Excess Insurer Does Not Pay Until Primary Pays Or Held Liable To Pay Full Limits
Full primary insurance limits must be paid (or be held liable to pay) prior to excess coverage attaching where the excess policy requires that the underlying policy “have paid or have been held liable to pay the full amount” of underlying limits. Where the insured settled with its primary insurer for less than policy limits, the excess insurer had no obligation to pay, ruled California’s appellate court in Qualcomm v. Certain Underwriters at Lloyd’s, London, __ Cal.App.4th __ (2008) [2008 WL 763483] (4th District - San Diego). The appellate court found the language of the excess policy clear and unambiguous and required this result, regardless of public policy considerations.
Qualcomm was sued in class actions relating to asserted rights to unvested company stock options. Qualcomm incurred in excess of $25 million defending against and resolving the lawsuits. Qualcomm tendered the claim under its director and officers insurance. Its primary insurer had $20 million in limits for loss, defined as including damages, judgments, settlements and defense costs. The primary insurer disputed coverage. Qualcomm and its primary insurer mediated and settled for $16 million. Qualcomm then sued London, its excess insurer, for declaratory relief and breach of contract for the remaining $9 million.
On demurrer, London moved to dismiss Qualcomm’s complaint for failure to state a cause of action on the basis of the excess policy’s “maintenance of underlying limits” and “exhaustion” clauses. Qualcomm argued in response that: (1) the maintenance of underlying limits clause was ambiguous; (2) the issue had been decided by a 1928 decision out of New York and a 1967 California case (which London was “chargeable” with knowing about) which cases held that when a primary insurer settles for less than policy limits, the excess insurer has to pay the losses that exceed the primary’s limits, and (3) it would be against public policy to rule otherwise because it would discourage settlements and result in a windfall for an excess insurer. The trial court sustained the demurrer.
On appeal, the court found no ambiguity in the exhaustion clause, as the appellate court referred to the “have paid or have been held liable to pay” language in the policy [also often called the attachment clause]. Excess insurance is understood to be secondary insurance, the court explained. Insurance policies should be interpreted according to their language. The court cannot rewrite the policy. The appellate court found the phrase “have paid … the full amount” of underlying limits could mean only actual payment of the $20 million of primary limits. The “have been held liable” language had to mean something different than actual payment or it would be redundant. Even interpreting that language in Qualcomm’s favor, as including a situation where the insurer agrees to pay policy limits as part of a settlement (rather than requiring an adjudication), the language still required full payment of policy limits.
Earlier decisions upon which Qualcomm relied, Home Indem. Co. v. Mission Ins. Co., 251 Cal.App.2d 942 (1967) and Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928), were neither precedent nor persuasive. The appellate court disagreed with the Zieg court’s willingness to put public policy considerations before policy language and its strained interpretation of the word “payment.” Both California and out of state authority disagree with the Zeig approach to contract interpretation. Home, the appellate court held,was consistent with the appellate court’s reasoning but the case’s result was based on disparate facts and circumstances.
The appellate court also ruled that public policy considerations, including those favoring settlements, could not supersede plain and unambiguous policy language. The court was “bound” by the policy’s language.
The appellate court did not address the maintenance of underlying limits requirement in the excess policy, which was another basis upon which the trial court had found in London’s favor.
