The California Court of Appeal has held that an excess policy’s “exhaustion” clause unambiguously relieved an excess insurer of any duty to indemnify its insured for unreimbursed defense and settlement costs after the insured settled with its primary insurer for less than the primary policy’s limit of liability. ( Qualcomm v. Certain Underwriters at Lloyd’s, London (2008) 73 Cal.Rptr.3d 770)
Facts
National Union Fire Insurance Company of Pittsburgh (National Union) issued Qualcomm, Inc. (Qualcomm) a primary directors and officers (D&O) liability policy, which insured Qualcomm and its directors and officers for “loss,” including settlements and defense costs arising from civil lawsuits. National Union’s primary policy had a $20 million limit of liability.
Certain Underwriters at Lloyd’s, London (Underwriters) issued Qualcomm a first level excess D&O liability policy, which provided another $20 million in coverage in excess of National Union’s $20 million primary policy limit. The Underwriters excess policy contained an “exhaustion” clause which stated that “Underwriters shall be liable only after the insurers under each of the Underlying Policies [i.e., the National Union primary policy] have paid or have been held liable to pay the full amount of the Underlying Limit of Liability.”
Various Qualcomm employees filed a class action lawsuit against Qualcomm asserting a right to unvested company stock options. Other employees filed similar lawsuits, asserting a right to accelerated vesting of stock options.
Qualcomm tendered the defense of these underlying actions to National Union and Underwriters. Qualcomm settled a coverage dispute with National Union in exchange for National Union’s payment of $16 million under the National Union $20 million primary policy. Qualcomm then paid the $4 million “gap” between National Union’s settlement amount and National Union’s primary policy limit. Thereafter, Qualcomm sought coverage from the excess insurer, Underwriters, for an additional $9 million in settlement payments and defense expenses that Qualcomm incurred in the underlying actions. Underwriters asserted that it had no obligation to pay, as the underlying National Union primary policy had not exhausted.
Qualcomm sued Underwriters for breach of contract and declaratory relief, contending that Underwriters’ excess policy obligated it to reimburse Qualcomm for the $9 million Qualcomm had incurred in defending and settling the underlying actions. Qualcomm asserted that National Union and Qualcomm had collectively paid at least $20 million for the defense and indemnity of the underlying actions. Underwriters countered that the “exhaustion” clause in its excess policy required National Union to pay or become obligated to pay its entire $20 million policy limit. The trial court ruled in Underwriters’ favor and Qualcomm appealed.
Holding
The Court of Appeal affirmed the trial court’s ruling, concluding that the “exhaustion” clause in Underwriters’ excess policy unambiguously required National Union to pay or be legally obligated to pay no less than its $20 million primary policy limit before Underwriters became obligated to pay under its excess policy. In holding that the Underwriters’ excess policy was not triggered, the appellate court rejected Qualcomm’s public policy arguments regarding the encouragement of settlements between insureds and primary insurers. Instead, the appellate court focused on the “literal language” of the excess policy, which required that the primary insurer pay the “full amount” of its limits before the excess policy would apply.
Comment
This case follows a long line of authorities in which California courts have held that the public policy considerations do not supersede clear and unambiguous policy language.