Opinion
NOT TO BE PUBLISHED
ORIGINAL PROCEEDING. Petition for writ of mandate.Los Angeles County Super. Ct. No. BC116835, Emilie Elias, Judge. Denied.
Musik, Peeler & Garrett LLP, Susan J. Field, Kenneth G. Katel and Jennifer M. Kokes for Petitioner.
Duane Morris LLP and Phillip Matthews and William J. Baron for Certain London Market Insurers, as Amici Curiae on behalf of Petitioner.
No appearance for Respondent.
Morgan, Lewis & Bockius LLP, Michel Y. Horton, Jason B. Komorsky and Thomas M. Peterson for Real Party in Interest.
CHAVEZ, J.
INTRODUCTION
In 1994, Fuller-Austin Insulation Company (Fuller-Austin) filed a declaratory relief action against approximately 20 excess insurance carriers to establish coverage for asbestos-related personal injury claims. Throughout the past 16 years, all defendants but one, petitioner Stonewall Insurance (Stonewall), have been dismissed from the case. The case is awaiting retrial following this court’s opinion in Fuller-Austin Insulation Co. v. Highlands Ins. Co. (2006) 135 Cal.App.4th 958, in which we affirmed in part and reversed in part a judgment entered following a phased bench and jury trial.
The trial court in the first trial ruled that Fuller-Austin’s primary umbrella policies were exhausted as a matter of law as the result of settlement payments by primary insurers. In anticipation of the retrial, Fuller-Austin filed a motion in limine to prohibit Stonewall, an excess insurer, from presenting evidence or argument challenging the exhaustion of the umbrella policies. We hold that the respondent court correctly granted the motion. Accordingly, we deny the petition.
The following facts are digested from this court’s opinion in Fuller-Austin Insulation Co. v. Highlands Ins. Co., supra.
From the mid-1940’s to the mid 1980’s, Fuller-Austin was in the business of installing and removing building materials containing asbestos. Dynalectron Corp. (DynCorp) acquired Fuller-Austin in 1974. Fuller-Austin continued to operate as a subsidiary of DynCorp until it ceased operations in 1987.
In the late 1980’s, Fuller-Austin began to face thousands of asbestos-related personal injury claims. The number of claims escalated sharply in the early 1990’s. Fuller-Austin tendered the claims to its primary general liability insurance carriers, who defended the claims until Fuller-Austin filed for bankruptcy in 1998. DynCorp and Fuller-Austin also had a number of excess insurance policies, including an excess policy by Stonewall covering the period from December 31, 1973 to December 31, 1975. The Stonewall policy was excess to a policy issued to DynCorp by Employers Insurance of Wausau.
In March 1993, Fuller-Austin sent letters to its excess carriers, including Stonewall, informing them that although Fuller-Austin’s primary carriers had agreed to defend the asbestos-related claims, it was possible that the primary policy limits would be exhausted, which would trigger the excess policies. Stonewall responded with a reservation of rights letter stating it did not have enough information to determine whether its policy covered the asserted losses and setting forth several possible bases under which it might deny coverage.
In November 1994, Fuller-Austin filed this coverage action against approximately 20 excess insurers.
On September 4, 1998, Fuller-Austin filed for bankruptcy under 11 United States Code section 524(g), a statute that specifically addresses bankruptcy issues that arise in the context of asbestos mass tort litigation. Section 524(g) provides a means whereby the bankrupt entity can transfer its assets to a trust. Once the bankruptcy court confirms a company’s bankruptcy plan under section 524(b), the court issues a permanent injunction barring any further asbestos-related lawsuits against the company, and any future claimants must seek compensation for their asbestos-related injuries from the trust alone.
Fuller-Austin came to the bankruptcy court with a “prepackaged” bankruptcy plan it had negotiated with attorneys representing asbestos claimants. (11 U.S.C. § 524(g)(2)(B)(ii)(V).) Fuller-Austin notified its excess carriers of the meeting and “invited” the carriers to participate in the settlement process “in an appropriate manner, ” subject to the carriers executing a confidentiality agreement. Fuller-Austin was aware that the excess carriers could direct it not to engage in any such negotiations or settlements. Fuller-Austin told the carriers it would accept such a direction only if the carriers agreed in writing to accept tender of the asbestos claim defense and indemnity without a reservation of rights. Representatives of two of the excess carriers attended the meeting. Fuller-Austin received approval of its plan from the required 75 percent of the asbestos claimants. Fuller-Austin neither sought nor obtained approval of the plan from the excess carriers, including Stonewall.
The excess carriers filed objections to the plan and sought to intervene in the bankruptcy proceeding. As the result of these objections, Fuller-Austin added language to the plan to the effect that all of the carriers’ claims and defenses would be adjudicated in the coverage action and would not be affected by the plan and the bankruptcy court’s order confirming it. The bankruptcy court found that the excess carriers lacked standing in the bankruptcy proceeding because their rights under the policies were preserved in the coverage action. The bankruptcy court approved the plan on November 13, 1998.
The “Fuller Austin Asbestos Settlement Trust” (the Trust) was established on December 11, 1998, pursuant to the bankruptcy court’s order approving the plan. DynCorp contributed to the trust approximately $14 million in cash, plus 100 percent ownership of Fuller-Austin. The Trustees of the plan thereby gained the right to the proceeds of insurance policies purchased by Fuller-Austin and DynCorp.
As Fuller-Austin pursued the coverage action, its claims against many of its excess insurance carriers were resolved by way of settlement or pretrial motions. In 2000, the case was tried before the Honorable Judith Chirlin as to the remaining 11 excess carriers. The court bifurcated the case into three phases: Phases IA and IB for a court trial on issues of law, and Phase II for a jury trial of factual issues. In Phase IA, Judge Chirlin found that horizontal, rather than vertical exhaustion, applied to determine when the excess policies would be triggered, and thus the policy limits of all of Fuller-Austin’s primary policies had to be exhausted before any of the excess policies were triggered. Judge Chirlin also found that the bankruptcy proceedings constituted a “settlement” for which the carriers’ consent was unnecessary because the carriers had received notice of and had an opportunity to participate in the bankruptcy proceeding. We reversed the latter finding and found that because of Fuller-Austin’s successful challenge to the carriers’ efforts to intervene in the bankruptcy proceedings, the carriers did not have the opportunity in the bankruptcy court to raise issues of “fairness, reasonableness and lack of fraud or collusion.”
In Phase IB of the court trial, Judge Chirlin, relying on Phoenix Ins. Co. v. United States Fire Ins. Co. (1987) 189 Cal.App.3d 1511 (Phoenix), found that the policies issued by settled or dismissed insurance companies were deemed exhausted as a matter of law.
In Phase II of the coverage trial, the jury awarded Fuller-Austin $108 million for pending claims and $750 million for future claims. After apportioning the jury’s award among the defendant insurers, the trial court entered a judgment in Fuller-Austin’s favor on August 1, 2003.
On January 19, 2006, we affirmed the judgment in part, reversed it in part, and remanded the case for a new trial. We specifically declined to address the exhaustion issue because it was rendered moot in view of our other conclusions.
At the beginning of 2007, the parties began to brief the legal issues to be resolved on remand, including exhaustion. Stonewall argued that coverage under its policies was not even triggered, let alone exhausted, because the primary carriers had settled for less than policy limits. Stonewall relied on language in its policy to the effect that the policy was not triggered until the limits or underlying policies were paid in full.
On November 20, 2008, the respondent court held a hearing on the issues briefed by the parties. On February 13, 2009, the court issued its rulings on these issues. In accordance with this court’s opinion, the court ruled that Stonewall would be entitled to assert upon retrial a defense that the bankruptcy plan was “unfair, unreasonable or the product of fraud or collusion, ” and could assert unclean hands as a defense to Fuller-Austin’s claims. Pertinent to this petition, the court ruled Judge Chirlin’s finding that Fuller-Austin’s primary policies were exhausted “is law of the case and is binding on the parties in this action on remand.” Fuller-Austin “must prove exhaustion of the excess/umbrella (second) layer.”
On June 9, 2009, Fuller-Austin filed a motion in limine to preclude Stonewall from “presenting evidence or argument challenging the exhaustion of Fuller-Austin’s umbrella level insurance policies.” On September 15, 2009, and November 13, 2009, the respondent court issued rulings on the in limine motion. The court granted the motion “to the extent it seeks a determination that the umbrella policies were exhausted as a matter of law and by settlement and by waiver.” The court found that Judge Chirlin’s ruling on the exhaustion issue was law of the case because it was not reversed; that Phoenix correctly stated the law, and that Qualcomm v. Certain Underwriters at Lloyd’s, London (2008) 161 Cal.App.4th 184, the case on which Stonewall primarily relied, was distinguishable.
On January 29, 2010, the court denied Stonewall’s motion for reconsideration. We initially denied Stonewall’s petition for writ of mandate. Stonewall filed a petition for review in the California Supreme Court. On June 9, 2010, the Supreme Court granted the petition for review and transferred the case to this court with directions to issue an order to show cause.
We hold that although Judge Chirlin’s ruling on the exhaustion issue was not “law of the case, ” the respondent court ruled correctly on the merits of the in limine motion.
DISCUSSION
Judge Chirlin’s ruling on the exhaustion issue is not law of the case.
Fuller-Austin based its motion in limine on Judge Chirlin’s rulings that Fuller-Austin’s underlying umbrella policies were exhausted as a result of settlement payments; that the non-settling insurers, including Stonewall, had waived any right to challenge exhaustion because they had not objected when the settling insurers were dismissed from the case; and Judge Chirlin’s rulings “were not overturned by the Court of Appeal, but were affirmed.” The respondent court agreed with Fuller-Austin on this point.
Under the law of the case doctrine, “a matter adjudicated on a prior appeal normally will not be relitigated on a subsequent appeal in the same case.” (Davies v. Krasna (1975) 14 Cal.3d 502, 507, fn. omitted.) ‘“The doctrine is generally applied upon retrial of a case following reversal of the judgment on appeal, and “deals with the effect of the first appellate decision on the subsequent retrial or appeal: The decision of an appellate court, stating a rule of law necessary to the decision of the case, conclusively establishes that rule and makes it determinative of the rights of the same parties in any subsequent retrial or appeal in the same case.’” (Shelton v. Rancho Mortgage & Investment Corp. (2002) 94 Cal.App.4th 1337, 1347.)
Although Stonewall did not raise the exhaustion issue in the prior appeal, the issue was raised by the London Market Insurers (LMI), amici curiae in this case. We specifically declined to address the exhaustion issue because it had been rendered moot in view of our other conclusions. Because we did not “state a rule of law necessary to the decision of the case, ” the law of the case doctrine is inapplicable.
The underlying policy limits were exhausted as a matter of law.
The respondent court did not rest its ruling completely on the law of the case doctrine, however. Relying on Phoenix, the court correctly concluded that policy limits of Fuller-Austin’s underlying umbrella policies were exhausted as a matter of law by virtue of the primary insurers’ settlements.
The Phoenix case involved five insurance carriers: Phoenix Insurance Company (Phoenix), United States Fire Insurance Company (USFIC), Olympic Insurance Company (Olympic), Central National Insurance Company of Omaha (Central), and Signal Insurance Company (Signal). Each carrier issued, during various periods, primary or excess liability policies to a law firm that was sued for malpractice in connection with a lengthy marital dissolution case. Initially, Olympic, Central and Signal defended the malpractice action. Phoenix, relying on certain language in its policy, believed its role to be that of an excess carrier, and it did not participate in the defense. Signal became insolvent and the California Insurance Guarantee Association (CIGA) assumed Signal’s obligations. Phoenix and CIGA became embroiled in a dispute over which of them was liable for coverage during a certain period. An arbitrator resolved the dispute in favor of CIGA.
Phoenix filed a declaratory relief action against the other carriers, and the declaratory relief action was consolidated with the malpractice action. All the carriers except CIGA agreed that the malpractice action should be settled for $1.8 million, but they could not agree on how to allocate the settlement payment among themselves. The matter was submitted to a special referee, who formulated a payment schedule that did not include CIGA, which refused to participate in the settlement. Phoenix and USFIC paid their portions but reserved the right to relitigate the apportionment. Olympic and Central agreed to pay their portions in exchange for Phoenix’s agreement to dismiss them from the declaratory relief action.
By stipulation, Phoenix amended its complaint in the declaratory relief action to allege that in order to assist in settlement, it had “advanced funds in an amount greatly exceeding the amount for which it was liable under its policy.” (Phoenix, supra, 189 Cal.App.3d at p. 1521.) Ultimately, the trial court in the declaratory relief action ordered USFIC and CIGA to pay Phoenix $500,000 and $360,000, respectively.
Among the issues raised on appeal was USFIC’s claim that the judgment “obligated USFIC beyond its contractual agreement since under its policies it could become liable for indemnification only after the insureds exhausted the coverage of their primary carriers, i.e., Olympic and Central.” (Phoenix, supra, 189 Cal.App.3d at p. 1529.) We rejected this contention, as follows: “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 parties were before the court when the reapportionment was determined.” (Id. at pp. 1529-1530.)
It has long been the general rule that exhaustion may occur by way of a settlement for less than a policy’s limits. (Zeig v. Massachusetts Bonding & Ins. Co. (2d Cir. 1928) 23 F.2d 665.) Phoenix stands for the proposition that when an insurer settles a case for less than its policy limits, and a non-settling insurer fails to assert an objection by way of a cross-claim, the settling insurer’s policy limits may be deemed exhausted as a matter of law.
The present case illustrates the wisdom of the rule set forth in Zeig and Phoenix. In 1998, when the bankruptcy court denied Stonewall’s motion to intervene in the bankruptcy proceeding, Stonewall was put on notice that coverage issues relating to its policy would be resolved in the coverage case, not the bankruptcy court. Stonewall was also doubtless aware that the trust would be funded in large part by insurance proceeds, and should have suspected that at least some, if not all, of the primary carriers would settle out of the case for less than their policy limits. It was incumbent upon Stonewall to assert its rights by way of a cross-claim that would have notified Fuller-Austin and the settling insurers of its intentions. Although such a cross-claim might have altered or even precluded settlement in some instances, the settling parties would at least have had notice of Stonewall’s claim and would have been able to approach the settlements from that perspective. Instead, Stonewall made a tactical decision, to its peril, that it would allow the case to proceed all the way through trial and appeal, without raising the exhaustion issue. The respondent court correctly concluded that under Phoenix, Stonewall had waived its right to raise the exhaustion issue at this juncture.
Qualcomm is distinguishable.
Stonewall contends that we should grant the petition based on the holding in Qualcomm. In that case, the insured, Qualcomm, settled a coverage dispute with its primary carrier for less than the carrier’s policy limits, and dismissed the primary carrier from the case. The settlement amount did not cover Qualcomm’s unreimbursed litigation defense expenses and settlement costs, so it looked to the excess carrier to pay those amounts. When the excess carrier refused to pay those amounts, Qualcomm sued it for declaratory relief and breach of contract. The trial court dismissed the insured’s claim on demurrer. The Court of Appeal affirmed, citing language in the excess carrier’s policy which provided that coverage under that policy was triggered only after the primary insurer actually paid, or became required to pay, the full primary policy limits. The court criticized Phoenix and held that a settlement below the primary policy limits did not trigger excess coverage.
As the respondent court noted in its ruling, Qualcomm is distinguishable on several grounds. First, waiver was not an issue as it is in this case, because the excess carrier participated, along with the insured and the primary carrier, in a mediation concerning coverage. Second, Qualcomm was a vertical exhaustion case with one primary and one excess policy, in which the court based its ruling on the particular language of a single excess policy. This is a horizontal exhaustion case in which the sheer number of policies and policy periods involved make the application of Qualcomm’s narrow rule difficult. This case, which involves the settlement of mass tort claims, also implicates public policy considerations not present in Qualcomm. As the respondent court noted in its ruling, the purpose of the rule of Zeig and Phoenix that allows exhaustion to occur by way of a settlement for less than policy limits is to “avoid delay, to promote settlement as opposed to litigation, and to avoid burdening a policyholder with the task of proving exhaustion of policies provided by insurance companies that have been dismissed from the case as a result of settlement. Qualcomm, on the other hand, virtually ensures that policyholders will litigate with primary and umbrella insurers to final judgment, thereby undermining California’s policy in favor of early resolutions via settlement.” We therefore decline to follow the Qualcomm rule here.
As Fuller-Austin notes in its return to the petition, Fuller-Austin may still be able to prevail on the merits by establishing that Employers Insurance of Wausau, the underlying primary carrier to Stonewall, actually paid the limits of its policy. Stonewall’s policy provides that the policy is not triggered unless Employers Insurance of Wausau pays $5 million per year during the policy period. If Fuller-Austin is able to show that Employers of Wausau did in fact pay these amounts, Stonewall’s excess policy would be triggered by the specific language of that policy.
DISPOSITION
The petition for writ of mandate is denied and the stay order issued June 23, 2010, is vacated. Costs of this proceeding are awarded to Fuller-Austin.
I concur: BOREN, P.J.
DOI TODD, J.-Dissenting
Because I find absolutely no factual basis in the record or the governing case law to hold that petitioner Stonewall Insurance Company is barred from litigating the issue of whether Fuller-Austin Insulation Company’s primary umbrella policies have been exhausted, I dissent. The prior conclusion in an unpublished portion of Fuller-Austin Insulation Co. v. Highlands Ins. Co. (2006) 135 Cal.App.4th 958 (Fuller-Austin) that the exhaustion issue was “moot” was intended to indicate that the issue was subsumed in the reversal of the trial court’s Phase IB findings and the jury verdict, and would therefore necessarily be re-litigated. I disagree with the majority’s conclusion that this case is governed by Phoenix Ins. Co. v. United States Fire Ins. Co. (1987) 189 Cal.App.3d 1511 (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, and decline to construe that case as standing for the broad principle that a non-settling excess insurer must file a cross-claim against a settling primary insurer in all instances in order to avoid the settlement being deemed to satisfy the exhaustion requirements of the excess policy. To the contrary, according to Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London (2008) 161 Cal.App.4th 184 (Qualcomm), the exhaustion determination must be based on the language of the policies at issue. Here, because the record fails to establish that Stonewall waived its right to enforce the language of its policy, there is no basis to preclude Stonewall from litigating the issue of exhaustion.
I express no opinion on the merits of Stonewall’s intended argument concerning per occurrence limits described in London Market Insurers v. Superior Court (2007) 146 Cal.App.4th 648.
I. Factual Background.
A. Proceedings Related to the Prior Fuller-Austin Decision.
This matter initially came before the Court of Appeal following a judgment in favor of Fuller-Austin and against multiple insurers as a result of a phased bench and jury trial. (See Fuller-Austin, supra, 135 Cal.App.4th at p. 966.) Beginning in the late 1980’s, Fuller-Austin was sued by thousands of individuals claiming to have suffered personal injury from exposure to asbestos. Fuller-Austin was an insured under an excess policy (Policy) issued by Stonewall covering the period between December 31, 1973 and December 31, 1975. (Id. at p. 967.) In multiple different provisions, the Policy provides that liability to pay attaches “only after the Primary and Underlying Excess Insurers have paid or have been held liable to pay the full amount of the Primary and Underlying Excess Limit(s).” Further, a condition of the Policy required that the primary, underlying excess and umbrella policies “be maintained in full effect during the currency of this Insurance except for any reduction of aggregate limits contained therein solely by payment of claims in respect of occurrences” during the Policy year.
As early as March 1993, Fuller-Austin notified Stonewall of the “underlying claims because it appears possible that excess general liability coverage may be implicated by these or future claims upon exhaustion of the primary limits.” Stonewall responded with a reservation of rights letter in April 1993. After providing similar notices to other insurers, Fuller-Austin filed this action in 1994 seeking to establish coverage for the asbestos claims. (Fuller-Austin, supra, 135 Cal.App.4th at pp. 967–968.)
During the pendency of the coverage action, Fuller-Austin filed for bankruptcy protection in accordance with title 11 United States Code section 524(g). (Fuller-Austin, supra, 135 Cal.App.4th at pp. 968–970.) Several insurers filed objections to the bankruptcy plan (Plan) and sought to intervene in the bankruptcy proceedings on the ground that the Plan effectively adjudicated coverage issues. (Id. at p. 970.) In response, Fuller-Austin modified the Plan and added a provision addressing the coverage issues which stated: “Maintenance of the Coverage Litigation. Notwithstanding any other provision in this Plan, all claims and defenses of any Asbestos Insurance Company that is a party to the Coverage Litigation shall be adjudicated in the Coverage Litigation, and all rights of the Asbestos Insurance Companies under the Asbestos Insurance Policies shall remain unaffected by the Plan and the Confirmation Order.” (Ibid.) Fuller-Austin relied on this provision in representing to the bankruptcy court that the Plan would not affect the insurers’ rights, particularly their claims and defenses in the coverage action. (Id. at p. 971.) The bankruptcy court agreed, concluding that the insurers lacked standing to appear in the bankruptcy proceedings because they “were ‘not “directly and pecuniarily affected” by the proposed Plan[.]’” (Ibid.) The bankruptcy court confirmed the Plan in December 1998.
Notwithstanding the Plan’s carving out coverage litigation matters from its purview, the Plan provided for “channeling injunctions” that prohibited third parties from filing claims or actions in bankruptcy court or elsewhere against insurers that had settled with Fuller-Austin. Both before and after Plan confirmation, Fuller-Austin settled with and dismissed its coverage action claims against several insurers. Many of those agreements provided for a series of payments over time, extending out several years beyond the settlement date. Further, some contained specific provisions stating that policy limits would be exhausted by payment of the settlement amount. Despite these settlement provisions, Fuller-Austin declined to produce the settlement agreements through discovery and opposed a motion to compel their production on the ground the agreements were irrelevant. It argued that because the likely result of Plan confirmation would be a judgment exceeding the policy limits of all non-settling insurers, “[t]hose policies will thus be triggered regardless of what any of the settlement agreements may actually say.” Indeed, even after the trial court granted the motion to compel, Fuller-Austin sought reconsideration after Plan confirmation, arguing that the Plan affixed liability in an amount exceeding all levels of coverage, therefore rendering the issue of exhaustion “moot.”
After Plan confirmation, the coverage action resumed against the remaining insurers, including Stonewall, that had not settled and been dismissed. (Fuller-Austin, supra, 135 Cal.App.4th at pp. 971–972.) In 2000 and 2002, respectively, the trial court conducted Phase IA and IB bench trials. (Id. at p. 972.) Among numerous other issues, in Phase IB the trial court ruled that “[t]he policies issued by the settled and dismissed insurance companies are deemed exhausted as a matter of law.” The trial court premised its determination on Phoenix, supra, 189 Cal.App.3d 1511, reasoning “Phoenix stands for the proposition that when the policyholder settles and dismisses an insurance company from a coverage action without the non-settling insurance companies filing cross-claims for contribution, subrogation, or other equitable relief against the settling insurance company, the settling insurance company’s policies will be deemed exhausted.” Applying Phoenix here, the trial court concluded that “[i]f the Joint Defendants wanted to challenge exhaustion of coverage provided by settling insurance companies, they had the right to (i) object to the settlements and dismissals at the time they were filed with the Court, and (ii) assert cross-claims against their co-defendants on the ‘exhaustion’ dispute. Having declined to pursue these remedies, the remaining Joint Defendants cannot challenge the exhaustion of the settled policies.” The trial court rejected the insurers’ argument that they were precluded from filing any type of cross-claim by reason of the channeling injunction issued as part of the Plan; it found the insurers could have objected to settlements entered into before the Plan was confirmed and, with respect to post-Plan settlements, they could have appealed the bankruptcy court’s channeling injunction.
Following the bench trial phases, a jury trial ensued against three insurers, including Stonewall. (Fuller-Austin, supra, 135 Cal.App.4th at pp. 973–974.) As a result of the trial court’s Phase IB rulings, the jury was instructed that the Plan was reasonable and that present and future asbestos claims were presumed to be harm within coverage, effectively leaving only the calculation of the asbestos claims’ aggregate value for the jury. (Id. at p. 1001.) In a special verdict, the jury concluded that the insurers breached their policies after Plan confirmation and awarded damages in the form of specific values on allowed, pending and future asbestos claims. (Id. at p. 974.)
Multiple insurers, including Stonewall, appealed the Phase IB rulings, and Stonewall and Certain Underwriters at Lloyd’s London and Certain London Market Insurance Companies (collectively LMI) appealed the jury verdict. (Fuller-Austin, supra, 135 Cal.App.4th at p. 974.) Although LMI specifically challenged the trial court’s finding that the policies of the settling insurers were exhausted as a matter of law, Stonewall did not. It did, however, expressly join in LMI’s opening brief.
In January 2006, this Division issued an opinion certified for partial publication which reversed significant portions of both the trial court’s statement of decision in Phase IB and the jury’s special verdict. (Fuller-Austin, supra, 135 Cal.App.4th at pp. 1006–1007.) The published portion of the decision reversed the judgment “to the extent it imposes liability on appellants, to the extent it requires appellants to pay an aggregate sum for present and potential future asbestos claims against Fuller-Austin, and to the extent that any indemnification was calculated on the basis of the [allowed liquidated value] amount of any claim.” (Id. at p. 1006.) As part of the disposition, the decision reversed the Phase IB’s statement of decision concerning excess policy triggers, encompassing “rulings concerning the bankruptcy adjudication as a judgment, the obligation to pay the [allowed liquidated value] amount of the claims and the obligation to pay an aggregate sum for present and potential future claims.” (Ibid.) Though not repeated in the disposition, in an earlier portion of the opinion which summarized the Phase IB rulings, we stated: “Appellants retain their prebankruptcy rights under the policies to raise defenses to coverage as to each claim for which liability has been established. [Citations.]” (Id. at p. 1000.)
The unpublished portion of the decision that addressed issues unique to either the Stonewall or LMI policies provided: “Though we need not discuss all points raised by LMI and Stonewall in view of the necessity of reversal for the reasons outlined above, we resolve the challenged special verdict findings that have not yet been addressed and those that may be implicated on retrial.” A footnote intended to clarify what issues necessarily had been reversed as part of the disposition of other issues provided: “Specifically, we do not address LMI’s claims that the trial court erred in finding that the bankruptcy settlement exhausted the underlying policies as a matter of law, that Fuller-Austin failed to meet its burden to establish coverage under the Cities Service policies and that Fuller-Austin failed to demonstrate that the minimum attachment points were satisfied for each of the Cities Service policies. These issues are moot in view of our other conclusions. Nor do we address Stonewall’s claim that the trial court abused its discretion by awarding prejudgment interest.”
B. Proceedings Following Reversal and Remand.
Both before and after remand, Fuller-Austin continued to enter into settlements with additional insurers, though not Stonewall. Settling insurers received bankruptcy court approval and protection via the Plan’s channeling injunction.
Following remand, Fuller-Austin and Stonewall began briefing the issues to be determined on retrial. Fuller-Austin took the position that the Fuller-Austin decision affirmed the trial court’s ruling on exhaustion as a matter of law, while the remaining insurers, including Stonewall, argued the fact the exhaustion issue was deemed “moot” meant that the issue was encompassed within the reversal and remand, and that Fuller-Austin therefore had the burden to establish exhaustion on retrial. Toward the end of briefing, the parties began to debate the applicability of Qualcomm, supra, 161 Cal.App.4th 184, a case holding that an excess insurer’s coverage obligations did not arise where there was no showing that the primary carrier paid or became obligated to pay the full amount of the primary liability limit. (Id. at p. 188.)
In early 2009, the respondent court issued several rulings concerning the scope of the issues to be determined on retrial. With respect to the issue of exhaustion, it agreed with Fuller-Austin’s position in large part, determining that “[t]he previous finding by the trial court that the primary insurance issued to Fuller-Austin was exhausted is law of the case and is binding on the parties in this action on remand” and “Fuller-Austin must prove exhaustion of the excess/umbrella (second) layer. The Court makes no ruling on how exhaustion may be demonstrated.”
In June 2009, Fuller-Austin moved for an order in limine to prevent Stonewall from presenting evidence or argument challenging the exhaustion of Fuller-Austin’s umbrella level insurance policies. Relying solely on the trial court’s Phase IB ruling, Fuller-Austin cited three bases for the motion: (1) the trial court had previously ruled the policies were exhausted as a result of settlement payments; (2) the trial court had previously ruled Stonewall had waived its right to challenge the exhaustion finding by not filing a cross-claim or otherwise objecting to the settlements; and (3) this Court affirmed both of those rulings. Stonewall opposed the motion on the grounds that it improperly sought reconsideration of the respondent court’s ruling that Fuller-Austin must prove exhaustion, that the trial court’s prior rulings had not been affirmed and that, in any event, the trial court’s rulings were erroneous.
The respondent court agreed with Fuller-Austin’s position, ruling that the Fuller-Austin decision did not disturb the trial court’s Phase IB exhaustion finding and that Stonewall had waived its right to challenge the exhaustion finding on any theory because it neither filed cross-claims nor otherwise objected to the settlements and dismissals at the time they were made. The respondent court thereafter denied Stonewall’s motion for reconsideration.
Stonewall filed a petition for writ of mandate seeking to vacate the respondent court’s in limine ruling, and I dissented when this Court initially denied the petition. The Supreme Court thereafter granted Stonewall’s petition for review and transferred the matter back to this Court with directions to issue an order to show cause. The majority has once again concluded that the petition should be denied.
II. Stonewall Should Not Be Precluded from Litigating Whether Underlying Insurance Has Been Exhausted.
A. Exhaustion as a Matter of Law is Not Law of the Case.
While the majority properly concludes that the trial court’s previous finding that the policies of settling and dismissed insurers were exhausted as a matter of law is not the law of the case, I write separately on this point to emphasize the import of this Court’s determination that the issue was “moot.”
The appeals in Fuller-Austin focused on challenging the trial court’s Phase IB rulings that deemed the Plan an adjudication, which consequently enabled the jury to make a determination of the value of present and future asbestos claims that would then be binding on the insurers. The Fuller-Austin decision reversed the jury’s liability findings as well as the trial court’s findings that had facilitated the jury determination. Only after concluding that the judgment could not serve to affix liability against the insurers did the decision address several issues that were unique to individual parties. Notably, Stonewall did not raise the issue of exhaustion in either its opening or reply briefs. Nor did Fuller-Austin address the issue-raised only by LMI-in its separate respondent’s brief directed to those unique issues. Instead, in a single paragraph in its respondent’s brief addressing the more global Phase IB findings and the jury verdict, Fuller-Austin reiterated the basis of the exhaustion ruling and then represented: “While Phoenix is on ‘all fours’ with this case, this legal ruling was eclipsed in its significance when the jury later determined, during the Phase II trial, that actual settlements and judgments exhausted all of the limits of Fuller-Austin’s primary coverage.”
Adopting Fuller-Austin’s position, the final section of the Fuller-Austin decision “resolv[ed] the challenged special verdict findings that have not yet been addressed....” (Italics added.) A footnote identified the issues not being discussed-i.e., those which had already been addressed as a result of the Phase IB and jury verdict reversals-including LMI’s claim that the underlying policies were not exhausted as a matter of law. By characterizing that and other issues as “moot, ” we reasoned that those matters had been subsumed-or “eclipsed”-by the jury verdict which the decision served to reverse. Where an appellate court’s reversal of an issue renders a related issue without legal effect, courts often refer to the latter issue as being “moot.” (See, e.g., Costa Serena Owners Coalition v. Costa Serena Architectural Com. (2009) 175 Cal.App.4th 1175, 1206 [reversal of judgment with directions to enter judgment in favor of the appellant rendered moot the respondent’s appeal challenging the trial court’s failure to award it attorney fees]; Gutierrez v. Cassiar Mining Corp. (1998) 64 Cal.App.4th 148, 160 [reversal of economic damages award rendered moot a dispute about whether funds should have been deposited into a court-supervised account]; Jacobs v. State Bd. of Optometry (1978) 81 Cal.App.3d 1022, 1034 [reversal of judgment that nonprofit group vision care corporation could not exclude optometrist from membership rendered moot state board’s request for special findings concerning its responsibilities and scope of authority over the corporation].) Because we reversed the jury verdict that had accelerated the insurers’ obligations on the basis of an aggregate value determination that Fuller-Austin had not yet paid, any issue concerning exhaustion of underlying policies was likewise implicitly reversed.
B. Exhaustion Should be Determined by the Language of the Insurance Policies at Issue.
Separate from whether and how the exhaustion issue was addressed in Fuller-Austin, I find no basis at this stage of the proceedings to preclude Stonewall from raising the failure to exhaust the underlying policies as an affirmative defense in the coverage action. (E.g., Iolab Corp. v. Seaboard Sur. Co. (9th Cir. 1994) 15 F.3d 1500, 1504 [applying California law and affirming dismissal of excess insurers on the ground that they established defense of failure to exhaust].) Such a ruling cannot be supported by Phoenix, supra, 189 Cal.App.3d 1511 and is inconsistent with Qualcomm, supra, 161 Cal.App.4th 184.
In Phoenix, attorneys who were sued for malpractice carried a series of primary and excess policies during the period of the allegedly negligent representation. Three carriers-Olympic, Central and Signal (the last later declared insolvent by the California Insurance Guarantee Association (CIGA) which substituted in its place)-issued primary policies. Phoenix was a primary insurer for certain time periods and an excess insurer for others. USFIC was an excess insurer for the entire relevant time period. (Phoenix, supra, 189 Cal.App.3d at pp. 1518–1519.) Once in the action, CIGA withdrew its defense on the ground that Phoenix provided “other insurance” which, according to the Signal policy, absolved CIGA of the responsibility to provide a defense. (Ibid.) Phoenix and CIGA agreed to binding arbitration to resolve the issue, and the arbitrator ruled in favor of CIGA, finding that Phoenix had a duty to provide a defense for negligent acts committed during Signal’s policy period. (Id at p. 1520.)
Phoenix thereafter filed a declaratory relief action against the attorneys and all other insurers, which was consolidated with the malpractice action. (Phoenix, supra, 189 Cal.App.3d at p. 1520.) While all insurers except CIGA agreed to a settlement in concept, they could not agree to an allocation and submitted the issue of apportionment to a referee. After the referee issued an apportionment, Phoenix and USFIC paid their respective amounts while reserving the right to litigate the apportionment; Olympic and Central paid their respective amounts and waived their right to litigate the issue in exchange for Phoenix’s dismissal. (Ibid.) Phoenix thereafter amended its declaratory relief complaint to allege that CIGA improperly failed to participate in the settlement and that USFIC paid less than its policy warranted. (Id. at p. 1521.) USFIC, in turn, filed a cross-complaint against Phoenix seeking reimbursement on the theory that Phoenix was the primary insurer during the time of the alleged malpractice. (Ibid.)
Following a bench trial, the trial court reallocated the amount of each insurer’s responsibility according to time period and ordered USFIC to pay an additional amount because the amounts paid by Olympic and Central in settlement were inadequate to cover their time period. (Phoenix, supra, 189 Cal.App.3d at p. 1522.) It also ruled in favor of Phoenix on USFIC’s cross-complaint. (Ibid.) One of USFIC’s arguments on appeal was that the judgment improperly obligated it beyond its contractual agreement because its policy required it to indemnify the attorneys only after they had exhausted their primary coverage, and the Olympic and Central combined settlement did not reach that level. (Id. at p. 1529.) Without either reference to the language of the USFIC policy or citation to authority, the Phoenix court held: “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.)
The majority characterizes Phoenix as standing for the broad proposition that a settling primary insurer’s policy may be deemed exhausted as a matter of law as to the excess insurer when the settlement is below policy limits and the excess insurer fails to object to the settlement by way of a cross-claim. I do not believe the case should be read so expansively. Rather, the decision turned on a unique and discrete set of circumstances where an excess insurer filed a cross-claim against some, but not all, of the insurers potentially liable, and sought to challenge a court-ordered allocation of liability. By stating “[i]n effect, the primary coverage was ‘exhausted’ when Central and Olympic paid their share of the settlement and were dismissed from the declaratory relief action, ” the court appears to have been using the term “exhausted” in quotation marks as a shorthand way of finding it had no basis to order Central and Olympic to pay more than their original share of the court-ordered allocation. (Phoenix, supra, 189 Cal.App.3d at p. 1529.)
The majority’s literal interpretation of the Phoenix court’s use of the term “exhausted” creates a conflict with a long line of California cases concluding that an insurer and an insured cannot artificially exhaust an insurance policy in a manner that differs from policy language. (E.g., Employers Ins. Co. v. Travelers Indemnity Co. (2006) 141 Cal.App.4th 398, 406 [“[M]erely saying a policy is exhausted does not make it so. While [the insured] and the settling insurers were free to agree as between themselves to ‘deem’ their policy limits ‘exhausted, ’ just as they were free to settle their coverage dispute between themselves, there is no evidence that the settlements actually exhausted the coverage available under the policies”]; Farmers Ins. Exchange v. Hurley (1999) 76 Cal.App.4th 797, 803 [statutory and policy language providing that “underinsurance coverage is not available until the limits of the underinsured’s policy ‘have been exhausted by payment of judgments or settlements’” can only be interpreted “to mean that the full limits of the policy must actually be paid”]; Chubb/Pacific Indemnity Group v. Insurance Co. of North America (1987) 188 Cal.App.3d 691, 698 [“Ceding policy limits to [excess carrier] for purposes of settlement did not exhaust [primary carrier’s] obligation to pay damages on behalf of its insured. That obligation could have been extinguished only by actual settlement or payment of judgment”]; Kaiser Foundation Hospitals v. North Star Reinsurance Corp. (1979) 90 Cal.App.3d 786, 792–793 [reversing in limine order prohibiting excess carrier from challenging dates of loss agreed to by insured and primary carrier, as the determination artificially exhausted underlying insurance].)
According to the majority, its conclusion contrary to this authority flows from the more general principle articulated in Zeig v. Massachusetts Bonding & Ins. Co. (2d Cir. 1928) 23 F.2d 665 (Zeig) that exhaustion may occur via a settlement for less than policy limits. Zeig, however, highlights the critical omission in Phoenix-the failure to examine policy language. In Zeig, the insured suffered a burglary loss exceeding $15,000, settled with his primary insurers for $6,000 and sought to recover from his excess carrier the amounts exceeding $15,000. Reversing a judgment in favor of the excess insurer, the court rejected the argument “that it was necessary for the plaintiff actually to collect the full amount of the policies for $15,000, in order to ‘exhaust’ that insurance. Such a construction of the policy sued on seems unnecessarily stringent. 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 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.” (Zeig, supra, 23 F.2d at p. 666.) The court declined to construe the policy’s requirement of “payment” to mean collection of the expressed limits, reasoning that “payment” could also be construed to mean satisfaction of the claim through compromise and settlement. (Ibid.)
Importantly, the Zeig court analyzed the language of the excess policy in order to evaluate the excess insurer’s obligations. I agree with the observation in Comerica Inc. v. Zurich American Ins. Co. (E.D.Mich. 2007) 498 F.Supp.2d 1019, 1030 (Comerica), that “[t]he cases that follow Zeig generally rely on an ambiguity in the definition of ‘exhaustion’ or lack of specificity in the excess contract as to how the primary insurance is to be discharged. [Citations.]” The Comerica court explained, however, that “[a] different result occurs when the policy language is more specific.” (Ibid., citing Danbeck v. Am. Family Mut. Ins. Co. (2001) 245 Wis.2d 186, 629 N.W.2d 150, 152, 155–156 [excess policy that attached “‘only after the limits of liability under any bodily injury liability bonds or policies have been exhausted by payment of judgments or settlements’” not triggered by settlement below primary policy limits] and Wright v. Newman (D.C. Mo. 1984) 598 F.Supp. 1178, 1196 [excess policy that provided “‘[l]iability... shall not attach unless and until the Primary and Underlying Excess Insurers shall have admitted liability for... [their] Limit(s) or unless and until... and only after the Primary and Underlying Excess Insurers have paid or been held liable to pay the full amount of... [their] Limits’” not triggered by settlement for less than the amount of underlying insurance].)
Turning to the language of the excess policy at issue in Comerica, the court there stated “that the excess policy in this case likewise requires that the primary insurance be exhausted or depleted by the actual payment of losses by the underlying insurer. Payments by the insured to fill the gap, settlements that extinguish liability up to the primary insurer’s limits, and agreements to give the excess insurer ‘credit’ against a judgment or settlement up to the primary insurer’s liability limit are not the same as actual payment. [The excess carrier’s] policy requires ‘actual payment of losses’ by the underlying insurer and states that its ‘policy does not provide coverage for any loss not covered by the “Underlying Insurance” except and to the extent that such loss is not paid under the “Underlying Insurance” solely by reason of the reduction or exhaustion of the available “Underlying Insurance” through payments of loss thereunder.’ That never happened in this case.” (Comerica, supra, 498 F.Supp. at p. 1032.)
Recognizing that an excess carrier’s obligations must be determined by the language of its policy-rather than by a settlement that fails to comport with the policy’s requirements-the court in Qualcomm, supra, 161 Cal.App.4th 184, held an excess carrier’s coverage obligation did not arise by reason of a settlement between the insured and the primary carrier for less than the primary carrier’s policy limit. Notably, the language of Stonewall’s Policy mirrors that of the excess policy issued by Certain Underwriters at Lloyd’s, London (Underwriters) in Qualcomm, which provided that “‘Underwriters shall be liable only after the insurers under each of the Underlying Policies [the National policy] have paid or have been held liable to pay the full amount of the Underlying Limit of Liability.’” (Id. at p. 189.) In Qualcomm, employees filed a class action against Qualcomm asserting a right to unvested stock options. Qualcomm tendered the matter to its directors and officers carriers, including primary insurer National which had issued a policy with a $20 million liability limit. Qualcomm, National and Underwriters participated in a mediation regarding coverage issues. Qualcomm and National subsequently reached a settlement whereby National agreed to pay $16 million to Qualcomm for settlement payments to employees and defense costs, and Qualcomm agreed to release National from any further obligations under its policy. (Id. at pp. 189–190.) Qualcomm thereafter sued Underwriters for breach of contract and declaratory relief, seeking payment of unreimbursed settlement costs and expenses above $20 million, and the trial court sustained Underwriters’ demurrer without leave to amend on the ground that its excess policy had not been triggered. (Id. at p. 190.)
The Court of Appeal affirmed. It relied on fundamental principles of contract interpretation-applicable to insurance policies-that effect must be given the parties’ mutual intent which, if possible, is to be inferred from the contract’s written provisions, and that the “‘clear and explicit’ meaning” of those provisions used in their “‘ordinary and popular sense’” controls judicial interpretation. (Qualcomm, supra, 161 Cal.App.4th at p. 191.) The Qualcomm court further reasoned that its evaluation of the policy language must take into account the nature of Underwriters’ policy as an excess policy, explaining: “‘In short, excess insurance is insurance that is expressly understood by both the insurer and insured to be secondary to specific underlying coverage which will not begin until after that underlying coverage is exhausted and which does not broaden that underlying coverage.’ [Citations.]” (Id. at p. 194.) With these principles in mind, the court determined that “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.” (Id. at p. 195.) The court found that a different result was not warranted under the balance of the relevant policy provision that triggered excess insurance if the primary insurer has been “‘held liable to pay’” the full amount of the policy limits, because there was no indication that the settlement agreement between Qualcomm and National “required National to accept responsibility or liability for the full amount of the $20 million limit on the underlying policy.” (Id. at p. 196, fn. omitted.)
Qualcomm expressly rejected the reasoning of the two cases on which the majority here relies. It confined Phoenix to its own facts, explaining that the case focused only on USFIC’s failure to seek relief from the primary carrier in the face of the referee’s allocation and, as a result, lacked any meaningful policy interpretation or analysis. (Qualcomm, supra, 161 Cal.App.4th at p. 203.) While acknowledging that the Zeig court left open the possibility that specific policy language could compel a different result, Qualcomm concluded that Zeig improperly placed the policy consideration of encouraging settlement ahead of policy language. (Qualcomm, supra, at pp. 197–198.)
Qualcomm is squarely on point. I am not persuaded by the majority’s efforts to distinguish the case. While the majority correctly observes that the requisite analysis of horizontal, as opposed to vertical, exhaustion may be “difficult, ” I am unaware of authority holding that difficulty renders controlling legal principles inapplicable. (See, e.g., Community Redevelopment Agency v. Aetna Casualty & Surety Co. (1996) 50 Cal.App.4th 329, 335–340 & fn. 6 [evaluating multiple policies to determine exhaustion].) The majority also focuses on public policy considerations, reasoning that following Qualcomm will encourage litigation while disregarding it will promote settlement. But our Supreme Court has consistently and repeatedly held that courts do not rewrite insurance policies for any purpose, including for compelling public policy considerations. (Certain Underwriters at Lloyd’s of London v. Superior Court (2001) 24 Cal.4th 945, 967–968; Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 888; accord, Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070, 1073 [“‘[W]e do not rewrite any provision of any contract, [including an insurance policy], for any purpose’”]; AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 818 [“The answer [to coverage questions] is to be found solely in the language of the policies, not in public policy considerations”].) In line with this authority, Qualcomm declined to rewrite the Underwriters’ policy, even though doing so would have promoted the public policies of encouraging settlement and insurance risk-spreading. (Qualcomm, supra, 161 Cal.App.4th at p. 204.)
I, too, am bound to construe the Stonewall Policy as written. The Policy contains language identical to that in the Underwriters’ excess policy, providing that Stonewall’s liability to pay attaches “only after the Primary and Underlying Excess Insurers have paid or have been held liable to pay the full amount of the Primary and Underlying Excess Limit(s).” “‘California case law has consistently protected the limited and shielded position of the excess carrier when the obligations of the excess carrier are set in clear phrases.’” (Qualcomm, supra, 161 Cal.App.4th at p. 194.) Guided by Qualcomm, I interpret the Policy issued by Stonewall to provide that Stonewall’s obligations as an excess carrier are not triggered by settlements between Fuller-Austin and its primary or underlying excess carriers that do not require the carriers to pay or be held liable to pay the full amount of their policy limits. Stonewall is entitled to litigate whether the requirements of its Policy have been met.
C. The Record does Not Support the Conclusion that Stonewall Waived Its Rights Under Its Policy.
Though the majority does not characterize waiver as an independent basis for affirming the respondent court’s in limine ruling, it is evident that waiver is an essential component of the majority’s holding. The majority concurs with the trial court’s original ruling that, pursuant to Phoenix, Stonewall has waived its right to raise the issue of exhaustion at this point because it did not assert a cross-claim against the settling insurers at the time of settlement; the majority also distinguishes Qualcomm on the ground the case did not involve the issue of waiver. Certainly, if it could be shown that Stonewall had waived its right to rely on the portion of its Policy governing exhaustion, I could affirm the respondent court’s ruling notwithstanding the language of the Policy. But the record, in my view, fails to establish that Stonewall waived any rights under its Policy.
“Generally, in the insurance context, waiver requires the intentional relinquishment of a known right. [Citations.] Waiver may also apply where a party acts in a manner inconsistent with the intent to enforce a right. As our Supreme Court explained in Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 33, 34, ‘[I]n the insurance context the terms “waiver” and “estoppel” are sometimes used interchangeably, even though estoppel requires proof of the insured’s detrimental reliance.... “California courts will find waiver when a party intentionally relinquishes a right or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.”’” (Colony Ins. Co. v. Crusader Ins. Co. (2010) 188 Cal.App.4th 743, 753.)
The majority concludes that Stonewall intentionally relinquished or acted inconsistently with its rights under the Policy because it was aware that the bankruptcy court would not resolve coverage issues, knew or should have known that the Plan’s settlement trust would be funded by insurance proceeds and knew or should have known that the primary carriers would therefore attempt to negotiate settlements below policy limits. Under these circumstances, the majority concludes that Stonewall had an obligation “assert its rights” and make the settling insurers aware of its “intentions” by filing a cross-claim at or before the time of settlement. By not raising the issue during the first trial and appeal, the majority concludes that Stonewall acted at its peril and waived its right to raise the exhaustion issue now.
Even setting aside the question of whether Stonewall was obligated to do anything more under these circumstances beyond relying on the language of its Policy, the record fails to show that Stonewall intentionally abandoned its rights or acted in a manner contradictory to its Policy. Rather, in October 1998, Stonewall filed an objection to Plan confirmation, in which it argued that Fuller-Austin had unilaterally designed the Plan so as to accelerate Stonewall’s obligations under its Policy, contended it did not have a meaningful opportunity to participate in Plan formulation and raised several coverage issues. The bankruptcy court expressly considered the objections offered by Stonewall and other carriers, summarizing: “[I]n essence, the Objecting Insurers object to the confirmation of the Plan and approval of the Disclosure Statement on the grounds that confirmation of the proposed Plan would ‘summarily adjudicate the liability of excess carriers under excess insurance policies, ’ thus impacting and possibly influencing the resolution of the pending Coverage Litigation and impairing the rights and obligations of Objecting Insurers under their insurance policies.” (Fn. omitted.) As a result of the objections, the Plan was modified to add the “Maintenance of the Coverage Litigation” provision, specifying that the insurers’ rights under their policies remained “unaffected by the Plan or the Confirmation Order.”
Thus, it is undisputed that coverage issues were to be litigated in the coverage action. Prior to confirmation of the Plan, beginning in 1997 and through October 1998, Fuller-Austin had already negotiated settlements with several insurers. Those early agreements required the insurers to make payments over time, extending into 2004, in exchange for dismissal from the coverage action. There is no indication in the record that Stonewall knew about those settlements or their terms at the time they were signed. Rather, Stonewall became aware of the settlements after Fuller-Austin filed a motion for leave to file a fifth amended complaint which included allegations that its settling with certain primary insurers exhausted the limits of those policies. Stonewall thereafter moved to compel the production of the settlement agreements, arguing that the documents could be relevant for several reasons, including that “the settlement amount might be less than the limits of the primary policy and could not, then, possibly serve to exhaust the policy.” Fuller-Austin opposed the motion on the ground that the forthcoming Plan confirmation would constitute a judgment exceeding all available insurance coverage, thereby triggering policies at every level. It did not argue that its settlement with and dismissal of any primary insurer constituted exhaustion of primary coverage as a matter of law.
After Plan confirmation, subsequent settlement agreements between Fuller-Austin and its insurers remained confidential, yet they now included an additional provision concerning exhaustion of policy limits. By way of example, the December 1998 Wausau settlement agreement provided: “The limits of liability of the Subject Policies shall be exhausted by the full and timely payment by Wausau of either the Settlement Amount or the Accelerated Settlement Amount.” Similarly, the January 2000 LMI settlement agreement provided: “It is agreed that, on and as of the date of execution of this Agreement, all limits of liability under the Subject Policies, including (without limitation) all per occurrence and aggregate limits of liability under the Subject Insurance Policies, are exhausted and deemed paid in full.”
As a result of the trial court’s ultimately granting Stonewall’s and other insurers’ motion to compel, the remaining insurers became aware of the inclusion of these “exhaustion of limits” provisions in the settlement agreements. However, contrary to the majority’s assertion that Stonewall made a perilous tactical decision to permit the case to proceed to trial and through appeal without challenging the effect of these provisions, the record shows that Stonewall and other carriers vigorously litigated the issue as part of the Phase IB proceedings.
In its Phase IB briefing, Stonewall argued that settlement agreements providing for installment payments or for payments below policy limits could not be held to constitute payment of the full amount of the primary policies as required by its Policy, and requested a ruling that “[i]nstallment and/or conditional agreement for payments by underlying insurers do not constitute exhaustion of underlying insurance until payment of underlying limits are actually made toward settlements or judgments against Fuller-Austin.” In response, Fuller-Austin argued that liability exceeding primary coverage-i.e., the confirmation of the Plan-constituted exhaustion or, alternatively, that under Phoenix, supra, 189 Cal.App.3d 1511, the excess carriers’ obligations were triggered when Fuller-Austin settled with the primary carriers for less than policy limits. Fuller-Austin further argued that Stonewall and other excess insurers had waived their right to challenge exhaustion without filing cross-claims against the dismissed insurers. The dismissals themselves were the only evidence offered on this point at trial.
Accordingly, Stonewall did not fail to raise the issue of exhaustion below-it simply failed to prevail. Consistent with the trial court’s Phase IB ruling against Stonewall, the majority further concludes that it was incumbent on Stonewall to file cross-claims against dismissed insurers in order to avoid a waiver under its Policy. Again, I find no support in the record for this position. Rather, by court order, Stonewall was precluded from filing a cross-claim against a settled and dismissed insurer. In 1997 and 1998, before Plan confirmation, Fuller-Austin dismissed two insurers and effectively removed a third from the action by failing to name it in the fifth amended complaint. Nothing in the record suggests that Stonewall was aware that the dismissals were the result of settlement agreements intended to implicate Stonewall’s excess obligations; in other words, at that time there was no reason for Stonewall to file a cross-claim or object to the dismissals. Shortly after those dismissals, the confirmed Plan specifically provided for a third party injunction that prohibited “all Entities which have held or asserted, which hold or assert, or which may in the future hold or assert any Third Party Claim” from “commencing or continuing in any manner any action or other proceeding of any kind with respect to any such claim, demand, cause of action or Interest against any Protected Party....” “[E]ach Settling Asbestos Insurance Company named in this Order” was deemed a “Protected Party” in the Plan. Thus, as of the date of Plan confirmation, Stonewall was precluded from filing a cross-claim against a dismissed insurer. Settlement agreements with additional insurers after Plan confirmation included provisions to have those insurers named as protected parties in the Plan.
Though the majority does not acknowledge that the Plan prohibited the filing of cross-claims against dismissed insurers, the trial court resolved the issue by ruling that Stonewall and other carriers should have appealed bankruptcy court confirmation to avoid a waiver. But that ruling ignores the critical Plan provision that assured Stonewall and other carriers that coverage matters would be adjudicated only in the coverage action. With the assurance all claims and defenses of any party to the coverage action would be adjudicated there and “remain unaffected” by the Plan, Stonewall had no reason to believe it had relinquished or acted inconsistently with its rights under its Policy by proceeding to litigate those matters in Phase IB.
Under these circumstances, I cannot conclude that Stonewall waived its rights under its Policy by failing to cross-complain against dismissed insurers. Nor can I conclude that these circumstances are akin to those in Phoenix, supra, 189 Cal.App.3d 1511. There, the court concluded that USFIC had forfeited its right to challenge a court-ordered allocation as to two dismissed insurers (Central and Olympic) by failing to name them in a cross-claim that it filed against a third insurer (Phoenix) challenging the allocation. (Id. at pp. 1529–1530.) I do not construe Phoenix to require an excess insurer to cross-complain against a dismissed primary insurer where the dismissal occurred following the payment of a settlement amount negotiated between the insured and the primary insurer, the settlement agreement was not disclosed to the excess insurer and, ultimately, a federal court order prohibited the filing of a cross-claim against the dismissed insurer.
Further, I find no basis to distinguish Qualcomm, supra, 161 Cal.App.4th 184 on the issue of waiver. While the majority suggests that waiver was not an issue because Qualcomm, its primary carrier and Underwriters participated in a mediation concerning coverage, the mediation did not resolve that issue. (Id. at pp. 189–190.) To the contrary, following the mediation Qualcomm settled with and released its primary carrier, and then sued its excess carrier Underwriters. (Ibid.) The parties in Qualcomm were therefore in the same procedural posture as the parties here. The Qualcomm court determined that Underwriters was entitled to enforce the language of its policy without any suggestion that a prerequisite to enforcement was a cross-claim against the primary carrier. (Id. at p. 198.) There is no meaningful basis on which to distinguish Qualcomm from the circumstances here.
For these reasons, I would grant the petition for writ of mandate and direct the respondent court to vacate its in limine ruling.