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Vol. 3, Iss. 1
January 8, 2014


Washington Court of Appeals:
Significant Excess Exhaustion Case
Broker Warning To Be Heeded

I’m coming up on my deadline to get this issue of Coverage Opinions to the designer. So I’ll keep this brief. But make no mistake – that is no statement on the significance of the Washington Court of Appeals’s decision in Quellos Group LLC v. Federal Ins. Co. (Wash. Ct. App. Nov. 12, 2013). Despite the brevity here, the decision is very important. I’m just pressed for time. Also, there is a write up of the case, and its significance, from the policyholder perspective, in the November/December issue of the Anderson Kill Policyholder Advisor.

Quellos sought coverage from several insurers for a settlement of claims related to a fraudulent tax shelter. An AISLIC primary policy had a $10,000,000 limit. AISLIC agreed to pay $5,000,000 under the policy. Quellos agreed to pay the gap – the $5,000,000 in policy limits that AISLIC refused to pay. Nonetheless, the court held that no exhaustion took place to trigger the Federal and Indian Harbor excess policies.

These excess carriers agreed to provide coverage only after exhaustion by payment of the insurer of the underlying policy limits. The Federal policy required payment by AISLIC “in legal currency” for the full amount of the underlying insurance. The Indian Harbor policy stated that coverage does not attach unless the underlying insurance coverage is exhausted by the “actual payment” of the claim by underlying insurers AISLIC and Federal.

The Quellos court concluded that the plain and unambiguous language of the excess policies stated how the underlying insurance was to be exhausted. The policies required the underlying insurer to pay the full amount of its limits of liability before excess coverage is triggered. However, AISLIC paid only one-half of the $10 million policy limits. “Because the exhaustion language in the Federal and Indian Harbor excess insurance policies is clear and unambiguous, we must enforce it as written.”

Interestingly, policyholders like to demand that policy language be interpreted based on just what it says. And that’s what they got here.

In reaching its decision, the court noted that the record showed that an amendment was available from Indian Harbor that allowed the insured, as well as the underlying insurer, to pay the full amount of the underlying policy limits to trigger excess coverage. In Anderson Kill’s Policyholder Advisor, Bill Passannante and Joshua Gold make a point about this: “Policyholders might also wonder why Quellos’s broker did not insist on the amendment. Policyholders and their brokers should also take note that it’s now vital to insist that excess D&O policies stipulate the policyholder’s right to make up any shortfall in the underlying policy payout without surrendering excess coverage on exhaustion grounds.”

 
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