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The California Court of Appeal for the Fourth District held that a settlement between an insured and its primary insurer for less than primary policy limits does not trigger an excess insurer’s coverage obligation.
In May 1999, certain Qualcomm employees filed a class action related to their right to unvested stock options. Other Qualcomm employees filed separate lawsuits. Qualcomm settled the lawsuits, incurring $3.6 million in unreimbursed defense expenses for the class action and $9 million in unreimbursed expenses in connection with the other litigation.
Qualcomm tendered the litigation to its D&O liability insurers, including National Union Fire Insurance Company of Pittsburgh, P.A. (“National Union”) and Certain Underwriters at Lloyd’s, London (“Underwriters”). National Union issued Qualcomm a primary D&O policy in effect March 15, 1999 to March 15, 2000 with a liability limit of $20 million. Underwriters issued Qualcomm a first layer excess “following form” D&O reimbursement policy for the same period, providing $20 million in coverage for losses in excess of the underlying $20 million primary policy limit.
The Underwriters excess policy contained a “Limit of Liability” section providing that “Underwriters 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.” The Underwriters policy also contained a “Maintenance of Underlying Policies” clause.
National Union agreed to reimburse Qualcomm $16 million relating to settlement payments and defense expenses for the nonclass litigation in exchange for a release from all future obligations under the policy. Qualcomm later sued Underwriters for breach of contract and declaratory relief, seeking a declaration that Underwriters was obligated to indemnify Qualcomm under the excess policy for more than $9 million in unreimbursed expenses, provided that Qualcomm, National Union, or other third parties paid at least $20 million in defense and indemnity relating to the litigation.
Underwriters demurred to Qualcomm’s complaint, arguing that coverage under the excess policy had not been triggered because Qualcomm did not, and could not, meet two conditions precedent to coverage. First, Qualcomm compromised the underlying National Union policy in violation the Maintenance of Underlying Policies clause. Second, Qualcomm failed to demonstrate that the underlying policy limits were exhausted by virtue of National Union having paid its $20 million policy limit or having been “held liable” to pay that amount, pursuant to the Limit of Liability provision.
The trial court agreed with Underwriters, holding that the excess policy had not been triggered based on the allegations Qualcomm had settled with its primary insurer for less than primary limits and sustaining Underwriters demurrer without leave to amend.
The Appellate Court affirmed. The court first determined that the Limit of Liability provision was not ambiguous, stating that Qualcomm’s objectively reasonable expectations as the insured were that the primary insurance would have to be exhausted before excess coverage would attach. The court stated the phrase “have paid . . the full amount of [$20 million],” cannot have any other reasonable meaning than actual payment of no less that the $20 million underlying limit. The court noted even if the phrase “held liable to pay” is susceptible to more than one reasonable meaning (which the court did not decide) and includes responsibility for payment under settlement agreement, National Union was still not required to pay the full limit of liability under the primary policy.
The court concluded that earlier decisions to the contrary were neither persuasive nor undisputed authorities. In particular, the court disagreed with Qualcomm’s reliance on Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928) and Home Indem. Co. v. Mission Ins. Co., 251 Cal.App.2d 942 (1967). The 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. The court also held that Home was consistent with the appellate court’s reasoning but that the holding was based on disparate facts and a different procedural context.
The court also ruled that public policy considerations, including those favoring settlements, could not supersede plain and unambiguous policy language, concluding that it was “bound” by the policy language.
The appellate court elected not to address the Maintenance of Underlying Limits provision in the Underwriters excess policy.
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This opinion is not final. It may be depublished, modified on rehearing, or review could be granted. This events would render this decision unavailable for use as legal authority.
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