Exhaustion Clause and Excess Insurer's Liability after Settling for Less than Limits
In Qualcomm, Inc. v. Certain Underwriters At Lloyd's, 2008 WL 763483 (Cal.App. 4 Dist., 2008), the California Court of Appeals affirmed the lower court's decision that coverage under an excess policy was not triggered because the primary insurer had neither paid the “full amount” of its policy limits nor had it become legally obligated to pay the full amount of the primary limits pursuant to the parties' settlement agreement.
In the underlying case, former Qualcomm employees sued the insured asserting claims relating to their asserted right to unvested company stock options. The insured sought coverage for the suit from its insurers, and both its primary and excess insurers disputed coverage. Following a mediation between the insured and its insurers, the insured settled its coverage dispute with its primary insurer for $4 million less than the $20 million policy limits. The insured then determined that it would pay the $4 million itself to fill in the gap and seek the remaining unreimbursed expenses from its excess insurer.
The excess insurer, however, refused to pay, asserting that coverage under the excess policy had not been triggered because the insured failed to meet two conditions precedent to coverage under the excess policy. First, the insured was required to refrain from “compromising” the underlying primary policy. Secondly, the underlying primary policy limits had not been exhausted because the primary insurer had not paid its full policy limits or been “held liable” to pay that amount. The excess policy stated that coverage was triggered 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.” In addition, the excess insurer claimed that another condition precedent to coverage under the excess policy included maintenance of an underlying policy.
The court affirmed the trial court's holding that the insured did not meet the excess policy's condition precedent of maintaining a primary policy with $20 million in limits, although it did not comment on the trial court's reasoning behind that decision. In addition, the court explained the courts should not adopt a strained or absurd interpretation of a policy in order to create an ambiguity where none exists. Thus, in interpreting the excess policy wording in its ordinary and popular sense, the court determined that the only reasonable interpretation of the policy wording requiring payment of the full amount of the underlying limits required actual payment of no less than the full $20 million underlying limit by the primary insurer.
As to whether the primary insurer could be said to have been “held liable” to pay the full underlying limit, the court noted that the insured's complaint did not state that the primary insurer was required to accept responsibility or liability for the full $20 million limit in the parties' settlement. And, because coverage under the excess policy was never triggered, the excess insurer had no obligation to the insured under the excess policy.
Therefore, the court stated that even if doing so would further the public policies of promoting settlement and risk-spreading by insurance, it would not obligate the excess insurer to reimburse the insured for its losses in excess of the primary policy's limit after the insured had settled with the primary insurer for less than the primary policy limit.