D&O Liability - Excess Insurance Not Implicated Where Underlying Insurer Failed to Exhaust
On March 25, 2008, in Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, No. D050433 (Cal. Ct. App.), the California Court of Appeal affirmed the dismissal of an excess insurer where the insured had settled
with its primary insurer for an amount less than the primary policy’s limit and “absorb[ed] the resulting gap” between the settlement amount and the primary policy’s limit. In holding that the excess policy
was not triggered, the court rejected the insured’s public policy arguments regarding the encouragement of settlements, instead relying on the “literal language” of the excess policy that required the primary
insurer to pay the “full amount” of its limit of liability.
The insured, Qualcomm, Inc., sought coverage under a $20 million primary directors and officers liability policy issued by National Union Fire Insurance Company of Pittsburgh, Pa. and a $20 million first excess policy issued by Certain
Underwriters at Lloyd’s, London for settlement payments and defense expenses incurred in connection with lawsuits brought by Qualcomm employees relating to unvested company stock options. Qualcomm settled with National Union
for $16 million, filled the $4 million gap between that amount and the primary policy’s limit, then sought coverage from Underwriters for an additional $9 million in settlement payments and defense expenses. Underwriters asserted
that it had no obligation to pay, as the primary policy had not exhausted. Qualcomm instituted this litigation against Underwriters in California state court, asserting causes of action for breach of contract and declaratory relief.
The trial court sustained Underwriters’ demurrer without leave to amend on the grounds that the excess policy had not been triggered. Based on the complaint’s allegation that Qualcomm had settled with its primary insurer
for $16 million in exchange for a release, the trial court ruled that Qualcomm could not meet a condition precedent of the policy to maintain the primary policy with a $20 million limit of liability. The trial court further ruled
that, in the absence of facts showing that the primary insurer did not pay due to insolvency, bankruptcy or liquidation, Qualcomm could not plead circumstances permitting it to be deemed self-insured.
In affirming the trial court’s dismissal of Underwriters, the appellate court noted that it did not need to reach the maintenance of underlying limits provision relied upon by the trial court. Instead, the court focused on the
exhaustion clause in the excess policy. That clause provided: “Underwriters shall be liable only after the insurers under each of the Underlying Policies [the primary policy] have paid or have been held liable to pay the full
amount of the Underlying Limit of Liability.” The court found the exhaustion clause to be unambiguous, noting that “Qualcomm’s objectively reasonable expectations as the insured were that primary insurance would
have to be exhausted before excess coverage would attach.” In sum, the court stated: “The exhaustion clause here compels us to conclude that the parties expressly agreed that National was required to pay (or be legally
obligated to pay) no less than $20 million as a condition of Underwriters’ liability. Because National did not so pay, Underwriters’ obligations did not arise.” The court cited to various California authorities
where courts had applied similar policy language, and found that the authorities to which Qualcomm cited did not have policy language that was as clear regarding the requirement that the primary insurer itself pay (or have been held
liable to pay) the full amount of its policy’s limits. The court placed the plain meaning of the policy before any public policy considerations that Qualcomm advanced (and that were relied upon in the cases that Qualcomm cited)
regarding encouraging settlements with primary insurers.