Failure to Plead Compliance with Condition Precedent Held Fatal to Declaratory Judgment Action

The United States District Court for the Southern District of New York has held that a declaratory judgment action filed against an excess difference in conditions (“DIC”) insurer is ripe for adjudication because the insured plausibly alleged a practical likelihood that the policy’s Drop-Down Clause will be triggered, even though he failed to allege that he has complied with a condition precedent to coverage. Johnson v. Ironshore Specialty Ins. Co., 2022 WL 912973 (S.D.N.Y. Mar. 28, 2022).

The insured was the former president and CEO of a national hunting and sporting goods distributor. He was accused of causing one of the company’s subsidiaries to use loan proceeds to pay off the parent company’s investors rather than investing the funds in the subsidiary’s business and for fraudulently enriching himself at the expense of the company. The company maintained four insurance policies: a primary Management Liability policy with a $10 million limit of liability, two excess policies with a $10 million limit of liability that each applied when the respective underlying limits were exhausted, and an excess DIC policy with a $5 million limit of liability that applied after the insured’s defense costs exceeded $30 million. The DIC policy also included a Drop-Down Clause, providing that the carrier would be required to advance defense costs if the primary carrier refused to indemnify the insured and the insured formally requested advancement of defense costs, including properly itemized and detailed invoices. 

After the primary carrier denied coverage and the other carriers refused to contribute to or reimburse the insured for defense costs, the insured filed an action against all four carriers.  At the time he filed the lawsuit, the insured had incurred approximately $1 million in defense costs. The excess carriers all moved to dismiss the complaint.

The court granted the DIC carrier’s motion to dismiss the cause of action against it alleging breach of the Drop-Down Clause because the insured failed to plead that he had formally requested reimbursement of defense costs from the carrier with appropriate documentation. Although the insured failed to plead that he complied with a condition precedent to coverage, the court nonetheless determined that the action was ripe because, assuming that the insured individual properly complied with the policy’s express requirements that the insured request advancement and submit detailed invoices, the DIC carrier’s obligation to advance defense costs would be triggered. By contrast, the excess carriers’ obligations were triggered after the underlying limits were exhausted, which required the insured to incur ten or twenty times the amount of defense costs that he had then incurred. The court accordingly dismissed the action against the excess carriers without leave to amend but allowed the insured an opportunity to amend his breach of contract claim against the DIC carrier.