On September 7, 2012, the Delaware Supreme Court, applying California law, held that the payment obligations of an excess insurer of Intel were not triggered when Intel had settled with the underlying insurer for less than the policy limit and Intel itself had funded defense costs that, when combined with the settlement, exceeded the underlying insurer's policy limit. The court made the ruling despite a provision in the excess insurer's policy that provided that coverage would apply when "the insured or the insured's underlying insurance has paid or is obligated to pay the full amount" of the underlying insurer's policy limits. Intel Corp. v. Am. Guar. & Liab. Ins. Co., et al., No. 692, 2011 (Del. Sept. 7, 2012).
The matter arose after Intel was involved in antitrust litigation that quickly exhausted its $5 million primary insurance policy. Intel carried multiple excess policies, including a first excess layer of $50 million with XL Insurance Company (XL). Intel subsequently became involved in insurance coverage litigation with XL, which the parties settled with a $27.5 million payment to Intel for defense costs. Intel funded its own defense costs above that amount.
After Intel incurred defense costs in excess of XL's $50 million policy limit, it sought reimbursement from its second excess insurer, American Guarantee & Liability Insurance Company (AGLI). AGLI denied coverage, and litigation ensued. The Delaware Superior Court granted summary judgment in favor of AGLI, finding that AGLI's payment obligations had not been triggered. Intel appealed the decision.
On appeal, Intel argued that its payment of defense costs was sufficient to trigger AGLI's payment obligations. Intel relied on language in the AGLI policy that coverage "will not apply unless and until the insured or the insured's underlying insurance had been paid or is obligated to pay the full amount of the Underlying Limits."
In turn, AGLI argued that its payment obligations had not been triggered because of language in an endorsement to the policy that provided, "Nothing in this Endorsement shall obligate us to provide a duty to defend any claims or suit before the Underlying Insurance Limits . . . are exhausted by payment of judgments or settlements." AGLI contended that, notwithstanding Intel's payment of defense costs, the underlying limit had not been exhausted by "payment of judgments or settlements."
The Delaware Supreme Court agreed. The court reasoned that "Intel's reading of the AGLI policy purports to do exactly what Paragraph C of the Endorsement forbids: obligate AGLI to provide a duty to defend before exhaustion of the underlying . . . policy by payment of judgments or settlements." The court found that the seemingly contradictory provision, which is captioned "When Damages Are Payable" and states "[c]overage under this policy will not apply unless and until the insured or the insured's underlying insurance has paid or is obligated to pay the full amount of the [underlying policy limits]," applied only to Intel's payment of damages and not to defense costs.
The Intel decision is only the latest in a series of cases strictly applying policy language that effectively provides that an excess insurer's payment obligations are not triggered when an insured settles with an underlying insurer for less than full policy limits, and thereby attempts to satisfy the remaining limit of liability of the underlying policy with its own payments. Indeed, in Intel, the Delaware court cited the California Court of Appeals' decision in Qualcomm, Inc. v. Certain Underwriters at Lloyd's, London, 161 Cal. App. 4th 184 (2008) (discussed here), in which the court held, based upon the policy language in that case, that when a company settled an insurance dispute with its primary insurer and the primary insurer paid less than the full limits of its policy, the company effectively forfeited all coverage from the excess carrier. Noting that the Qualcomm case involved different policy language, the Delaware court explained that "the implications of Qualcomm's holding for this case are clear. Plain policy language on exhaustion, such as that contained in Paragraph C, will control despite competing public policy concerns."
Because they were decided on the specific policy language at issue, the Intel and Qualcomm decisions demonstrate that companies must carefully review the language not only in their primary insurance policies, but also in their excess insurance policies. In particular, excess policies should have clear language providing that the policies are triggered when the insured or the insured's underlying insurance has paid or is obligated to pay the full amount of the underlying insurer's policy limits, and they should be reviewed carefully to insure that no other language in the policy suggests a different result. Otherwise, a company may not be able to settle a coverage dispute with its primary insurer without risking the loss of coverage under the excess policies.
Should you have any questions about the Intel decision or any related matters, please feel free to contact Steven Guggenheim, Katherine Henderson, or Jeff Palmer in Wilson Sonsini Goodrich & Rosati's litigation department.