A Delaware Superior Court, applying Delaware and New Jersey law, has held that “in the absence of contract language that would require it . . . allocation of defense costs prior to the final disposition of any underlying claim is not required.” In so holding, the court rejected the argument advanced by the insurers that defense costs needed to be allocated over three implicated insurance programs. The court also held that where defense costs incurred exceeded the underlying policies’ limits of liability, those underlying policies were “exhausted as a matter of law” even if those insurers did not actually exhaust their limits of liability by actual payment. HLTH Corp., et al. v. Agric. Excess & Surplus Ins. Co., et al., No. 07C-09-102 (Del. Super. Ct. July 31, 2008).
In this case, a corporation that had acquired two other corporations sought coverage under three separate insurance programs for defense costs incurred in connection with a criminal indictment of former corporate directors and officers. Among other things, the indictment asserted criminal conspiracy to commit securities, mail and wire fraud between “1997 and at least 2003.” The three insurance programs afforded specified coverage only for wrongful acts committed or allegedly committed during certain time frames: (1) the first program afforded coverage only for wrongful acts prior to July 23, 1999 (the date that the first corporation was acquired by the second corporation); (2) the second program afforded coverage only for wrongful acts between July 23, 1999 and September 12, 2000 (the date that the second corporation was acquired by the third corporation); and (3) the third program afforded coverage only for wrongful acts after September 12, 2000. The insurers asserted that because all three programs were implicated and afforded specified coverage only for wrongful acts that allegedly occurred in different time periods, the court was required to allocate the insurers’ defense cost advancement obligation across all three of the implicated insurance programs. The specific allocation scheme advocated by the insurers allocated a percentage of the overall defense costs to each insurance program based on the percentage of the total overt acts alleged in the indictment to have occurred during the insurance program’s wrongful act period. According to the insurers, 63% of the over acts allegedly occurred prior to July 23, 1999, 23% of the overt acts allegedly occurred between July 23, 1999 and September 12, 2000, and 14% of the overt acts occurred after September 12, 2000. As such, the insurers asserted that a corresponding percentage of the total defense costs incurred should be allocated to each insurance program.
The court rejected the insurers’ allocation scheme and concluded that no allocation was required prior to the disposition of the underlying claim. First, the court concluded that the insurers’ proposal “is unfair . . . especially considering the inability of [the insurers] to direct the Court to any contract provision or case that would specifically require it.” Second, the court distinguished several New Jersey cases cited by the insurers that required allocation by noting that those cases all “dealt with apportionment only after the underlying claim had been resolved.” In rejecting the extension of those cases to unresolved claims, the court noted that a “requirement to allocate insurance liability before a triggering claim has been finally decided actually could create more, rather than less, uncertainty about ultimate proportionate liability for insurance coverage between two or more insurance companies.” Specifically, the court noted that the United States Attorney in the underlying action indicated that the number of alleged overt acts may be amended, which could result in the need to reallocate and, thus, “redundant and wasteful litigation.” The court also held that because “all three towers of coverage have been triggered, [the plaintiffs] may elect to collect payments in advance from any tower with which it currently holds coverage. To hold otherwise would be tantamount to requiring that an allocation be performed at this preliminary stage.” The court did, however, state that it “expresses no view as to whether allocation will be required at some future time."
As to the exhaustion issue, the trial court rejected the insurers’ contention that the plaintiffs must demonstrate exhaustion of underlying policies’ by actual payment before they can trigger coverage under excess policies. Relying on both Delaware and New Jersey case law, the court stated that an “excess policy is triggered when the underlying policy limit [is] reached by the total costs incurred by the insured, regardless of whether the total payments to the insured reached those limits, because the excess insurance company could not possibly claim to have a stake in whether the insured actually received all of the underlying insurance limits.” In so holding, the court specifically rejected the “reasoning set forth in Qualcomm, Inc. v. Certain Underwriters at Lloyd’s London, 2008 WL 763483 (Cal. App. Mar. 25, 2008) or in Comerica Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007) as the opinions in both of [those] cases are . . . contrary to the established case law of New Jersey and Delaware.” Accordingly, the court held that “to the extent that Plaintiffs’ defense costs exceed any loss they may have imposed on themselves by accepting settlements with underlying insurers for less than the policy limit, the Court holds that those underlying policies have been exhausted as a matter of law.”