Delaware Supreme Court: Insured's Payment of Defense Expenses Does Not Trigger Excess Insurer's Payment Obligations

On September 7, 2012, the Delaware Supreme Court, applying California law, held that Intel's excess insurer's defense obligations were not triggered where Intel had settled with the underlying insurer for less than policy limits and had itself funded the defense fees above the settlement amount and below the underlying insurer's policy limit. A copy of the Court's opinion can be found here. (Hat tip to the Traub Lieberman Insurance Law Blog for the link to the Court's opinion).

Intel carried a multilayer tower of general liability insurance, consisting of a primary layer of $5 million, a first excess layer of $50 million, and multiple layers above that. Intel became involved in antitrust class action litigation triggering the insurance tower. Intel subsequently became involved in insurance coverage litigation with the first level excess insurer, which the first level excess insurer settled with a payment to Intel of $27.5 million. Intel funded its own defense expenses above that amount.

When its payment of defense expenses exceeded the remaining amount of the first level excess carrier's limit of liability, Intel contended that the second level excess carrier's defense obligations had been triggered. The second level excess carrier contended that its payment obligations could only be triggered by payments by the underlying excess insurer and that Intel's own payments did not trigger payment. The second level excess insurer (hereafter, the insurer) filed an action in Delaware Superior Court seeking a judicial declaration that its payment obligations had not been triggered. The Superior Court granted summary judgment for the excess insurer, and Intel appealed.

On appeal, Intel argued that its defense cost payments were sufficient to trigger the insurer's payment obligation. In making this argument, Intel relied on Condition H, which is titled "When Damages Are Payable" and provides that policy 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 arguing that its payment obligations had not been triggered notwithstanding Intel's payment of the defense expenses, the insurer argued in reliance on an Endorsement that had been added to the policy and that provided in Paragraph C that "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." The insurer argued that notwithstanding Intel's payment of defense expenses, the underlying limit had not been exhausted by "payment of judgments or settlements."

In affirming the lower court's entry of summary judgment, the Supreme Court, in an opinion written by Justice Henry duPont Ridgeley for a five-judge panel, found that "Intel's reading of the [insurer's] policy purports to do exactly what Paragraph C of the Endorsement forbids: obligate [the insurer] to provide a duty to defend before exhaustion of the underlying ...policy by payment of judgments or settlements." The Court added that "viewing the policy language as a whole, Intel's reading is untenable." The Delaware Court also called Intel's interpretation "strained."

The Court specifically found that Paragraph C "cannot be construed under California precedents to encompass an insured's own payment of defense costs." The term "judgments" refers, the Court found,"to a decision by some adjudicative body of the parties' rights" and the term "settlements" refers to "some agreement between parties as to a dispute between them." Defense costs paid by the insured "do not fall within the plain meaning of either term."

The Delaware court also referred specifically to the California Intermediate Court of Appeals decision in the Qualcomm case (about which refer here), in which the court held that payments of amounts by the policyholder did not suffice to exhaust the underlying insurance and trigger the excess coverage.  Though noting that the Qualcomm case involved different policy language, "the implications of Qualcomm's holding for this case are clear" - that is, that "plain policy language on exhaustion, such as that contained in Paragraph C, will control despite competing public policy concerns."

The Delaware Court also concluded that because the "plain language of the policy control," the venerable Zeig v. Massachusetts Bonding & Insurance Co. decision from the Second Circuit is "inapplicable."

Discussion

This Delaware decision joins a growing line of cases concluding --based on the language at issue requiring payment by the underlying insurer -- that the policyholder's payments do not suffice to trigger an excess insurer's payment obligation. (Refer here for the most recent discussion of the growing line of cases).

It is worth emphasizing that these cases are strictly a reflection of the policy language at issue. The excess policies certainly could provide that payment by either the insurer or the insured would suffice to exhaust the underlying insurance amounts and to trigger the excess insurer's payment obligation. Indeed, more recently, many excess D&O insurance carriers have agreed to modify their policies to recognize payment either by the underlying insurer or by the insured as a trigger to the excess insurer's obligation.

One of the interesting things about this case is that Condition H, on which Intel relied, did in fact expressly allow for the amount of the underlying insurance to be paid either by the "insured or the insured's underlying insurance." The Delaware Court, interpreting this provision (which is captioned "When Damages Are Payable"), said that it provided only that "Intel's payment of damages may trigger [the insurer's] duty to indemnify" (emphasis added). The Court went on to say that "nothing in Paragraph C suggests that Intel's direct payment of defense costs may trigger (the insurer's] duty to defend" (emphasis added).

That is, because the payment on which Intel sought to rely in arguing that the insurer's payment obligations had been triggered was the payment of defense expenses (not damages), and because INtel was seeking payment from the insurer of defense expense (not damages), Condition H was irrelevant and only Paragraph C applied.

It is worth noting that Paragraph C had been added by endorsement, and it is fair to say the relationship between the various provisions and amendments is complicated. As the Delaware court itself noted, the "interplay" between the provisions "is admittedly complex."

Insurance policies are of course complicated contracts with a variety of operating provisions. These provisions interact in complex ways, and when base forms are amended by endorsement, the interactions can become even more complicated.

Without in any way meaning to suggest that the policy at issue in this case did not reflect the intent of the parties to the contract, this case is a good illustration of how important it is to make sure that all of the various policy provisions are appropriately structured to that the interaction of the various provisions results in the intended outcome. Which is reminder that it is mportant in connection with the policy placement process that policyholders enlist the assistance of knowledgeable, experienced insurance advisors who understand the coverage and understand how various provisions and amendments will interact even the event of a claim.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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