Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London
Issue Discussed: Exhaustion of Underlying Policy Limits
Submitted by Cecilia Froelich Moss, Karen C. Baswell
Date Promulgated: June 11, 2008
Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 161 Cal. App. 4th 184 (Cal. Ct. App. 2008)
Court: California Court of Appeal, Fourth District
Issues Decided: Whether an insured’s below-limit settlement with its primary carrier is sufficient to exhaust the underlying policy and trigger coverage under an excess layer policy when the insured “filled the gap” between the settlement and the primary policy limits?
The insured, Qualcomm, sought coverage from its primary and excess D&O insurance carriers for defense and indemnity arising from several litigations filed by its former employees. Qualcomm eventually settled with its primary carrier for an amount below the full limits of the primary policy. Qualcomm then filed suit against its excess layer carrier, Certain Underwriters at Lloyd’s, London (“Underwriters”) when it refused to provide coverage. Underwriters moved to dismiss, arguing that the excess policy had not been triggered, because Qualcomm had failed to meet two conditions precedent to coverage: (1) Qualcomm had failed to maintain the underlying policy and “compromised” that policy by settling for an amount below policy limits; and (2) the underlying policy had not been “exhausted” as required to trigger coverage. The trial court granted the motion to dismiss, and Qualcomm appealed.
The appellate court rejected Qualcomm’s argument that the policy language regarding exhaustion was ambiguous. The excess policy provided:
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 appellate court held that the only reasonable reading of this language was that actual payment of the full underlying policy limit was required before the excess policy could be triggered. 161 Cal. App. 4th 184, 195-96.
In its analysis, the California appellate court rejected the public policy arguments of Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928), which held that “[t]o require an absolute collection of the primary insurance to its full limit would in many, if not most, cases involve delay, promote litigation, and prevent an adjustment of disputes which is both convenient and commendable.” Zeig, 23 F.2d at 666. The California appellate court noted that the Zeig court acknowledged that parties could include policy language requiring actual payment as a condition precedent to coverage under an excess policy, and held that the parties had done so in this instance. Qualcomm, 161 Cal. App. 4th at 198.
- The specific language of the excess policy at issue will determine whether an underlying policy can be “exhausted” by a below-limits settlement with the insured “filling the gap.” When the language of the excess policy requires actual payment of the full underlying policy limit, a below-limits settlement is insufficient to trigger coverage under the excess policy.
- Public policy arguments do not outweigh the plain, unambiguous language of an insurance policy. Cf Stonewall Ins. Co. v. Superior Court, 2010 WL 4277559 (Cal. Ct. App. Nov. 1, 2010) (declining to follow Qualcomm).
* Cecilia Froelich Moss is a founding partner of Chaffetz Lindsey LLP, where her practice focuses on representing major insurance companies in reinsurance disputes and in coverage litigation. Ms. Moss also handles large scale commercial disputes in court and in international arbitration.
* Karen C. Baswell is an associate of Chaffetz Lindsey LLP, focusing on insurance and reinsurance dispute resolution.