Excess Insurers Prevail on Exhaustion Requirement in the Wash. Court of Appeals

Last week, the Washington Court of Appeals, Div. 1, issued a published opinion in Quellos Group, LLC v. Federal Ins. Co. et al., Wash. Ct. of App., Div. I, Case No. 68478-7-I (2013).  The insured filed suit against its excess insurers seeking insurance benefits for settlements and defense costs.  In the opinion, the Court analyzed whether the trial court correctly granted summary judgment in favor of the excess insurers where the underlying insurance had not been exhausted when the claim was brought by the insured.  An analysis of each of the excess insurance policies resulted in the conclusion that they clearly and unambiguously required the insured to exhaust the underlying liability insurance limits by actual payment by the insurer before excess insurance coverage could be triggered.  The parties did not dispute that the underlying insurers had not paid the policy limits.

The Court also rejected the argument that the exhaustion requirement in the excess policy should be treated as a “condition of coverage,” similar to a cooperation clause or settlement notice requirement.  If the exhaustion requirement were treated as a condition of coverage, the insurers would have been required to show prejudice.  In rejecting the argument, the Court of Appeals reasoned that, unlike the cooperation or no-settlement clause, the exhaustion requirement does not “designate the manner in which claims covered by the policy are to be handled one a claim has been made.  Rather, the policies unambiguously state how the underlying insurance is exhausted.” (citations omitted).  Accordingly, the Court of Appeals, Div. 1, upheld the trial court’s award of summary judgment in favor of the excess insurers.

Law360 provides a thorough analysis of the case here.

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