from Federal from July 1996 to July 1, 1998. When that expired, the company switched to Zurich for a three-year, $1.5 million excess fidelity policy.

When The Times-Picayune uncovered Anzalone's crimes, the company reported the loss and settled with National for the full extent of its primary coverage, and claimed the remaining loss (more than $1.2 million) on its excess policy.

Zurich, however, read its excess policy differently than the newspaper company did. The carrier's interpretation of the excess fidelity policy held that Zurich was only liable for losses if the primary policy was exhausted, and only if the losses that exhausted it occurred during the term of Zurich's policy--not prior excess policies.

During the period that Zurich was the excess underwriter, from 1998 to 2001, Anzalone made off with $1,165,873. Zurich thus said it only owed the $165,873 that was in excess of the primary coverage limit, and offered to settle for this amount.

Claiming breach of contract, The Time-Picayune filed suit in state court. Zurich moved the case to the federal court, which found for Zurich. The Times-Picayune appealed.

This federal appellate court decided for the insured and reversed the prior finding. In its opinion, the appeals court wrote that the excess policy must be interpreted "as a whole." Whereas Zurich and the lower court had focused on the prior loss clause of the primary coverage, the appeals court contended that a reading of the "plain language" of the excess policy as a whole, including specifically its "insuring" and "drop down" clauses, was required.

A plain reading of the policy, said the court, nullified Zurich's contention that it was only responsible for losses occurring after 1998. In effect, Zurich became the primary insurer--as soon as National's primary policy was exhausted.

In interpreting its excess coverage without integration, Zurich had "manufactured an ambiguity" in the policy, the court found.

For insureds, the decision represents a victory against parsing insurers, said Brendel. Zurich would not comment on the ease.