Excess Insurance: Questions Raised by Qualcomm and Issues Relating to the Duty to Defend

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1 ACI s 2 nd National Forum on Insurance Allocation June 25-26, 2015 PLEASE SEND PRESENTATION TO [email protected] Excess Insurance: Questions Raised by Qualcomm and Issues Relating to the Duty to Defend Scott M. Seaman Hinshaw & Culbertson LLP Seth D. Lamden Neal, Gerber & Eisenberg LLP Steven C. Schwartz Chaffetz Lindsey LLP David Cox Kilpatrick Townsend & Stockton LLP 1 Tweeting about this conference?

2 Excess Policy: Background A policy issued to provide limits in excess of an underlying liability policy. The underlying liability policy can be, and often is, an umbrella liability policy. An excess liability policy is no broader than the underlying liability policy; its sole purpose is to provide additional limits of insurance. Glossary of Insurance and Risk Management Terms, IRMI (12 th Ed.). 2

3 Background Umbrella Policy: Provides excess limits when the limits of underlying liability policies are exhausted by the payment of claims; Drops down and picks up where the underlying policy leaves off when the aggregate limit of the underlying policy in question is exhausted by the payment of claims; and Provides protection against some claims not covered by the underlying policies, subject to the assumption by the named insured of a self-insured retention (SIR). Glossary of Insurance and Risk Management Terms, IRMI (12 th Ed.). 3

4 Background In normal (undisputed) insurance claim, excess or umbrella coverage is triggered when underlying insurer(s) exhausts limits by payment of covered settlement or judgment. Trigger of excess or umbrella coverage becomes less clear when underlying insurer disputes coverage obligations, becomes insolvent, or settles with insured for less than full limits. 4

5 Issue: Can excess or umbrella insurance be triggered if underlying insurer does not exhaust policy limits through actual payment of covered losses? For 80+ years, this issue arose infrequently and the answer was often yes. 5

6 Why Does This Issue Matter? When actual payment of limits by the underlying insurer is required to trigger excess or umbrella coverage: Insured that settles a disputed claim with its primary insurer for less than limits risks losing excess defense and indemnity coverage for that claim. Primary insurer that denies coverage or becomes insolvent could compromise coverage for insured under all excess or umbrella policies. 6

7 Functional Exhaustion v. Actual Exhaustion Functional Exhaustion: Insured is liable for covered loss in excess of primary limits. Actual Exhaustion: Insured is liable for covered loss in excess of primary limits and underlying insurer(s) pays the full amount of limits towards that loss. 7

8 Key Issues When are actual exhaustion clauses enforced? Do payments by the insured and/or other insurers count towards actual exhaustion? Is an unfunded judgment or settlement against the insured the same as payment for purposes of actual exhaustion? Can an insured and primary insurer deem policy limits to be exhausted? Special circumstances such as insolvency of underlying insurer. Proving actual exhaustion. 8

9 Seminal Case: No Actual Exhaustion Required Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928). 9

10 Zeig Policy Provision (No Actual Exhaustion Required) Coverage shall apply and cover only after [underlying coverage] shall have been exhausted in the payment of claims to the full amount of the expressed limits of such other insurance.... Court: Excess insurer had no rational interest in whether the insured collected the full amount of the primary policies

11 Seminal Cases: Actual Exhaustion Required Qualcomm, Inc. v. Certain Underwriters at Lloyd s, London, 161 Cal. App. 4th 184 (2008). Comerica, Inc. v. Zurich Am. Ins. Co., 498 F. Supp. 2d 1019 (E.D. Mich. 2007). 11

12 Qualcomm Policy Provision (Actual Exhaustion Required) 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. Court: This clause, particularly when read in the context of the entire excess policy and its function as arising upon exhaustion of primary insurance, cannot have any other reasonable meaning that the actual payment of no less than the... underlying limit. 12

13 Comerica Policy Provision (Actual Exhaustion Required) In the event of the depletion of the limit(s) of liability of the Underlying Insurance solely as a result of actual payment of loss thereunder by the applicable insurers, this Policy... shall continue to apply to loss as excess over the amount of insurance remaining.... Court: Policy unambiguously requires exhaustion of underlying limits by actual payment of losses by the underlying insurers. 13

14 Other Examples (Actual Exhaustion Required) [L]iability for any loss shall attach... only after the Primary and Underlying Excess Insurers shall have paid the full amount of their respective liability. Court: This exhaustion provision unambiguously required actual payment of the underlying policy limits by the underlying insurer. Zeig applies only when exhaustion provision is ambiguous. J.P. Morgan Chase & Co. v. Indian Harbor Ins. Co., 947 N.Y.S.2d 17 (N.Y. App. Div. 2012). 14

15 Other Examples (Actual Exhaustion Required) Coverage applied when all Underlying Insurance carriers have paid in cash the full amount of their respective liabilities.... Court: Policy clearly explains that exhaustion occurs through payment, in cash, and of the full amount of the underlying insurer s limit of liability. Citigroup, Inc. v. Fed. Ins. Co., 649 F.3d 367 (5th Cir. 2011). 15

16 Other Examples (Actual Exhaustion Not Required) [Insurer] agrees to indemnify the Insured for loss which exceeds the Underlying Insurance if such loss is properly payable thereunder, or would be, except for exhaustion of the Underlying Insurance. Court: Because [the excess insurer s] liability is triggered when the loss is payable and not paid, the plain language indicates that exhaustion by payment is not required to trigger liability. Fremont Reorganizing Corp. v. Fed. Ins. Co., 2010 WL (C.D. Cal. Feb ). 16

17 Other Examples (Actual Exhaustion Not Required) Coverage applied when the Underlying Limit of Liability is exhausted by reason of the insurers of the Underlying Policies paying or being held liable to pay in legal currency the full amount of the Underlying Limit of Liability as loss. Court: Declined to interpret ambiguous exhaustion provision as requiring actual exhaustion because why it should make a difference that the primary insurer and insured settled for less than the policy limits. Mills Ltd. P ship v. Liberty Mut. Ins. Co., 2010 Del. Super. LEXIS 563 (Nov. 5, 2010). 17

18 Liability v. Payment of Liability Mere entry of a judgment that exceeds underlying limits usually does not trigger excess or umbrella coverage where policy requires actual exhaustion. Ali v. Fed. Ins. Co., 719 F.3d 83 (2d Cir. 2013); Estate of Bradley v. Royal Surplus Lines Ins. Co., 647 F.3d 524 (5th Cir. 2011). 18

19 Combination of Payments by Insurer and Insured Coverage applied only after all applicable Underlying Insurance with respect to an Insurance Product has been exhausted by actual payment under such Underlying Insurance. Court: Insured could fund gap created by less-thanlimits settlement with underlying insurers to trigger excess coverage. Maximus Inc. v. Twin City Fire Ins. Co., 856 F. Supp. 2d 797 (E.D. Va. 2012). 19

20 Combination of Payments by Insurer and Insured Excess policy shall apply only after applicable Underlying Insurance... has been exhausted by actual payment.... When policy does not specify whether payments must be made by insurer, payments by insured may count towards exhaustion. Trinity Homes LLC v. Ohio Cas. Ins. Co., 629 F.3d 653 (7th Cir. 2010). 20

21 Insolvency of Primary Insurer May Constitute Actual Exhaustion Bankruptcy of primary insurer may exhaust primary policy for purposes of triggering excess coverage. Fed. Ins. Co. v. Scarsella Bros., Inc., 931 F.2d 599 (9th Cir. 1991). Excess policy not triggered when primary insurer became insolvement. Actual exhaustion occurs solely as a result of payment of losses thereunder. Ali v. Fed. Ins. Co., 719 F.3d 83 (2d Cir. 2013). 21

22 Proving Actual Exhaustion Payment by primary insurer may create presumption of exhaustion by covered loss. Excess insurer not bound by primary insurer s policy interpretation. Allmerica Fin. Corp. v. Certain Underwriters at Lloyd s, London, 449 Mass. 621 (2007). Insured usually has burden of proving exhaustion. J.P. Morgan Chase & Co. v. Indian Harbor Ins. Co., 947 N.Y.S.2d 17 (N.Y. App. Div. 2012). Insurer may have burden to prove no actual exhaustion. Stargatt v. The Fid. & Cas. Co. of New York, 67 F.R.D. 689, aff d 578 F.2d 1375 (3d Cir. 1975). 22

23 Disputes Relating to Proving Actual Exhaustion Number of occurrences. How many primary per occurrence limits/sirs apply? Trigger dates, especially with long-tail claims. Are multiple primary policies triggered? Horizontal exhaustion jurisdiction? Pro rata v. all sums? Discovery of privileged materials or work product from underlying action? Application of settlement credits? 23

24 Reinsurance Implications Lexington Ins. Co. v. Tokio Marine & Nichido Fire Ins. Co., Ltd., 2012 WL (S.D.N.Y. March 28, 2012) Following Zeig: In the absence of unambiguous language requiring exhaustion via full payment of the underlying policy, no such exhaustion is required. Follow the fortunes? 24

25 Summary of Arguments Against Enforcing Actual Exhaustion Not required by express policy language. Policy condition that can be waived or may not be enforceable without prejudice to excess insurer. Ambiguity/reasonable expectations of insured. 25

26 Summary of Arguments Against Enforcing Actual Exhaustion (Cont d) May not be required in long-tail claim involving numerous primary and excess policies. See Stonewall Ins. Co. v. Superior Court, 2010 WL (Cal. Ct. App. Nov. 1, 2010). May not be required when excess insurer has opportunity to object to less-than-limits settlement and fails to do so. See id. 26

27 Public Policy Against Actual Exhaustion Requirement [D]iscourages reasonable settlement between the insured and the primary insurer. [E]xcess insurers are not harmed, since they only pay for losses exceeding the full limit of the primary policy. Elliott Co. v. Liberty Mut. Ins. Co., 434 F. Supp. 2d 483 (N.D. Ohio 2006). 27

28 Summary of Arguments In Favor of Enforcing Actual Exhaustion Required by express policy language. Part of insuring agreement. Insured has burden of proving actual exhaustion as prerequisite to coverage. Freedom of parties to contract. 28

29 Insured s Perspective Excess insurance becomes less valuable/not willing to pay as much premium. Impediment to settlements with primary insurer due to potential loss of excess coverage. Violates public policy because it dissuades insurers and insureds from settling coverage disputes. Inconsistent with reasonable expectations of insured. Excess insurer relying on actual exhaustion clause as excuse not to participate in settlement of underlying claim may breach duties to insured. 29

30 Excess Insurer s Perspective Actual exhaustion language is part of underwriting analysis and reflected in premium. See Goodyear Tire & Rubber Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 694 F.3d 781 (6th Cir Insured purchased policy with actual exhaustion provision and is not entitled to broader coverage. 30

31 Primary Insurer s Perspective Actual exhaustion language can be an impediment to resolving coverage disputes because insured may be unwilling to settle for less than primary limits. Excess insurer that relies on actual exhaustion clause as an excuse not to participate in settlement may breach duties to primary insurer or insured. 31

32 Reinsurer s Perspective Only required to pay covered losses. Coverage under excess policy with actual payment exhaustion provision not triggered prior to exhaustion. 32

33 Tips for Insureds Ask insurer/broker for excess policies without actual exhaustion provisions at renewal (e.g. Limits Shaving or Limits Reduction endorsements). Consider asking excess or umbrella insurers to waive actual exhaustion provision prior to settling coverage dispute with primary insurer. Pursue global settlement with all insurers. 33

34 Tips for Excess and Umbrella Insurers Consider whether it is worth enforcing actual exhaustion requirement. An insured that cannot settle a coverage dispute with all layers may be forced to sue primary and excess insurers. Inability to settle with primary insurer may lead to expensive all-or-nothing coverage litigation. Sit back and wait approach to exhaustion could preclude involvement in defense of underlying suit. Clarify policy language to avoid Zeig result. 34

35 Functional Exhaustion Provision "Coverage hereunder shall attach only after all of the aggregate Limits of Liability... have been exhausted through payment of covered loss under all... Underlying Insurance.. by or on behalf of the insurers of such Underlying Insurance, or by or on behalf of the Insureds. The risk of uncollectibility of any Underlying Insurance (in whole or in part), whether because of financial impairment or insolvency of an underlying insurer or for any other reason, is expressly retained by the Insureds and is not insured by or assumed by the Insurer." 35

36 ACI s 2 nd National Forum on Insurance Allocation June 25-26, 2015 PLEASE SEND PRESENTATION TO [email protected] Excess Insurance: Questions Raised by Qualcomm and Issues Relating to the Duty to Defend Scott M. Seaman Hinshaw & Culbertson LLP Seth D. Lamden Neal, Gerber & Eisenberg LLP Steven C. Schwartz Chaffetz Lindsey LLP David Cox Kilpatrick Townsend & Stockton LLP 36 Tweeting about this conference?