Qualcomm, Inc. v. Certain Underwriters at Lloyd's, London

Opinion

In this insurance coverage dispute, plaintiff Qualcomm, Incorporated (Qualcomm), appeals from a judgment entered after the court sustained without leave to amend the demurrer of defendant Certain Underwriters at Lloyd’s, London (Underwriters), to Qualcomm’s complaint for declaratory relief and breach of contract. Underwriters, which had issued an excess director and officer insurance policy to Qualcomm, refused to pay under that policy after Qualcomm settled a coverage dispute with its primary

In October 2006, Qualcomm sued Underwriters for breach of contract and declaratory relief. It sought compensatory damages as well as a judicial declaration that Underwriters were obligated to indemnify Qualcomm under the excess policy for more than $9 million in unreimbursed expenses Qualcomm had incurred in connection with the defense and settlement of the non-class-action litigation, “provided that Qualcomm, [National], or other third parties paid at least $20 million in defense and indemnity of Qualcomm for [the litigation matters].” Qualcomm also alleged it had “paid the required premiums in full and has satisfied all other conditions to coverage, or is otherwise excused from doing so.”

Underwriters demurred on grounds Qualcomm’s complaint failed to state sufficient facts constituting a cause of action. They argued coverage under the excess policy had not been triggered because Qualcomm did not, and could not, meet two conditions precedent to coverage: first, under the maintenance clause, that Qualcomm refrain from compromising the underlying National policy, and second, under the exhaustion clause, that underlying policy limits be exhausted by virtue of National having “paid” its $20 million policy limit or having been “held liable” to pay that amount. In opposition, Qualcomm argued the coverage question raised by Underwriters was squarely decided in its favor in Home Indem. Co. v. Mission Ins. Co. (1967) 251 Cal.App.2d 942 , 966 [ 60 Cal.Rptr. 544 ] as well as out-of-state authorities adopting the reasoning of Zeig v. Massachusetts Bonding & Ins. Co. (2d Cir. 1928) 23 F.2d 665 (Zeig), in which the court held primary insurance was exhausted and an excess carrier was liable for losses exceeding the actual limits of underlying primary insurance, even where the primary insurer settled for less than the actual policy limits. Qualcomm also argued Underwriters had misconstrued the maintenance clause; that the clause was ambiguous and should be construed in Qualcomm’s favor to increase insurance coverage. Qualcomm maintained that while its position was supported by the excess policy’s language, denying excess coverage in the circumstances presented would be contrary to public policy because such denial would work a forfeiture, provide a windfall to the excess carrier, and encourage litigation by discouraging settlements between insureds and their primary carriers.

The trial court sustained Underwriters’s demurrer without leave to amend on grounds the excess policy had not been triggered. Based on the complaint’s allegation that Qualcomm had settled with its primary insurer for $16 million in exchange for a release, the court ruled Qualcomm could not meet a condition precedent of the policy to maintain the primary policy with $20 million limits of liability. The court further ruled that in the absence of facts

DISCUSSION

“In determining whether plaintiffs properly stated a claim for relief, our standard of review is clear: ‘ “We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.” [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff.’ ” (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112 , 1126 [ 119 Cal.Rptr.2d 709 , 45 P.3d 1171 ].) “Where written documents are the foundation of an action and are attached to the complaint and incorporated therein by reference, they become a part of the complaint and may be considered on demurrer.” (City of Pomona v. Superior Court (2001) 89 Cal.App.4th 793 , 800 [ 107 Cal.Rptr.2d 710 ].)

This court summarized settled contract interpretation principles applicable to insurance policies in Palacin v. Allstate Ins. Co. (2004) 119 Cal.App.4th 855 , 861 [ 14 Cal.Rptr.3d 731 ] (Palacin): “The fundamental rule [of contract interpretation] is that a court must give effect to the mutual intention of the parties when they formed the contract. [Citation.] This intent is to be inferred, if possible, solely from the written provisions of the contract. [Citation.] ‘The “clear and explicit” meaning of these provisions, interpreted in their “ordinary and popular sense,” unless “used by the parties in a technical sense or a special meaning is given to them by usage” . . . , controls judicial interpretation.’ ” (Id. at p. 861, quoting E.M.M.I., Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465 , 470 [ 9 Cal.Rptr.3d 701 , 84 P.3d 385 ] (E.M.M.I.); see also Powerine Oil Co., Inc. v. Superior Court (2005) 37 Cal.4th 377 , 390 [ 33 Cal.Rptr.3d 562 , 118 P.3d 589 ] (Powerine II).)

Like here, Palacin involved a case resolved in the insurer’s favor at the pleading stage. Thus, Palacin explained how the above principles operate on an appeal from a judgment after an insurer’s demurrer was sustained without leave to amend: “[A]n insurer [demurring] based on insurance policy language must establish conclusively that this language unambiguously negates beyond reasonable controversy the construction alleged in the body of the complaint. [Citation.] To meet this burden, an insurer is required to demonstrate that the policy language supporting its position is so clear that parol evidence would be inadmissible to refute it. [Citation.] Absent this showing, the court must overrule the demurrer and permit the parties to litigate the issue in a context that permits the development and presentation of a factual record, e.g., summary judgment or trial.” (Palacin, supra, 119 Cal.App.4th at p. 862.)

Neither party in this case challenges the trial court’s resolution of the issues raised by Underwriters’s demurrer as a matter of law. Absent an argument that extrinsic evidence is needed to interpret the policy language, interpretation of the excess policy is a pure question of law for our independent review. (E.M.M.I., supra, 32 Cal.4th at p. 470; Garcia v. Truck Ins. Exchange (1984) 36 Cal.3d 426 , 439 [ 204 Cal.Rptr. 435 , 682 P.2d 1100 ]; see Herzberg v. County of Plumas (2005) 133 Cal.App.4th 1 , 24 [ 34 Cal.Rptr.3d 588 ].)

Urging us to interpret ambiguity in Underwriters’s excess policy in its favor, and pointing to Zeig, supra, 23 F.2d 665 and cases following it,

Qualcomm further asks us to reject Underwriters’s arguments that the excess policy’s maintenance clause imposed a duty upon it not to “compromise” the primary policy limits by settling with the primary insurer for an amount below policy limits. Pointing to secondary authorities stating that the purpose of a maintenance clause is to preclude any “drop down” obligation by the excess insurer to provide primary coverage, Qualcomm contends the maintenance clause does no more than require it to pay the premiums as they came due to maintain the underlying policy, which it did. Finally, relying on the proposition that insurance policy exclusions must be plain, conspicuous and clear, Qualcomm asserts that the last sentence of the maintenance clause cannot be interpreted by negative implication to prohibit Qualcomm from self-insuring in the event of a below-limits settlement with the primary insurer.

A. The Exhaustion Clause Unambiguously Precludes Underwriters ’s Liability

Qualcomm provides little analysis for a major premise of the above arguments: that the excess policy language is ambiguous in that it is susceptible to two or more reasonable constructions in view of the policy as a whole. Indeed, Qualcomm appears to argue ambiguity arises because of cases such as Zeig and others, and that its reasonable expectation for excess coverage was premised on the existence of these cases. But “[a]n expectation of coverage . . . cannot create an ambiguity; it is merely an interpretive tool used to resolve an ambiguity once it is found to exist.” (Fire Ins. Exchange v. Superior Court (2004) 116 Cal.App.4th 446 , 456-457 [ 10 Cal.Rptr.3d 617 ]; see, e.g., Pardee Construction Co. v. Insurance Co. of the West (2000) 77 Cal.App.4th 1340 , 1352 [ 92 Cal.Rptr.2d 443 ].) An insured’s subjective expectations do not dictate our analysis of the presence or absence of ambiguity in the excess policy language.

As to the exhaustion clause, we cannot detect ambiguity. Our assessment of the policy language must be made in the context of the nature of

Our threshold inquiry is whether, interpreting these words in their ordinary and popular sense and not as an attorney or insurance expert, their meaning is clear and explicit. (MacKinnon v. Truck Ins. Exchange, supra, 31 Cal.4th at pp. 647-648; E.M.M.I., supra, 32 Cal.4th at p. 471; Garamendi v. Mission Ins. Co. (2005) 131 Cal.App.4th 30 , 41-42 [ 31 Cal.Rptr.3d 395 ].) “If the meaning a layperson would ascribe to insurance contract language is not ambiguous, courts will apply that meaning.” (Vandenberg v. Superior Court (1999) 21 Cal.4th 815 , 840 [ 88 Cal.Rptr.2d 366 , 982 P.2d 229 ]; see E.M.M.I., at p. 471.) “Courts will not adopt a strained or absurd interpretation in order to create an ambiguity where none exists.” (Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800 , 807 [ 180 Cal.Rptr. 628 , 640 P.2d 764 ].)

In our view, the phrase “have paid ... the full amount of [$20 million],” 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 than actual payment of no less than the $20 million underlying limit. (See e.g., Powerine II, supra, 37 Cal.4th at pp. 402-403 & fn. 10 [interpreting language in excess policy: “ ‘Liability under this policy with respect to any occurrence shall not attach unless and until the Insured, or the Insured’s underlying insurer, shall have paid the amount of the underlying limits on account of such occurrence’ ” to provide that the “insurer’s indemnification obligation under the policy does not commence until any underlying policy limits have been exhausted by actual payment of a covered loss” (italics added) and that the “ ‘excess’ coverage afforded under these policies was not invoked because the limits of the underlying primary CGL policy were neither paid nor exhausted”]; Denny’s Inc. v. Chicago Ins. Co. (1991) 234 Cal.App.3d 1786 , 1790, 1793 [ 286 Cal.Rptr. 507 ] [involving third level excess policies that provided, “ ‘It is expressly agreed that liability shall attach to the [excess insurer] only after the Underlying Umbrella Insurer(s) have paid or have been held liable to pay the full amount of the respective ultimate net loss liability as follows . . .’ ”; court held this language

Qualcomm does not point to any dictionary meaning or other reasonable alternative construction of the term “paid” (or the related words “pay” or “payment”) or the phrases “full amount” or “held liable” that convinces us otherwise. Rather, it argues we should adopt the interpretation advanced by Zeig, supra, 23 F.2d 665 , in which the court declined to interpret the word “payment” in an excess policy as only relating to payment in cash. Citing no authority, the court said, “[The word payment] often is used as meaning the satisfaction of a claim by compromise, or in other ways.” (Id. at p. 666.)

In Zeig, the insured held primary burglary insurance policies with a $15,000 liability limit but settled claims under the primary policies for $6,000. (Zeig, 23 F.2d at p. 665.) The language of the excess policy in Zeig provided that the excess policy “ ‘shall apply and cover only after all other insurance herein referred to shall have been exhausted in the payment of claims to the full amount of the expressed limits of such other insurance.’ ” (Id. at p. 666.) The excess insurer argued the insured was required actually to collect the full amount of underlying insurance as a prerequisite to coverage under the excess policy. (Ibid.) The Zeig court rejected the argument as “unnecessarily stringent,” stating, “It is doubtless true that the parties could impose such a condition precedent to liability upon the policy, if they chose to do so. But the defendant [excess insurer] had no rational interest in whether the insured collected the full amount of the primary policies, so long as it was only called upon to pay such portion of the loss as was in excess of the limits of those policies. To require an absolute collection of the primary insurance to its full limit would in many, if not most, cases involve delay, promote litigation, and prevent an adjustment of disputes which is both convenient and commendable. A result harmful to the insured, and of no rational advantage to the insurer, ought only to be reached when the terms of the contract demand it.” (Ibid.; see also Stargatt v. Fidelity and Casualty Co. of New York (D.Del. 1975) 67 F.R.D. 689 , 690-691 [adopting and quoting Zeig in case where excess policy language limited coverage to when the primary insurance was “exhausted”].) Zeig reasoned that the excess policy language did not include the word “ ‘collection,’ ” and absent such a term it would not construe the policy in a “burdensome” way to the insured. (Zeig, supra, 23 F.2d at p. 666.) The court asserted that “claims are paid to the full amount of the policies, if they are settled and discharged, and the primary insurance is thereby exhausted.” (Ibid.)

We are not persuaded that Zeig compels excess coverage in this case for several reasons. First, the court appeared to place policy considerations (i.e., the promotion of convenient settlement or adjustment of disputes) above

Our conclusion is supported by non-California authorities applying a plain language meaning of the word “payment,” such as the Wisconsin Supreme Court in Danbeck v. American Family Mut. Ins. Co. (2001) 2001 WI 91 [ 245 Wis.2d 186 , 629 N.W.2d 150 ]. There, an underinsured motorist (UIM) policy “specifie[d] that only one manner of exhaustion would trigger the obligation to pay UIM benefits: exhaustion ‘by payment of judgements [sic] or settlements.’ ” (Id., 629 N.W.2d at p. 155.) Declining to allow a generalized public policy to supercede unambiguous policy language (id. at p. 156), the court rejected the argument that a reasonable insured would understand that phrase to mean a below-limits settlement giving a credit for full payment of liability limits would “effectively ‘exhaust’ ” those limits: “[A] ‘settlement plus credit’ does not constitute ‘payment’ of liability limits as that term is commonly and ordinarily understood. It is true that a settlement of this nature bars further claim against the tortfeasor’s insurer and protects the UIM carrier against liability for the difference between the settlement amount and the tortfeasor’s full policy limits. But it plainly does not exhaust the tortfeasor’s policy limits by payment of those limits, as required by the UIM policy.” (Id. at pp. 154, 155.) The court utilized a dictionary definition for word “payment” as “ ‘something that is paid; an amount paid; compensation; recompense . . . [or] the act of paying . . . .’ ” (Ibid., citing Random House Unabridged Dictionary 1424 (2d ed. 1993).) It agreed with the appellate court’s conclusion that “in the context of this UIM exhaustion clause, the term ‘payment’ is susceptible of only one reasonable meaning: ‘compensation paid by the liability insurer and received by the insured.’ ” (Danbeck, 629 N.W.2d at p. 155; see also Comerica Inc. v. Zurich American Ins. Co. (E.D.Mich. 2007) 498 F.Supp.2d 1019 .)

In Comerica Inc. v. Zurich American Ins. Co., supra, 498 F.Supp.2d 1019 , the federal district court in the Eastern District of Michigan followed Danbeck in underlying factual circumstances almost identical to those present in this case. There, the insured corporation, Comerica, settled securities fraud class actions lawsuits for $21 million. Its primary insurer, whose policy carried a

We cannot agree with Qualcomm’s reasonable expectation of coverage argument, which is premised on the notion Underwriters should be deemed to have knowledge of Zeig and numerous authorities following Zeig. But there was authority contrary to Zeig before the parties entered into their insurance contract in 1999. (See, e.g., Wright v. Newman (1984) 598 F.Supp. 1178 , 1197 [expressly rejecting Zeig’s rationale as contrary to the Colorado rule that an insurance policy “must generally be enforced as written”]; United States Fire Ins. Co. v. Lay (7th Cir. 1978) 577 F.2d 421 , 423 [excess insurer’s liability was extinguished by a settlement agreement between tort claimant and primary insurer for less than the amount of the primary insurer’s policy limits; court held excess carrier was not obligated to indemnify the primary insurer because the settlement agreement “effectively released” the primary insurer from all liability in excess of $70,000, and thus the excess carrier’s obligation to indemnify the primary carrier “never arose”]; Johnson v. Milgo Indus., Inc. (D.C. Minn. 1978) 458 F.Supp. 297 , 301-302 & fn. 3 [observing Zeig interpreted the term “exhausted” in an ambiguous context and that recent courts had rejected its reasoning; court distinguished the situation before it as involving unambiguous policy language and it declined to disregard the plain meaning of the language before it].) We perceive no compelling reason why, for purposes of our interpretation of the excess insurance policy here, Underwriters should be imputed with knowledge of

Nor are we convinced to reach a different result by the California authorities cited by Qualcomm: Home Indem. Co. v. Mission Ins. Co., supra, 251 Cal.App.2d 942 (Home Indemnity) and Phoenix Ins. Co. v. United States Fire Ins. Co. (1987) 189 Cal.App.3d 1511 [ 235 Cal.Rptr. 185 ] (Phoenix), superseded by statute on other grounds as stated in California Ins. Guarantee Assn. v. Workers’ Comp. Appeals Bd. (2005) 128 Cal.App.4th 307 , 315 [ 26 Cal.Rptr.3d 845 ]. Home Indemnity was a declaratory relief action filed by insurer Home Indemnity Company (Home) and its insured, a leasing company, to determine their rights as against Mission Insurance Company (Mission), which was found to have provided excess insurance for a lessee of Home’s insured. (Home Indemnity, supra, at pp. 944-945, 949.) The lessee had been sued as a result of an automobile accident. Before trial, the plaintiffs negotiated a settlement in which Home paid $31,000, and Tower Indemnity Company (Tower) paid $9,000 under its policy, which had a $10,000 limit. (Id. at p. 945.) Misson’s excess policy provided that it “ ‘agrees to indemnify the Insured . . . , in accordance with the applicable insuring agreements of the Primary Insurance [Tower], against excess loss subject to the limits stated . . . and as fully and to all intents and purposes as though the Primary Insurance had been issued for the limits set forth .... This policy shall apply . . . only in excess of the . . . amount as set forth . . . , provided always that it is expressly agreed that liability shall attach to the Company [Mission] only after the Primary insurers have paid or have been held liable to pay the full amount of their respective underlying limits as stated [$10,000/$20,000], the Company shall then be liable to pay only such additional amount as will provide the Insured with the total limits as stated [$100,000/$300,000]. ’ ” (Id. at p. 962.)

In Home’s ensuing declaratory relief action, the trial court found (among other findings) that Mission had incurred no obligation under the terms of its

Home Indemnity is consistent with our reasoning because the Court of Appeal there acknowledged that by reason of the clause attaching excess liability “ ‘only after the Primary insurers have paid or have been held liable to pay the full amount of their respective underlying limits’ ” the excess insurer would not incur any obligation until the primary insurer had been adjudged liable to pay the full amount of its liability limit. (Home Indemnity, supra, 251 Cal.App.2d at pp. 962, 965-966.) However, Home Indemnity’s result is based on disparate facts and circumstances rendering it inapposite here, including the fact that National is not a party to this action and the trial court cannot determine its liability, particularly where it has received a release from Qualcomm. Underwriters further points out it did not agree to the reasonableness of Qualcomm’s settlement, and thus Home Indemnity’s outcome cannot apply under these circumstances, where it would be prejudiced in having to litigate coverage under the primary policy. Because these assertions are matters outside the pleadings, we do not address them on our review of the trial court’s demurrer ruling. We do not find Home Indemnity persuasive in any event in view of the differing procedural contexts.

On appeal, USFIC challenged the judgment on numerous grounds, including that it obligated it beyond its contractual agreement since under its policies it could become liable for indemnification only after the insureds had exhausted the $1.8 million of Olympic’s and Central’s combined primary coverage. (Phoenix, supra, 189 Cal.App.3d at p. 1529.) In a cursory statement, the Court of Appeal rejected the assertion: “In effect, the primary coverage was ‘exhausted’ when Central and Olympic paid their share of the settlement and were dismissed from the declaratory relief action. Had USFIC wanted to raise this issue, it could simply have named Olympic and Central as defendants in its cross-complaint thereby assuring that all the parties were before the court when the reapportionment was determined.” (Id. at pp. 1529-1530.) We agree with Underwriters’s observation that ultimately, the Phoenix court focused on USFIC’s failure to seek relief in its cross-complaint from the underlying primary carriers in the face of the referee’s ordered allocation, which permitted them to be released from their obligation without paying their full limits. Absent meaningful excess policy interpretation or analysis, we decline to rely upon Phoenix.

B. Maintenance Clause

Because our review is de novo and we are not bound by the trial court’s reasoning, we need not decide whether the excess policy’s maintenance clause independently compels a conclusion that excess coverage is precluded because Qualcomm did not comply with it as an express condition precedent to coverage. In reviewing the judgment on Qualcomm’s demurrer, we are not

C. Public Policy

Qualcomm argues that if we conclude the excess policy language is unambiguous in Underwriters’s favor, public policies of promoting settlement and risk-spreading by insurance should compel us to obligate Underwriters to pay even if the obligation contravenes the policy language. We decline to do so.

“Whatever merit there may be to conflicting social and economic considerations, they have nothing whatsoever to do with our interpretation of the unambiguous contractual terms. [Citation.] If contractual language in an insurance contract is clear and unambiguous, it governs, and we do not rewrite it ‘for any purpose.’ ” (Aerojet-General Corp. v. Commercial Union Ins. Co. (2007) 155 Cal.App.4th 132 , 145-146 [ 65 Cal.Rptr.3d 803 ], quoting Certain Underwriters at Lloyd’s of London v. Superior Court (2001) 24 Cal.4th 945 , 967 [ 103 Cal.Rptr.2d 672 , 16 P.3d 94 ]; see also Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070 , 1077-1078 [ 135 Cal.Rptr.2d 361 , 70 P.3d 351 ]; Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857 , 888 [ 77 Cal.Rptr.2d 107 , 959 P.2d 265 ]; AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807 , 818 [ 274 Cal.Rptr. 820 , 799 P.2d 1253 ].) Our conclusion is consistent with the authority on which Qualcomm relies, Signal Companies, Inc. v. Harbor Ins. Co. (1980) 27 Cal.3d 359 [ 165 Cal.Rptr. 799 , 612 P.2d 889 ], in which the California Supreme Court found no “compelling equitable consideration” to impose an obligation on an excess carrier, contrary to the language of its excess policy, to reimburse a primary carrier for defense costs where those costs were incurred before exhaustion of the primary policy limits. (Id. at pp. 365-367, 369.) The court “expressly decline[d] to formulate a definitive rule applicable in every case in light of varying equitable considerations which may arise, and which may affect the insured and the primary and excess carriers, and which depend upon the particular policies of insurance, the nature of the claim made, and the relation of the insured to the insurers.” (Id. at p. 369.) Taking Signal’s lead, we affirm the judgment based on the excess policy language and underlying circumstances of this particular case.

The judgment is affirmed.

Huffman, Acting P. L, and Aaron, J., concurred.

Appellant’s petition for review by the Supreme Court was denied June 11, 2008, SI63293. Chin, J., did not participate therein.