Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

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.

The Fourth Circuit ruled in Horace Mann Ins. Co. v. General Star National Ins. Co., No. 06-2156 (4th Cir. January 23, 2008) that because the General Star umbrella policy was a “true excess” policy, whereas the Horace Mann policy merely contained an “other insurance” clause purporting to make it excess of all other available insurance, a West Virginia district court erred in holding that Horace Mann had no obligation to contribute to the settlement.

Whereas the District Court had found that the two “excess” clauses were not in conflict since the General Star policy stated that it was excess to all other insurance “other than insurance that is in excess of the insurance afforded by this policy,” the Fourth Circuit ruled that these principles did not apply in a conflict between a primary policy and a true excess policy. Despite the fact that Horace Mann had developed this particular policy for school principals who typically would be entitled to coverage under other policies, the court rejected Horace Mann’s contention that this was, in fact, an excess policy holding that it was clearly designed to be a primary liability policy that might operate as excess insurance depending on the circumstances. While the excess other insurance clause in the Horace Mann policy might reduce the insurer’s exposure in most cases, the court held that it did not transform the policy into a true excess policy.

Writing in dissent, Judge Niemeyer argued that the district court had correctly undertaken a common sense reading of the respective wordings to reconcile their effect and that the Horace Mann policy therefore was excess of the General Star umbrella policy. The dissent also argued that this interpretation was consistent with the intent of the parties in structuring this insurance program for principals and educators.

The case of The Yaffe Companies v. Great American Ins. Co.,  arose out of an explosion at Yaffe’s scrap yard in Muskogee, Illinois which caused significant property damage and bodily harm.  Ultimately, Yaffe paid $1.8 million to settle the various claims brought against it.  It sought coverage from Ace, which had issued a CGL policy to it with a $1 million per occurrence limit but a deductible of $10,000 per claim.  Owing to the numerous underlying claims, Ace ultimately paid only half a million dollars for the losses with the Yaffe Companies absorbing the rest. 

Yaffe sued Great American contending that its umbrella liability policy, which was issued excess of the Ace $1 million policy was responsible for the difference between its total loss and $1 million.  Great American denied the claim arguing that it was only liable for that portion of the loss that remained after the underlying insurer had exhausted its limits. 

An Oklahoma district court granted summary judgment for Great American but the Tenth Circuit reversed.  Construing the various provisions of the umbrella policy together, the court found ambiguity and declared that the fortuity that the insured had chosen to purchase primary insurance on a “per claim” basis was irrelevant to the construction of the language of the Great American policy.  Since Yaffe had clearly paid more than $1 million, the court ruled that Great American was responsible for the remaining $800,000 in loss.

A dissenting judge argued that the language was, in fact, unambiguous and was keyed to the underlying limits of coverage, not the amount of the insured’s loss.  Judge Briscoe rejected the majority’s conclusion that the umbrella language referring to the “applicable limits of the underlying policies” merely set a dollar threshold at which point the excess carrier should pay, declaring instead that the language was clear that it was only intended to imply in excess of the retained limit, being the greater of the total amount of the limits of the underlying policies or the self-insured retention.

This case illustrates the trouble that excess underwriters can get into when their policies are not written on all fours with the primary coverage.  In this case, the underwriting file merely stated that the primary policy had a $10,000 deductible.  It is unclear whether the underwriter was aware that this was a “per claim” deductible that could have profound consequences in the event of mass tort incidents such as the Muskogee plant explosion giving rise to these claims. 

At the same time, it appears that the majority’s analysis did considerable violence to the manner in which umbrella carriers are conventionally called upon to pay and contorted the language of the policy in an effort to contrive coverage for the unfortunate and expensive consequence of the bargain that The Yaffe Companies had struck with its primary insurer.  Without saying so, the majority has in effect created a third form of umbrella coverage.  Whereas the policy itself only provides coverage for payments in excess of the primary limits or for cases outside the scope of the primary insurance, the Tenth Circuit’s analysis now creates an intermediate form of coverage requiring the umbrella carrier to also pay for that portion of an otherwise insured loss that is not owed by the primary insurer by reason of features such as deductibles or self-insured retentions.