NY Adopts Qualcomm: Settlement For Less Than Limits Results In Forfeiture Of Excess Coverageshoke2013
A New York appeals court affirmed the lower court’s ruling that RSUI Indemnity Co. does not have to provide indemnity coverage for Forest Laboratories’ $65 million class action settlement because lower level excess insurers did not exhaust their policies first. RSUI was a 7th layer excess carrier above a primary policy in an $80 million “tower” of insurance. Forest Laboratories reached a separate settlement with two of its excess insurers below RSUI’s excess layer in which those two insurers paid out only part of their policy limits and Forest Laboratories “filled the gaps” to reach the policies’ limits. The appellate court agreed with the lower court’s finding that the language in RSUI’s policy expressly required the lower level excess insurers’ policies to be exhausted through actual payment of those policies’ limits before RSUI’s coverage could be triggered. Forest Laboratories, Inc. v. Arch Ins. Co., No. 600219/2010 (N.Y. App. Div. April 29, 2014).
The issue of whether settlement of underlying limits for less than their stated value results in forfeiture of the excess coverage has become known as the Qualcomm issue based the most the well-known application of the doctrine in that case. Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 73 Cal. Rptr. 3d 770 (Ct. App. 2008). It is a serious obstacle to settlement in large value cases (including long-tail matters) in the many jurisdictions where the doctrine applies, or in jurisdictions in which the law is unclear. It is important to note that the decisions frequently turn on obscure but precise language in the excess policies concerning how the underlying coverage must be exhausted. To date, there are no sure-fire ways to avoid a Qualcomm outcome if you want to settle your high value, multiple insurer/multi-layer case.