In a recent case, the United States Court of Appeals for the Fifth Circuit considered whether a below-limit payment by a primary insurance carrier could trigger excess insurance coverage in circumstances where the policyholder settled the underlying action for an amount far in excess of primary insurance policy limits. Martin Resource Mgmt. Corp. v. Axis Ins. Co., No. 14-40512, 2015 U.S. App. LEXIS 18279 (5th Cir. Oct. 21, 2015).

The dispute originated when the policyholder was sued in Texas state court and settled the claim by paying roughly $70 million.  The policyholder then sued its primary insurance carrier for coverage in federal court.  The primary carrier eventually settled the policyholder’s claim by paying $6 million.  In the same action, the policyholder also sought excess coverage from its excess insurer.  The question was whether the primary insurer’s $6 million payment, combined with the policyholder’s settlement of the underlying suit, triggered the excess insurer’s excess insurance policy.  The Fifth Circuit held that it did not.

The Fifth Circuit first considered whether the excess-insurance policy language was ambiguous. The pertinent provision of the excess policy stated:

The Insurance afforded under this Policy shall apply only after all applicable Underlying Insurance…has been exhausted by actual payment under such Underlying Insurance, and shall only pay excess of any retention or deductible amounts provided in the Primary Policy and other exhausted Underlying Insurance.  (Emphasis added).

The Fifth Circuit found that this policy language was not ambiguous.  In making this determination, the court considered the policy language to determine:  (1) who must pay and (2) the amount that must be paid to exhaust the underlying primary insurance policy. The court answered the first question by focusing on the phrase “exhausted by actual payment under [the primary policy].”  The court rejected the policyholder’s argument that the primary insurance policy was “exhausted by actual payment” when the policyholder settled with the primary insurance carrier for $6 million and the policyholder “filled the gap” by paying amounts greatly exceeding the remaining primary insurance policy limit.  The court found that the policy language unambiguously required the primary insurance carrier itself to pay the full amount of its liability limit.

As to the amount that must be paid, the court found that the clear language of the excess insurance policy requires “actual payment” of “all applicable Underlying Insurance.”  The excess policy defines “Underlying Insurance” as the policies stated in the endorsement section, which identifies the primary insurance policy with a liability limit of $10 million.  Therefore, the court found that the amount that must be paid to exhaust the primary insurance policy is the $10 million policy limit.

As a result, the court held that the excess insurance policy is not triggered where “[the policyholder] pays the difference between [the primary insurance carrier’s] liability limit and a below-limit settlement releasing [the primary carrier] of any further obligations.”  In so holding, the Fifth Circuit affirmed the lower court’s decision granting summary judgment in favor of the excess insurer.