Second Circuit Limits Zeig v. Massachusetts Bonding & Insurance Co.

On June 4, 2013, the federal Second Circuit Court of Appeals issued an important decision addressing when underlying insurance will be deemed exhausted for purposes of the attachment of higher layers of excess insurance.  In doing do, the court sharply limited an influential 1928 precedent, Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928).  Zeig, written by Judge Augustus Hand, is often cited as the leading case standing for the proposition that, if an excess policy ambiguously defines "exhaustion," settlement with an underlying insurer will constitute exhaustion of the underlying policy for purposes of the attachment of the excess coverage.

The new decision, Mehdi Ali v. Federal Insurance Co., 719 F.3d 83 (2d Cir. 2013), involved a single tower of D & O insurance that had been issued to a now bankrupt computer company (Commodore).  Two of the insurers in the tower were themselves in liquidation and unable to pay claims.  Commodore's former