Insurance towers provide significant protection for many businesses. Insurance towers are comprised of a primary insurer followed by layers of excess insurers. Once the primary insurer’s policy limits have been exhausted, the first layer excess insurer takes over until its policy limits are exhausted. This process continues until the claim is paid in full or the insurance tower’s policy limits are exhausted. The amount of coverage varies greatly and can range from a few million dollars to hundreds of millions of dollars. However, your insurance tower may not be as formidable as you believe.

In Pharmacia Corp. v. Arch Specialty Ins. Co., 2024 WL 208146 (3d Cir. Jan. 19, 2024), Pharmacia Corporation, a pharmaceutical drug manufacturer, purchased a $200 million directors and officers insurance tower provided by thirteen insurers. The eighth-layer excess policy was issued by Twin City Fire Insurance Company (the “Twin City Policy”). The Twin City Policy provided $10 million in coverage and was triggered “only after the Primary and Underlying Excess Insurers shall have [(1)] duly admitted liability and [(2)] . . . paid the full amount of their respective liability.”

Pharmacia shareholders filed a putative class action against the company, alleging that it artificially inflated its stock by misrepresenting the results of a clinical drug study. Litigation lasted for ten years before a settlement was reached. Pharmacia incurred roughly $207 million in defense and indemnity costs. Pharmacia sought coverage from Twin City and provided proof that the primary insurer and excess insurers ahead of it paid their respective policy limits. Twin City declined to provide coverage.

Pharmacia sued Twin City seeking a declaration that the Twin City Policy provided coverage for the losses incurred in the class action suit. Twin City was granted summary judgment in the District Court based on a finding that the Twin City Policy required the other insurers to admit liability as a condition precedent of coverage and six insurers disclaimed liability. The Third Circuit Court of Appeals wasted little time affirming the District Court’s ruling. Here is the entirety of the Third Circuit’s analysis:

Applying these principles, the Policy here unambiguously imposes two distinct conditions precedent for coverage to attach. Specifically, Pharmacia must show both that the insurers ahead of Twin City in the tower have (1) “duly admitted liability and [(2)] … paid the full amount of their respective liability.” App. 601. The use of the word “and” demonstrates that both conditions must be met. See Pine Belt Chevrolet, Inc. v. Jersey Cent. Power & Light Co., 626 A.2d 434, 441 (N.J. 1993) (noting that “[t]he word ‘and’ carries with it natural conjunctive import while the word ‘or’ carries with it natural disjunctive import” (quoting State v. Duva, 470 A.2d 53, 55 (N.J. Super. Ct. Law Div. 1983))); see also Progressive Ne. Ins. Co. v. State Farm Ins. Cos., 81 A.D.3d 1376, 1378 (N.Y. App. Div. 2011) (declining to replace a contract’s use of “the conjunctive ‘and’ [with the] disjunctive ‘or’ ” because doing so would have a “strained, unnatural and unreasonable” effect).

Here, Pharmacia has failed to show that both conditions to trigger Twin City’s coverage were met. Regardless of whether the other insurers in the tower paid their policy limits, the record does not demonstrate that all of those insurers admitted liability. Because Pharmacia has failed to establish at least one condition precedent, the District Court correctly declined to declare that Twin City owes Pharmacia coverage.

The ease at which the District Court and the Third Circuit found for Twin City highlights the importance of understanding your insurance policies and the conditions of coverage.