A California appellate court recently declined an invitation to broadly declare that when an insured settles with its primary insurer for an amount below the primary policy limit and absorbs the resulting gap between the settlement amount and the primary policy limit, primary coverage should be deemed exhausted and excess coverage triggered in Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London.
Starting in 1999, Qualcomm became a defendant in individual and class actions brought by its current and former employees. Qualcomm tendered the claims to its director and officer liability insurers. It held a $20 million primary D&O insurance policy through National Union Fire Insurance Company, and a $20 million excess policy through Certain Underwriters at Lloyd’s. Once it settled certain of the underlying suits, Qualcomm looked to these and other insurers to reimburse defense and settlement expenses.
Qualcomm’s primary carrier, National, agreed to reimburse a portion of the expenses in the non-class action cases in exchange for Qualcomm’s agreement to release National from all future obligations under the primary policy, and accordingly paid $16 million under the primary policy.
Unable to reach a similar agreement with Underwriters, Qualcomm sued its excess carrier for recovery of more than $9 million in unreimbursed expenses. Underwriters defended by citing the following exhaustion clause in the excess policy: “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.” Concluding that the foregoing exhaustion clause was unambiguous and that National had neither paid nor been held legally obligated to pay the full $20 million limit of liability under the primary policy prior to obtaining its release, the court agreed with Underwriters that excess coverage was never triggered.