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IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON QUELLOS GROUP LLC, Appellant/Cross Respondent,

v. FEDERAL INSURANCE COMPANY; INDIAN HARBOR INSURANCE COMPANY, Respondents/Cross Appellants, STEADFAST INSURANCE COMPANY; AND NUTMEG INSURANCE COMPANY, Defendants. No. 68478-7-1 DIVISION ONE

PUBLISHED OPINION

FILED: November 12, 2013 

### Schindler, J. —An excess insurance policy provides coverage only after underlying insurance coverage is exhausted. Quellos Group LLC appeals summary judgment dismissal ofthe lawsuit against excess insurance carriers Federal Insurance Company and Indian Harbor Insurance Company for failure to exhaust the underlying 

### insurance coverage. The Federal policy states coverage "shall attach only afterthe insurers ofthe Underlying Insurance shall have paid in legal currency the full amount of the Underlying Limit." The Indian Harbor policy states coverage "will attach only after all ofthe Underlying Insurance has been exhausted by the actual payment of loss by the applicable insurers thereunder." Because the plain and unambiguous language oftheNo. 68478-7-1/2



### excessinsurance policies require exhaustion oftheunderlying liability limits by actual paymentbytheinsurerbefore excess coverage istriggered, and there is nodispute that the underlying insurers did not pay policy limits, we affirm.

FACTS 

### Quellos Group LLC was a Seattle-basedinvestmentmanagementcompany. Beginning in 1999,former ChiefExecutive Officer (CEO) Jeffrey Greenstein and Quellos Directorand attorney Charles Wilk, together with other Quellos employees, developed a new tax shelter strategy, the "Personally Optimized INvestment 

### Transaction" (POINT). The POINTtax shelter gave wealthy clients the opportunityto offset large capital gains by acquiring securities with built-inlosses. Quellos used two 

### offshore shell corporations and a "paper portfolio of over $9 billion in U.S. high tech stocks" to create "fake" capital losses for the POINT transactions. The fee Quellos charged clients was based on the amount ofthe POINT transaction tax loss. 

### Using circulartransactions and offsetting payments that cancelled each other out, these offshore corporations created a paper portfolio ofover $9 billion in U.S. high tech stocks that appeared to suffer price drops and generated the fake capital losses used inthe POINT transactions. The 

### fees charged by Quellos depended upon the amount of tax loss generated ineach transaction for the taxpayerwho bought the shelter; the more money the taxpayer "lost" from the transaction, the more Quellos charged for the scheme. 

### Quellos recognized the importance ofobtaining legal opinions from well regarded law firms on the tax consequences ofthe POINT tax shelter. Quellos provided false information and documentation to the law firms on the POINT tax shelter in order to obtain favorable legal opinions that supported the POINT strategy. Between 2000 and 2002, six Quellos clients agreed to use the POINT tax shelter. The first three POINT client transactions took place between April and September 2000.No. 68478-7-1/3 

### In September2000, Quellos purchased layers ofinsurance coveragefor investment management claims against its directors and officers. 

### Quellos purchased a claims-made insurance policyfrom American International 

### Specialty Lines InsuranceCompany (AISLIC), an "Investment Management Insurance Policy," for the period ofSeptember21, 2000 through September21, 2002, with a 

### liability limitof $20 million. Quellos purchased excess insurance coverage for the period ofSeptember 21, 2000 to September 21, 2004 from AISLIC and other carriers. The next three POINT client transactions occurred in late 2000 and 2001. In 

### total, the POINTtransactions protected approximately $2 billion in capital gains from federal taxes and generated approximately $65 million in fees to Quellos. In 2004, AISLICissued a claims-made Investment Management Insurance Policy to Quellos with a $10 million liability limitforthe period ofSeptember21, 2004 to September 21, 2005. The policy was subjectto a $2.5 million self-insured retention. 

### Under the terms ofthe policy, there is no duty to defend. The AISLIC policyprovides coverage to the past, present, or future officers, directors, and employees of Quellos for damages, including defense costs resulting from claims first made during the "Policy Period

... for any Wrongful Act" in rendering services as an investment adviser and for 

### otherprofessional services.1

1TheAISLIC policy provides, in pertinentpart: With respect to any such Wrongful Act for which insurance is afforded by this policy under Insuring Agreement ICoverages A, B, C or D above, the Company shall, as part of and subjectto the limit of liability setforth in Item 3 ofthe Declarations, pay the Insured's Defense Costs as they are incurred. "Defense Costs" are defined as reasonable and necessary fees, costs and expenses . . . incurred by the Company or by the Insured with the written consent ofthe Company, and resulting solely from the investigation, adjustment, defense and appeal of any claim against the Insured.No. 68478-7-1/4 

### Quellos obtained excess coveragefrom Federal Insurance Company and secondtier excess coveragefrom Indian Harbor InsuranceCompanyfor the policy period of September 21, 2004 to September21, 2005. Thefirst-tier Federal policy provided a $10 million liability limit after exhaustion of the AISLIC policy limits. The second-tier Indian Harbor policy provided excess coverage of$20 million after exhaustion of AISLICand 

### Federal coverage policy limits. The Federal and Indian Harbor policies are subject to and incorporate the terms of the AISLIC primarypolicy, and do not providecoverage for claims excluded from coverage underthe AISLIC policy. The AISLIC policy provides, in pertinent part: 1. INSURING AGREEMENTS COVERAGE A: INVESTMENTADVISER PROFESSIONAL LIABILITY

— AND CORPORATE REIMBURSEMENT This policy shall, subjectto the limit of liabilitysetforth in Item 3 of the Declarations, pay on behalfofthe Insured all sums which the Insured shall become legally obligated to pay as damages resulting from any claim or claims first made against the Insured and reported in writing to the Company during the Policy Period orthe Extended Reporting Period (ifapplicable) for any Wrongful Act of the Insured or of any person for whose Wrongful Act the Insured is legally responsible, but only ifsuch Wrongful Act occurs prior to the end ofthe Policy Period and solely in rendering orfailing to render Investment Advisory Services for others for compensation in the course ofthe Entity Insured's business as an InvestmentAdviser; and with respect to the Entity Insured including amounts which the Entity Insured is permitted or required to pay as indemnification for such liability ofthe Individual Insured.

COVERAGE C: DIRECTORS AND OFFICERS LIABILITYAND CORPORATE REIMBURSEMENT This policy shall, subject to the limit of liability set forth in Item 3 of the Declarations, pay on behalfof the Executive Insured all sums which the Executive Insured shall become legally obligated to pay as damages resulting from any claim or claims first made against the Executive Insured and reported in writing to the Company during the Policy Period orthe Extended Reporting Period (if applicable) for any Wrongful Act ofthe Executive Insured or of anyNo. 68478-7-1/5 

### other person forwhose Wrongful Act the Executive Insured is 

### legally responsible, but notWrongful Acts towhich Coverage A or Coverage Dapplies or would apply if it had been effected under this policy, and only ifsuch Wrongful Actoccurs prior to the end of 

### the Policy Period; and with respectto the Entity Insured including amounts which the Entity Insured is permitted or required to pay as indemnification for such liability ofthe Executive Insured. This Coverage C shall not apply to Executive Insureds ofthe Funds for 

### anyWrongful Act in their capacity as such.[2] The AISLIC policy defines "Wrongful Acts"as "anybreach of duty, neglect, error, misstatement, misleading statement, omission or other act wrongfully done or attempted by the Insured." The AISLIC policyexpressly excludes from coverage "any claim arising out of, based upon or attributable to the committing in fact ofany criminal or deliberate fraudulent act by any Insured, or any knowing orwillful violation of any statute by any Insured." The policy also excludes "any actual or alleged Wrongful Act committed with knowledge that is was a Wrongful Act" and "any actual or alleged Wrongful Act occurring prior to the Continuity Date specified in Item 6 ofthe Declarations, if on or before such Continuity Date any Insured knew of such Wrongful Act or could have 

### reasonablyforeseen that suchWrongful Actcould lead to a claim."3 The Internal Revenue Service (IRS) audited the tax returns ofthe six Quellos clients who used the POINT tax shelter. In February 2005, the IRS subpoenaed POINT transaction documents from Quellos. The IRS denied the tax benefits claimed by the Quellos clients. In June 2005, one ofthe POINT tax shelter clients notified Quellos ofthe intent to file a lawsuit. In March 2006, Quellos entered into a settlementwith the client, and the client agreed to release all claims against Quellos and its directors and officers. In



### 2(Emphasis in original.) 3The"Continuity Date" isSeptember20, 2000.No. 68478-7-1/6 

### March 2006, another POINT clientthreatened legal action. In November 2007, Quellos entered into a settlement agreement, and the clientreleased all claims against Quellos and its directors and officers. In September 2005, the United States Senate Permanent Subcommittee on 

### Investigations of the Committee on Homeland Security and Governmental Affairs (Senate Subcommittee) initiated an investigation and subpoenaed information from 

### Quellos about the POINTtax shelter strategy. Former Quellos CEO Jeffrey Greenstein
testified before the Senate Subcommittee. On August 1, 2006, the Senate Subcommittee issued a report on Tax Haven Abuses: The Enablers. the Tools and Secrecy. 109th Cong. 1. The report describes the Quellos POINT tax shelter as a complex securities transaction "aimed at sheltering



### over $2 billion incapital gains from U.S. taxes, relying inpart on offshore secrecy to shield its workings from U.S. law enforcement." Tax Haven Abuses, at 3. InJuly 2007 and June 2008, the United States Attorney's Office for the Western District ofWashington issued subpoenas to Quellos to obtain information and documents related to the POINT transactions, and convened a grandjury. In 2008, the State of California Franchise Tax Board (Board) audited the tax

return of a Quellos client who used the POINT tax shelter. The Board concluded the 

### POINT tax shelterwas fraudulent and assessed approximately $1 million inpenalties against Quellos. In December 2009, the United States Attorney filed an indictment charging Greenstein and Wilkwith conspiracy to defraud the IRS, tax evasion, counseling false tax returns, wire fraud, and conspiracy to launder monetary instruments. Inthe 42-pageNo. 68478-7-1/7 

### indictment, the United States Attorney alleges thatfrom 1999to2001, Greenstein, Wilk, and others designed, marketed, and implemented POINTas a "pre-ordained series of 

### shamtransactions

... forthe sole purpose ofproviding a meansforwealthy individuals to reduce and/or defer the payment oftaxes on capital gains income." 

### On September 10, 2010, Greenstein andWilk pleadedguiltytoconspiracyto defraud the IRS of $240 million in taxes. Greenstein and Wilk admitted that they conspired with others to defraud the IRS by designing and promoting the fraudulent POINT tax shelter. Greenstein and Wilk admitted, in pertinent part: Beginning in 1999 and continuing through 2005, Jeffrey Greenstein, togetherwith Charles Wilk, and others conspired and agreed to defraud 

### the Internal Revenue Service by designing, promoting, and implementing a fraudulent tax shelter, which they referred to by the acronym, POINT, and by directly and indirectly deceiving and lying to the IRS during examinations ofreturns that taxpayers filed in reliance upon POINT. To 

### accomplish the objective of this conspiracy, Jeffrey Greenstein and Charles Wilkworked with individuals at European American Investment 

### Group (EURAM) to create fictitious losses through the purported purchase and sale of "synthetic" stock with a paper value exceeding $9.6 Billion between two Special Purpose Vehicles (SPV's), Isle of Man businesses, Jackstones, Ltd., and Barnville, Ltd, which had no assets. In truth there was no actual stock; no purchase and sale of actual stock; no paymentfor actual stock, and no basis in stock. These fictitious losses were used in 

### POINT to offset approximately equal dollar amounts of real capital gains, thereby deferring substantial capital gains taxes. As part ofthe conspiracy and infurtherance of it, Jeffrey Greenstein and Charles Wilk told wealthy individuals and their advisors with substantial capital gains that they could defertaxes on such capital gains by participating in POINT. The defendants then provided and caused to be provided to these willingtaxpayers, information and documentation for POINT that they knew were false. They also provided these taxpayers with legal opinions, based upon the same false information and documentation, that attested to the probable legitimacy of POINT. Defendants knew these opinions relied on false information and documentation. The taxpayers, in reliance upon the losses generated by POINT, filed individual and partnership returns in which they claimed huge losses as a means of offsetting real capital gains, thereby deferring taxes of approximately $240 Million. When these returns came underaudit, theNo. 68478-7-1/8 

### defendants gave the taxpayers and their advisors the same false information and documentation and the defendants knew that the taxpayers and their advisors would use the false information and 

### documentation inresponding to the IRS. The false information and 

### documentation purportedly explained the genesis and business purpose of the POINT strategy. 

### Quellos sought reimbursementfrom AISLIC, Federal, and Indian Harborforthe policy period ofSeptember21, 2004 to September21, 2005 forthe POINTtransaction 

### settlements and costs related to thegovernment investigations.4 In addition toseeking approximately $35 million for the settlements with the individual investors, Quellos sought approximately $45 million indefense costs and other costs incurred in connection with the investigation ofthe IRS, the Senate Subcommittee, and the United States Attorney. AISLIC determined that Quellos was entitled to coverage underthe 2004-2005 

### policy for $4,982,974 ofthe $10 million policy limit. Federal and Indian Harbor refused to pay under a reservation ofrights and on the grounds that the underlying insurance
limits had not been exhausted. In December 2010, Quellos filed a breach of contract and declaratoryjudgment action againstAISLIC and excess insurance carriers Federal, Indian Harbor, Steadfast Insurance Company, and Nutmeg Insurance Company. Quellos alleged the insurance carriers breached the terms ofthe insurance policies issued from 2000 through 2006 by denying coverage for defense and other costs related to the investigations and POINT transactions.5

4Quellos did not seek coverage underthe2000-2004 policies for itsclaims related to thePOINT transactions. 5 Quellos purchased additional excess coverage from September21, 2000 to September21, 2004 from AISLIC, Steadfast, and Nutmeg that is not relevant to this appeal. 8No. 68478-7-1/9 

### AISLIC, Federal, and Indian Harbor denied Quellos was entitled to coverage for defense and other costs under the terms of the policies. In addition to asserting the claims were barred bythe AISLIC policyexclusions, including the exclusion for "any actual or alleged Wrongful Act committed with knowledge that itwas a Wrongful Act," the excess carriers asserted coverage was not triggered untilafter Quellos exhausted underlying coverage and policy limits. InJune 2011, Quellos entered into a global settlement agreementwith AISLIC. Inthe "Confidential Settlement and Release Agreement" dated June 27, 2011, AISLIC agreed to pay $5 million under the excess policy thatAISLIC issued in 2000 for contingent deferred swap transactions, and $10 million underthe 2006 AISLIC primary policy inconnection with a Texas lawsuit. AISLIC did not agree to pay any additional amounts underthe 2004-2005 policy. In an effort to triggerthe excess insurance coverage for the 2004-2005 policy period, Quellos agreed to pay the gap between the 

### $10 million liability limit and the approximately $5 million AISLIC had previously agreed to pay under the 2004-2005 policy. The excess carriers filed a motion for summaryjudgment dismissal ofthe breach ofcontract and coverage claims on the grounds that the Wrongful Act and other 

### exclusions inthe AISLIC policy barred coverage for defense and othercosts related to the fraudulent POINT tax shelter. Federal and Indian Harbor also filed a separate 

### motion for summaryjudgmentdismissal on the grounds that under the express terms of the policies, the failure to exhaust primary coverage was an absolute barto excess insurance coverage.No. 68478-7-1/10 

### Quellosfiled a crossmotionfor "Partial SummaryJudgment Regarding Exhaustion of Underlying Limits ofInsurance." Quellos conceded the settlement 

### agreementwith AISLIC released AISLIC from any further liability under the 2004-2005 policy, that AISLIC paid only approximately one-half of the policy limits for the 2004- 2005 policy period, and the settlementagreementdid not allocate any additional payments for the 2004-2005 policy period. Quellos argued that a literal interpretation of the exhaustion requirement violated the policy of promoting settlements. In the alternative, Quellos argued that because the exhaustion requirements function as "a condition to coverage," the excess carriers waived the right to invoke the condition and could not establish breach ofthe exhaustion requirement was either material or prejudicial. 

### The court granted inpart and denied in part the motion for summaryjudgment on the exclusions. The court ruled, in pertinent part: "Each ofthe Exclusions apply to Quellos's claims, but there are genuine issues ofmaterial fact as to which amounts sought by Quellos in this action are covered, if any, and which are not." The court granted the excess carriers' motion for summaryjudgmentfor failure to exhaust the underlying coverage and policy limits. The court ruled that underthe plain and unambiguous language ofthe policies, Quellos did not exhaust the underlying limits of liability. And in this particular case the court finds that neitherthe Federal Insurance Company policy nor the Indian Harbor Insurance Company policy language are ambiguous, and ifthey're not ambiguous, the court willgive effectto the policy language that the parties entered into and therefore the cases, virtually all ofthe cases that the plaintiff cites to the court on this particular issue, are not applicable and are fully distinguishable.

10No. 68478-7-1/11 

### [T]heWashington cases do not actually construe condition as - the term condition as broadly as the policy holder here would ask us to do and 

### simplythere is a substantial difference between a grant ofcoverage and conditions to that coverage itself. 

### And in this particular case, the attachment point or underlying limit or however you want to characterize it,that particular issue is the essential 

### characteristic of an excess insurance. Imean, that is, essentially, what distinguishes it from anything else. Itfollows form, essentially, to the primary insurance and the only difference is the attachment point. Imean, that is the one distinguishing factor.



### ... It is thatfactor which basically is the defining aspect ofexcess insurance policy itself. So it is not a mere condition to coverage that is susceptible to the prejudice analysis, but rather, it is the defining characteristic ofan excess insurance policy. The court entered a finaljudgment under CR 54(b). The "Corrected CR 54(B) Stipulation Re Final Judgment" states, inpertinent part: Since Quellos' claims against Federal and Indian Harbor arise from the POINT Claims and are unrelated to Quellos' claims against Nutmeg, which arise out of.

. . separate and distinct.

. . Transactions, there is no just reason for delay ofentry of a final and appealablejudgment as to the summaryjudgment orders dismissing Quellos' claims against Federal and Indian Harbor. There is no reason to delay the process towards resolving the disputes between Quellos and Federal/Indian Harbor.
ANALYSIS Quellos contends the court erred by dismissing the lawsuit against excess 

### carriers Federal andIndian Harborforfailure to exhausttheunderlying policy limits.6 In

an effort to avoid the exhaustion requirement and shift the burden to the excess carriers, Quellos argues exhaustion is a condition and the excess carriers did not establish either material breach or prejudice. The excess carriers assert exhaustion of

6Federal andIndian Harborfiled a cross appealchallenging denial ofthemotion for summary judgmenton the policy exclusions. Adenial of summaryjudgment is not an appealable order. RAP 2.2(a)(1); In re Estate ofJones. 170 Wn. App 594, 605, 287 P.3d 610 (2012) ("denial of a summary judgment motion is not a final orderthat can be appealed"). While the corrected CR 54(b) finaljudgment lists the ordergranting inpart and denying in part the motion for summaryjudgment regarding policy exclusions, the orderexpressly finds thatthe final and appealablejudgmentrelates only to dismissing the claims against Federal and Indian Harbor. 11No. 68478-7-1/12 

### the primary policylimits is the critical and defining feature ofexcess policy coverage and underthe plain and unambiguous language ofthe excess insurance policies, the court did not err ingranting summaryjudgment dismissal. We agree withthe excess carriers. We review summaryjudgmentde novo. Smith v. Safeco Ins. Co., 150Wn.2d 

### 478, 483, 78 P.3d 1274 (2003). Interpretation of an insurance contract is a question of law that we also review de novo. Overton v. Consol. Ins. Co., 145 Wn.2d 417, 424, 38 P.3d 322 (2002); McDonald v. State Farm Fire &Cas. Co.. 119 Wn.2d 724, 730-31, 837 P.2d 1000 (1992). We construe an insurance policy inthe same manner as a contract. Quadrant Corp. v. Am. States Ins. Co.. 154Wn.2d 165, 171, 110 P.3d 733 (2005). The policy should be read as a whole and given a fair, reasonable, and sensible construction

as would be given to the contract by the average person purchasing insurance. Am. Nat'l Fire Ins. Co. v. B&L Trucking & Constr. Co.. 134 Wn.2d 413, 427-28, 951 P.2d 250 (1998). The insured has the burden ofestablishing coverage. McDonald. 119Wn.2dat

731. 

### When interpreting an insurance contract, our primary goal is to determine the intent ofthe parties and view the contract as a whole; a phrase cannot be interpreted in isolation. Allstate Ins. Co. v. Peaslev. 131 Wn.2d 420, 424, 932 P.2d 1244 (1997). "[A] 

### court must construe the entire contracttogether so as to give force and effectto each clause." Pub. Util. Dist. No. 1 of Klickitat County v. Int'l Ins. Co.. 124 Wn.2d 789, 797, 881 P.2d 1020 (1994). "[T]he expectations ofthe insured cannot override the plain 

### language of the contract." Quadrant. 154 Wn.2d at 172. A provision is ambiguous only if on itsface, it is fairlysusceptible to more than one reasonable interpretation. Quadrant, 154Wn.2d at 171. Ifthe policy language is clear and unambiguous, we must

12No. 68478-7-1/13 

### enforceit as written and notmodifythe insurance contract or create ambiguity where noneexists. Quadrant. 154 Wn.2d at 171. 

### Anexcess insurance policyprovides coverage "over and above that available through an underlying policy." Christal v. Farmers Ins. Co. ofWash.. 133 Wn. App. 186, 195, 135 P.3d 479 (2006). The critical and distinctive feature of an excess insurance 

### policy is that itprovides coverage "onlyafterthe primary coverage is exhausted." Diaz

v. Nat'l Car Rental Svs.. Inc.. 143 Wn.2d 57, 62, 17 P.3d 603 (2001). Federal issued a first-tier excess insurance policy for the policy period of September 21, 2004 to September 21, 2005 with a liability limit of $10 million. The

excess coverage is subject to the terms and conditions ofthe primary AISLIC policy, and attaches only afterAISLIC pays "in legal currency the full amount ofthe Underlying Limit." The Federal excess policy states, in pertinent part: In consideration ofthe payment ofthe premium and subjectto the Declarations, limitations, conditions, provisions and other terms ofthis policy, the Company agrees as follows: Insuring Clause 1. The Company shall provide the Insureds with insurance during the Policy Period excess of the Underlying Limit. Coverage hereunder shall attach only after the insurers ofthe Underlying Insurance shall have paid in legal currency the full amount ofthe Underlying Limit for such Policy Period. Coverage hereunder shall then apply inconformance with the terms and conditions ofthe Primary Policy as amended by any more restrictive terms and conditions of any other policy designated in Item 4(B) ofthe Declarations, except as 

### otherwise provided herein.[7]

7{Second emphasisadded.) 13No. 68478-7-1/14 

### The Federal policy defines the "Underlying Limit" to mean "the amount equal to the aggregate of all limits of liabilityas setforth in Item 4 ofthe Declarations for all 

### Underlying Insurance, . . . plus the applicable uninsured retention, ifany, underthe Primary Policy." The Federal policydeclarations identifythe "UnderlyingInsurance" as the "Primary Policy" issued by AISLIC. Other sections ofthe Federal policy reiterate the requirement to exhaust underlying limits through payment by the underlying insurer. The "Maintenance of Underlying Insurance" section states: AllUnderlying Insurance shall be maintained in full effect during the Policy Period and shall afford the same coverage provided by all Underlying Insurance in effect upon inception ofthis Policy Period, except for any depletion or exhaustion ofthe Underlying Limit solely by reason of 

### payment of losses thereunder.® The "Depletion of Underlying Limits" section ofthe Federal policy states: Only in the event ofexhaustion ofthe Underlying Limit by reason ofthe Insurers ofthe Underlying Insurance, or the Insureds in the event of financial impairment or insolvency ofan insurer ofthe Underlying Insurance, paving in legal currency loss which, exceptfor the amount thereof, would have been covered hereunder, this policy shall continue in 

### force as primary insurance, subjectto itsterms and conditions and any retention applicable to the Primary Policy, which retention shall be applied to any subsequent loss inthe same manner as specified inthe Primary Policy.The risk ofuncollectability ofany Underlying Insurance, whether because offinancial impairment of insolvency of an underlying insurer or any other reason, is expressly retained by the Insureds and is not inany 

### way insured or assumedbytheCompany.[9] Indian Harbor issued a second-tier excess insurance policy for the policy period 

### ofSeptember21, 2004 to September21, 2005 with a liability limit of $20 million. The Indian Harborpolicy is subjectto the terms and conditions ofthe AISLIC primary policy

8(Emphasisadded.) 9(Emphasisadded.) 14No. 68478-7-1/15 

### and the terms andconditions oftheFederal excess policy. TheIndian Harborpolicy does notprovide coverage until all of the underlying insurance has been exhausted "by the actual payment ofloss by the applicable insurers." 

### The "Insuring Agreement" of the Indian Harbor policystates, in pertinent part: The coverage hereunderwill attach onlyafter all of the Underlying Insurance has been exhausted by the actual payment ofloss by the 

### applicable insurers thereunder and in no eventwill the coverage underthis 

### Policybe broaderthan the coverage under anyUnderlying Insurance.[10] The Indian Harbor policydefines "UnderlyingInsurance" as the AISLIC primary policy and the first-layer Federal excess policy. The Indian Harbor policy reiterates the requirement ofexhaustion of all underlying insurance by actual payment ofloss by the insurer inthe "Depletion of 

### Underlying Limits ofLiability" and "Maintenance of Underlying Insurance" provisions. The Depletion of Underlying Limits of Liability provision states: (A) This policy, subjectto the terms, conditions, limitations and endorsements ofthis Policy and the Underlying Insurance, will continue to apply to loss as excess insurance remaining under such Underlying Insurance, in the event ofthe reduction or exhaustion of the limits of liability ofthe Underlying Insurance solely as the result ofthe actual payment of loss by the applicable insurer thereunder. (B) This Policy, subject to the terms, conditions, limitations and endorsements ofthis Policy and the Underlying Insurance, will continue for subseguent claims or loss as primary insurance in the event ofthe exhaustion ofall ofthe limits of liability of such Underlying insurance solely as the result ofthe actual payment of loss by the applicable insurer thereunder. (C) Any risk ofuncollectibility with respect to the Underlying Insurance willbe expressly retained by the Insured and willnot be assumed by the Insurer. This Policy, subjectto all its terms, conditions and endorsements, will not drop down for any reason including, but not limited to uncollectibility (in whole or in part) whether because offinancial impairment or insolvency ofthe Underlying Insurance or for any 10 (Emphasis added.; 15No. 68478-7-1/16
other reason except for the actual payment ofloss by the applicable Insurer thereunder.[11] 

### The Maintenance ofUnderlying Insurance provisionstates, in pertinent part: The limit(s) ofliability ofthe Underlying Insurance designated in ITEM 4 of the Declarations shall be maintained during the Policy Period in full effect except for any reduction or exhaustion ofthe aggregate limits of liability available under the Underlying Insurance solely by reason of actual 

### paymentof lossthereunder.[1^ Ininterpreting the provisions ofthe excess insurance contracts as a whole, the 

### plain and unambiguous language compels the conclusion that excess coverage was not triggered by the agreement ofQuellos to pay the policy limits ofapproximately $5 million thatAISLIC refused to pay. Under the Federal and Indian Harbor policies, the excess carriers agreed to provide coverage only after exhaustion by payment ofthe insurer of the underlying policy limits. The Federal policy requires payment by primary insurer AISLIC "inlegal currency" for the fullamount ofthe underlying insurance. The Indian Harbor policy states that coverage does not attach unless the underlying insurance coverage is exhausted by the "actual payment" ofthe claim by underlying insurers
AISLIC and Federal. Use ofthe language "only after" inthe insuring clause in the policies does not

mean that the requirement thatthe insurer must pay the full amount ofthe underlying policy limits before the excess insurer is obliged to provide coverage is a condition. The language "only after" reflects the distinguishing characteristic and function of an excess insurance policy. The terms of an insurance agreement establish whether the function ofthe policy is to attach coverage immediately upon the happening of an accident (inwhich case the policy is primary), or whetherthe function of 11 (Emphasisadded.] 12 {Emphasis added.] 16No. 68478-7-1/17 

### the policy is to providecoverage only after the primarycoverage is exhausted (inwhich case it is excess). Diaz. 143Wn.2dat62.13 

### We also reject the argument that the exhaustion requirement should be treated in the same manner as a cooperation or notice requirement. Incontrast to a cooperation

or no-settlement clause, the requirement thatthe underlying insurer mustfirst pay the full amount ofthe underlying policy limits in orderto trigger excess insurance coverage does not "designate the manner in which claims covered by the policy are to be handled

once a claim has been made." Klickitat County. 124 Wn.2d at 803; Or. Auto. Ins. Co. v. 

### Salzberg. 85Wn.2d 372, 377, 535P.2d 816(1975).14 Rather, thepolicies unambiguously state how the underlying insurance is exhausted. See also Goodyear Tire & Rubber Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh. Pa.. 694 F.3d 781, 783 (6th Cir. 2012) ("[T]his case does not concern a mere notice or cooperation requirement 

### Rather, the provision at issue here is where the rubber hits the road: the agreement's 

### Insuring Clause, underwhose terms [the insurer] undisputedly did not agree to provide the coverage that [the insured] now seeks."). Inthe alternative, Quellos asserts that a literal interpretation ofthe standardized 

### language in the excess policies to preclude Quellos from paying the approximately $5 million gap contravenes the public policy in favor ofsettlements, and produces an absurd result.15

13 (Emphasis added.) 14 Quellos cites and relies on a number of unpublished cases that are neither precedential nor persuasive. 15 Quellos also claims that the excess carriers waived the right to demand compliancewith the exhaustion requirement. Butthe record shows thatAISLIC consistently denied liability for the policy limits under the terms of the 2004-2005 policy. The excess carriers also consistently identified the exhaustion requirement. 17No. 68478-7-1/18 

### The record does not supportthe assertion that the exhaustion provision in the 

### Federal and Indian Harbor policies is standardized language. Unlike the language in the Federal and Indian Harbor policies, the excess insurance policy issued byAISLIC 

### for 2000 to 2002 allowed Quellos to pay underlying policylimits inorderto trigger

excess insurance coverage. The AISLICexcess policy provided, inpertinent part: It is expressly agreed that liabilityfor any covered Loss with respect to Claims first made against the Insureds during the Policy Period and the Discovery Period (ifapplicable) and reported in writing to the Insurer pursuant to the terms ofthis policy shall attach to the Insurer only afterthe Underlying Insurers and/or the Insureds or the Company shall have paid the fullamount ofthe Total Underlying Limits, and the Company or the Insureds shall have paid the full amount ofthe applicable Retention amount under any Underlying Policy. Inthe event, and only in the event, ofexhaustion ofthe Total Underlying Limits by reason ofthe Underlying Insurers and/or the Insured orthe Company paying Loss covered thereunder, this policy shall: (i) inthe event of reduction, pay excess of the reduced Total Underlying Limits, and (ii) in the event of exhaustion, 

### continue inforce as primary insurance.1161
The record also shows that an amendment was available from Indian Harbor that allowed the insured as well as the underlying insurerto pay the full amount ofthe 

### underlying policy limits totriggerexcesscoverage.17 Neither the Washington Supreme Court's decision in Seafirst Center Limited Partnership v. Erickson. 127 Wn.2d 355, 898 P.2d 299 (1995), norZeig v. Massachusetts Bonding & Insurance Co.. 23 F.2d 665 (2d Cir. 1928), support the



### 16 (Emphasis added.) 17 In consideration of the premium charged, SectionIII Depletion ofUnderlying Limits of Liability (C) ofthe Policy is amended to read in its entirety as follows: (C) Any risk ofuncollectibility withrespectto the Underlying Insurance will be expressly retained by the Insured and will not be assumed by the Insurer. This Policy, subject to its terms, conditions and endorsements, will not drop down for any reason including, but notlimited to uncollectibility (in whole or in part) whether because of financial impairmentor insolvency of the Underlying Insurance or for any other reason except for the actual payment ofloss by the applicable Insurer thereunder or the Insured. (Emphasis added) (internal quotation marks omitted). 18No. 68478-7-1/19 

### argumentthat publicpolicy should override the unambiguous exhaustion language in the Federal and Indian Harbor policies. InSeafirst. the court did not rewrite the plain and unambiguous terms of the contract. The court abrogated the common law rule ofdischarge for settlements that involve joint contractual obligations. Seafirst. 127 Wn.2d at 364. InZeig and the other



### cases Quellos cites that follow Zeig. there was either an ambiguity inthe definition of "exhaustion" or a lack of specificity inthe policy language as to how to exhaust primary insurance. See Zeig. 23 F.2d at 666; see also Stargatt v. Fid. & Cas. Co. of N.Y.. 67 F.R.D. 689 (D. Del. 1975) (policy did not define "exhaustion"); Reliance Ins. Co. v. Transamerica Ins. Co.. 826 So. 2d 998 (Fla. Dist. Ct. App. 2001) ("exhaustion" not defined). In Zeig. the excess insurance policy required exhaustion ofthe underlying policy, but was silent about whether the full amount ofthe underlying policy needed to be 

### collected or actually paid out before the excess policywas triggered. The Second Circuit held the underlying policywas exhausted by a settlement agreement and public policy favoring settlement supported that conclusion. Zeig. 23 F.2d at 666. The defendant argues that itwas necessary forthe plaintiffactually to collectthe full amount ofthe policies for $15,000, inorderto "exhaust" that insurance. Such a construction ofthe policy sued on seems 

### unnecessarily stringent. It is doubtless true that the parties could impose such a condition precedentto liability upon the policy, ifthey chose to do so. But the defendant had no rational interest in whether the insured collected the full amount ofthe primary policies, so long as itwas only 

### called upon to pay such portion ofthe loss as was inexcess ofthe limits of those policies. To require an absolute collection ofthe primary insurance to its full limit would in many, if not most, cases involve delay, promote 

### litigation, and prevent an adjustment ofdisputes which is both convenient and commendable. A result harmful to the insured, and ofno rational

19No. 68478-7-1/20 

### advantage to the insurer, ought only to be reached when the terms of the contract demand it. Zeig. 23F.2dat666. 

### Here, unlike in Zeig. the plain and unambiguous language of the excess insurance policies unambiguously states how the underlying insurance is exhausted. The policies require the underlying insurerto pay the full amount of its limits ofliability before excess coverage is triggered. AISLIC paid only approximately one-halfof the $10 million policy limits and continued to dispute whether Quellos was entitled to coverage under the 2004-2005 policy for defense and other costs related to the investigations into the fraudulent POINT tax shelter scheme. See also Citigroup. Inc. v. Fed. Ins. Co.. 649 F.3d 367, 372 (5th Cir. 2011) ("the plain language ofthe [excess insurance] policies dictate thatthe primary insurer pays the full amount of its limits of liability before excess coverage is triggered"); Qualcomm, Inc. v. Certain Underwriters at Lloyd's. London. 73 Cal. Rptr. 3d 770, 785 (Cal. Ct. App. 4 2008) (because the exhaustion language inthe excess policy unambiguously precluded coverage, the court 

### rejected argument that the public policy promoting settlement contravened the policy language). Because the exhaustion language inthe Federal and Indian Harbor excess 

### insurance policies is clear and unambiguous, we must enforce itas written, and affirm summaryjudgment dismissal ofthe lawsuit against Federal and Indian Harbor. However, because the order to seal "Exhibit G," "PlaintiffQuellos Group LLC's 

### Responses and Objections to Defendant Indian Harbor Insurance Company's FirstSet ofInterrogatories to Plaintiff," does not comply with GR 15 or Seattle Times Co. v.

20No. 68478-7-1/21 

### Ishikawa, 97 Wn.2d 30, 640 P.2d 716 (1982), we remand to considerwhetherto seal Exhibit G.18 

# SgiO*,vtQQ

WE CONCUR: 

# T^ec^og;

18 On appeal, theparties submitted a "Stipulated Motion to SealExhibit Previously Sealedin the Trial Court and Regarding Continued Protection of ConfidentialInformation," Exhibit G to the "Declaration of Gary P. Seligman inSupportof Defendant Federal Insurance Company's Motion for Summary Judgment." Because the trial court order does not complywith GR 15 and the record does not indicate that the court addressed Ishikawa, we deny the stipulated motion to seal the unredacted Exhibit G, and remand. 21