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

The appellate court disagreed. While it acknowledged there were authorities holding an insured's deliberate or intentional conduct negates an accident, the court construed California authority as requiring that the harm also be intended. Id. at 328 (construing the test developed in Merced Mutual Insurance Company v. Mendez (1989) 213 Cal.App.3d 41 which found no coverage for a claim of sexual battery even if the insured did not intend to harm the claimant). 

The Mendez court had explained that:

An accident, however, is never present where the insured performs a deliberate act unless some additional, unexpected, independent and unforeseen happening occurs that produces the damage. Clearly, where the insured intended all of the acts that resulted in the victim's injury, the event may not be deemed an "accident" merely because the insured did not intend to cause injury. Conversely, an "accident" exists when any aspect in the causal series of events leading to the injury or damage was unintended by the insured and a matter of fortuity. Id. at 50.

State Farm distinguished Mendez and other authorities as involving situations where "the insured intended all of the acts in the causal chain, including the injury." State Farm, 164 Cal.App.4^th at 328. Thus, the court held that, because the insured had not intended the plaintiff to land on the pool steps and had miscalculated the force needed to clear the steps, there was unintentional conduct satisfying the accident requirement. 

The State Farm decision confuses the analysis and focuses on the resulting injury, when the focus should only be on the action taken by the insured. But, the debate is not over. The new year may bring additional decisions on the issue. Another accident case, Delgado v. Inter-Insurance Exchange, etc. (2007) 153 Cal.App.4^th 571 (review granted), is presently pending before the California Supreme Court. Delgado focuses on whether unreasonable self-defense can create an accident, but the Supreme Court may clarify the accident rules and comment upon State Farm.

Excess Insurer Liability Where Primary Settles

As previously reported, the California appellate court held that full primary insurance limits must be paid 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. Qualcomm v. Certain Underwriters at Lloyd’s, London (2008) 161 Cal.App.4^th 184 (review denied).

The primary insurer, with $20 million in liability limits, settled with Qualcomm for $16 million. Qualcomm then sued London, its excess insurer, for declaratory relief and breach of contract for the remaining $9 million owed on the claim. London successfully demurred to Qualcomm’s complaint. The appellate court affirmed this decision, finding that the “have paid or have been held liable to pay” language in the policy [the “attachment” clause], meant only actual payment of the $20 million of primary limits would suffice to meet that policy requirement. The appellate court ruled that public policy considerations, including those favoring settlements, could not supersede plain and unambiguous policy language.

The case is consistent with the literary approach taken by California’s appellate courts (or most of them) in analyzing insurance policy language. While insurers have made these arguments before, until this decision there was little published authority upon which to buttress the argument. One perhaps unfortunate ramification of the decision is that, depending on the strength of the coverage defenses and other issues that factor into settlement, it may be more difficult for primary insurers to settle for less than policy limits where there is a larger than limits potential exposure. The case has it s limits since not all excess insurance policies have the same “have paid or have been held liable to pay” requirement.

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.