Primary Insurer's Payment of Less Than the Underlying Limit Fails to Trigger Excess Policy, Even Though Insured Incurred Loss Over the Underlying Limit

Primary Insurer's Payment of Less Than the Underlying Limit Fails to Trigger Excess Policy, Even Though Insured Incurred Loss Over the Underlying Limit

04.09.2008

A March 25, 2008 decision by the California Court of Appeal in Qualcomm, Inc. v. Certain Underwriters At Lloyd’s, London, __ Cal.Rptr.3d __, 2008 WL 763483, illustrates that “California case law has consistently protected the limited and shielded position of the excess carrier when the obligations of the excess carrier are set in clear phrases.” 

In May 1999, Qualcomm employees and former employees sued Qualcomm asserting rights in unvested stock options. Qualcomm tendered the actions to its primary insurer under a Directors & Officers Liability Policy, which had $20 million in limits, and to its excess insurer under an excess policy, which had an additional $20 million in limits. 

The primary policy insured Qualcomm and its directors and officers for losses, including damages, judgments, settlements and defense costs, arising from a claim. The excess policy “followed form” to the primary policy and further included a “ Maintenance of Underlying Policies” clause requiring Qualcomm to keep the primary policy intact, with limits of liability, subject to reduction or exhaustion as losses were paid. The excess policy’s “exhaustion” provision stated that the excess insurer “shall be liable only after the insurers under each of the Underlying Policies have paid or have been held liable to pay the full amount of the Underlying Limit of Liability. ”

Qualcomm eventually settled with the primary insurer, agreeing to release the primary insurer from all future coverage obligations in exchange for the primary insurer’s payment of settlements and defense expenses totaling $16 million. In 2006, Qualcomm sued the excess insurer seeking to recover $9 million remaining in incurred but unreimbursed settlement and defense expenses.  

Qualcomm argued the excess policy was triggered because Qualcomm, the primary insurer, or other third parties combined had paid a total of at least $20 million in defense and indemnity of Qualcomm in the litigation.

The excess insurer demurred on grounds that the excess policy had not been triggered because Qualcomm could not satisfy the two conditions precedent:  Qualcomm failed to maintain the underlying policy by releasing the primary insurer, and the primary insurer had not paid its $20 million policy limit (nor could it following its settlement with Qualcomm). 

The trial court agreed with the excess insurer. On appeal, the Court of Appeal determined there was no reasonable possibility that the defect in the complaint could be cured by amendment and therefore affirmed the trial court’s decision.

The Court held that the exhaustion clause in the excess policy was clear; that the excess insurer “shall be liable only after the insurers under each of the Underlying policies have paid or have been held to liable to pay the full amount of the Underlying Limit of Liability” “cannot have any other reasonable meaning than actual payment of no less than the $20 million underlying limits.”

Qualcomm argued the Court should adopt the interpretation in an out-of-state decision, Zeig v. Massachusetts Bonding and Ins. Co., 23 F.2d 665 (2d Cir. 1928), in which the court held that primary insurance was “exhausted” and an excess insurer was liable for losses exceeding the primary limits, even where the primary insurer settled for less than its actual policy limits. The Zeig court reasoned that the excess insurer had no rational interest in whether the insured actually collected the full amount of the primary policies’ limits, “so long as it was only called upon to pay such portion of the loss as was in excess of the limits of those policies. To require an absolute collection of the primary insurance to its full limit would in many, if not most, cases involve delay, promote litigation, and prevent an adjustment of disputes which is both convenient and commendable. ” 

The California Court, however, was not persuaded by Zeig and found it error to interpret clear and unambiguous policy language in any way other than according to its plain meaning. The Court also rejected Qualcomm’s suggestion that under Zeig and other cases, the exhaustion clause was rendered ambiguous because Qualcomm reasonably expected coverage.  

The Court concluded that the excess policy was unambiguous; that “payment” means payment. The Court was not going to rewrite policy language, even to encourage settlements. As another Court eloquently stated, “whatever merit there may be to conflicting social and economic considerations, they have nothing whatsoever to do with our interpretation of the unambiguous contractual terms. If contractual language in an insurance contract is clear and unambiguous, it governs, and we do not rewrite it for any purpose.” Aerojet-General Corp v. Commercial Union Ins. Co., 155 Cal.App.4th 133, 145-146 (2007).