Recently, the Delaware Superior Court, in a case entitled HLTH Corp. v. AESIC, C.A. No. 07C-09-102 RRC, declined to follow the holdings of Qualcomm, Inc. v. Certain Underwriters At Lloyd’s, 161 Cal.App.4th 184 (4th Dist. 2008) and Comerica Inc. v. Zurich American Ins. Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007) on the following issue: where an insured settles with a primary insurer and/or certain underlying excess insurers for less than the full limits of liability of those policies, what are an excess insurer’s obligations to its insured?
Under Qualcomm and Comerica, the underlying insurers must pay their full limits before the underlying policies are deemed “exhausted” and, therefore, before coverage will be triggered. The HLTH court, however, ruled that the law of New Jersey and Delaware permitted an the insured to “fill the gap” by paying the difference between the amounts paid by the underlying insurers and the limits of the underlying policies. In reaching this conclusion, the HLTH court rejected what appeared to be clear and unambiguous policy language requiring actual payment by underlying carriers.
Brief Recap of Exhaustion Case Law
The seminal case on this issue is Zeig v. Massachusetts Bonding & Ins. Co., which held that an insured can “fill the gap” where the insured settles for less than its full underlying limits. 23 F.2d 665 (2d. Cir. 1928). The exhaustion language in the Zeig policy, however, did not specifically require full payment of the underlying limits by the underlying insurers; rather, it required only that the underlying policy be “exhausted in the payment of claims to the full amount of the expressed limits of such other insurance.” It was left to the Second Circuit, therefore, to decide whether this language meant that full payment of those limits had to be made by the underlying insurers or whether the insured could “fill the gap.” The Second Circuit concluded that the latter approach was appropriate, ruling that to require actual payment by underlying carriers would be “unnecessarily stringent.”
Many courts dealing with similar language have agreed with the Zeig ruling. For example, in Stargatt v. Fidelity and Casualty Co., 67 F.R.D. 689 (D. Del. 1975), the court followed Zeig in interpreting a clause providing that “[t]he insurers shall not be liable to indemnify the Assured … [until the primary policy] has been exhausted.”
To deal with this issue, insurers began adopting less ambiguous language which made it clear that the policy required actual payment by the underlying carriers. As more carriers adopted this sort of language, most courts like those in Qualcomm and Comerica, began ruling that the insured in such circumstances would no longer be permitted to "fill the gap." For example, the policy language in Qualcomm provided that “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.” Based on that language, the court ruled that actual payment by the underlying carriers was required.
The Holding in HLTH v. AESIC
The HLTH court was faced with policy language very similar in substance to the policy language at issue in the Qualcomm case. The language in that policy provided that:
“[o]nly in the event of exhaustion of the Underlying Limit by reason of the insurers of the Underlying Insurance, or of the insureds in the event of financial impairment or insolvency of an insurer of the Underlying Insurance, paying in legal currency loss which, except for the amount thereof, would have been covered hereunder, this policy shall continue in force as primary insurance, subject to its terms and conditions and any retention applicable to the Primary Policy.
Despite this clear and unambiguous language, however, the HLTH court ruled that the insured could still "fill the gap" with its own money. In reaching that conclusion, the HLTH court provided sparse reasoning to support its decision to disregard the holdings of Qualcomm and Comerica and the plain language of the policy. Rather, the court simply noted that the law of Delaware and New Jersey (the court had not resolved which of these states’ law applies at the time of this decision) follows Zeig and Stargatt. As stated above, the Zeig and Stargatt decisions interpreted different exhaustion clauses than those at issue in Qualcomm and HLTH.
In addition, the HLTH court referred to a number of public policy and equitable considerations; namely, the public policy of encouraging settlement and the arguable unfairness of permitting excess insurers to avoid their coverage obligations. In this regard, the court stated: "[s]ettlements avoid costly and needless delays and are desirable alternatives to litigation where both parties can agree to payment and leave other separately underwritten risks unchanged ... [t]he Court sees unfairness in allowing the excess insurance companies in the instant case to avoid payment on an otherwise undisputedly legitimate claim.”
The HLTH decision also ignores that excess policies with stringent exhaustion language are priced more cheaply than those which expressly permit the insured to "fill the gap." Accordingly, not only does the HLTH decision ignore the legal principle that a contract should be enforced in accordance with its terms, it deprives the excess carrier of the benefit of its bargain.