The California District Court of Appeals has come out with a couple decisions in the last two years which present serious traps for an insured when settling a case with the underlying claimant or separately with one layer of coverage. Two such cases are Qualcomm and Aerojet. We will be discussing these cases, as well as thoughts regarding how to deal with them, in upcoming blogs. As part of that process, we hope to solicit the thoughts and experiences of readers as well. There are any number of ways to approach the difficulties presented by these cases, as well as carrier responses, and we would also appreciate hearing any experiences other insureds have had with addressing these problems in their pending cases or on renewal. We will post helpful information in future postings.
The Qualcomm case involved a settlement of a D&O coverage dispute with a primary carrier for less than policy limits (due to coverage defenses). The claim implicated the excess layer as well and the insured then sued the excess carrier for the sums in excess of the primary limits. The insured conceded that it was required to pay the "gap" between the amount the primary carrier paid and the attachment of the excess policy, but sought the sums within the excess layer. Surprisingly, the Court ruled against the insured, holding that the insured had forfeited any right to excess coverage. The excess policy required that primary carrier have "paid or been held liable to pay" its full limits before the excess policy attached. The Court strictly upheld this limitation, despite the fact that the carrier was not prejudiced by the lack of strict compliance, that the ruling resulted in a complete forfeiture of excess coverage and that the rule would discouraged settlement. This is a surprising and very harsh result, and contrary to the very sparse but favorable case law up until now.
Insureds, obviously should exercise great care before entering partial settlements with primary carriers while the excess layer is still in play. Insureds need to carefully check their policy language. Some policies have the language at issue in Qualcomm and other policy forms state that the payment of underlying limits can be made by the insured or the insurer. These later clauses do not present a Qualcomm problem. In a recent article by one of our partners, Mary McCutcheon highlights Qualcomm and its implications for D&O insurance and claims.
The case also has implications for CGL and other coverages as well. On a practical level, before attempting partial settlement with any primary or lower level carrier, you should examine the requirements of the policies overlying it, to understand whether you have the problem and where it lies. In some cases, there may be no solution other than seeking a global settlement with all carriers simultaneously. In multi-year cases, you may be able to compromise freely with some insurers but not others. You may have some insurers that have a mix of provisions in the policies above them. In that case, you may be able to compromise limits in certain years, and insist on payment of full limits in other years to address this problem. There is some risk, of course, that such allocations may not be honored in subsequent litigation, if not reasonable.
The insured may also be able to seek or obtain the consent of the excess carrier, and argue that failure to consent would be bad faith. The insured could also consider creative structures which require the payment of full limits initially, but permit some credit back to the primary upon resolution of the dispute with the excess layer. This last approach, of course, may also be subject to attack. This is an issue which begs for further appellate review, but of course, the very existence of the case discourages other insureds from following the same course, so opportunities for future appellate review may be limited.