Excess D&O policies didn’t apply where insured accepted only partial payment from primary insurer

by Christopher Graham and Joseph Kelly

Washington

Quellos Group LLC v. Federal Ins. Co., et al, Case No. 68478-7-1 (Court of Appeals, Washington Nov. 12, 2013)

An insured with an $80 million loss takes a $5 million hair-cut off a $10 million limit in settling with a primary insurer and, as a result, is left with no excess coverage for $70 million in additional losses. Settling with the primary insurer for less than limits, thus, backfired.

The insured, Quellos Group — an investment firm — created a tax shelter for clients to offset capital gains with losses. But the shelter ran afoul of IRS’s rules, leading Quellos to pay a $35 million settlement and incur $45 million in defense fees.

The insured’s first excess policy from Federal with a $10 million limit provided that coverage “shall attach only after the insurers of the Underlying Insurance shall have paid in legal currency the full amount of the Underlying Limit.”

It’s second excess policy from Indian Harbor with a $20 million limit provided that it “will attach only after all of the Underlying Insurance has been exhausted by the actual payment of loss by the applicable insurers thereunder.”

The appeals court, in affirming summary judgment for the excess insurers, explained:

[T]he plain and unambiguous language of the excess insurance policies unambiguously states how the underlying insurance is exhausted. The policies require the underlying insurer to pay the full amount of its limits of liability before excess coverage is triggered. [The primary insurer] paid only approximately one-half of the $10 million policy limits and continued to dispute whether Quellos was entitled to coverage under the 2004-2005 policy for defense and other costs related to [the tax shelter.]

and

Because the exhaustion language in the Federal and Indian Harbor excess insurance policies is clear and unambiguous, we must enforce it as written, and affirm summary judgment dismissal of the lawsuit against Federal and Indian Harbor.

It didn’t matter that the insured paid the $5 million the primary insured didn’t pay, so that the insured’s and primary insurer’s combined payments totaled $10 million, the full amount of the primary policy. The excess policies’ wording required that the primary insurer actually pay its $10 million primary limit before any excess coverage would attach.

The Court also rejected the insured’s arguments that: (1) “only after” in the excess policies’ insuring agreements made exhaustion a condition, shifting the proof burden to the excess carriers to show prejudice; and (2) enforcement of the exhuastion language would violate public policy.

Tags: D&O, underlying, excess, exhaustion

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