In Amerisure Mutual Insurance Co. v. Arch Specialty Insurance Co., -- F.3d --, 2015 WL 1811843 (5th Cir. Apr. 21, 2015), the United States Court of Appeals for the Fifth Circuit, applying Texas law, reversed in part a grant of summary judgment against a general liability insurer, agreeing with the insurer that attorneys’ fees and defense costs incurred in defending its policyholder qualified as “expenses” that eroded the limits of its policy.
Amerisure involved a dispute between an excess liability insurer, Amerisure Mutual Insurance Co., and a primary liability insurer, Arch Specialty Insurance Co. Amerisure sued Arch for breach of contract after Arch withdrew its defense of the underlying policyholder, who had been sued for faulty construction work. Id. at *1–2. Arch had withdrawn its defense on the ground that its policy limits were exhausted, in part by the attorneys’ fees and other costs it incurred in defending the policyholder. Id. at *1. Amerisure, which was forced to take over the defense, argued that defense costs did not erode the limits of Arch’s policy, and therefore Arch’s refusal to defend and indemnify the policyholder was wrongful. Id. at *2.
Amerisure’s and Arch’s arguments focused on the meaning of the word “expenses,” as it was used in Arch’s policy. An endorsement to the policy stated that “[a]ll expenses we incur” in investigating, settling, or defending a claim will reduce the limits of insurance under the policy. Id. at *2–3. The policy did not define “expenses.” Id. at *3. Amerisure argued that the term “expenses,” when read in the context of other policy provisions, did not cover attorneys’ fees and other defense costs. Id. Specifically, Amerisure pointed to a separate provision that provided that Arch’s duty to defend expired when it “used up the [policy limits] in the payment of judgments or settlements.” Id.(emphasis added). The Fifth Circuit disagreed. It noted that “it has long been the law in Texas that the term ‘expense’ encompasses attorneys’ fees,” and it saw no reason to depart from that plain meaning under the policy. Id. at *4.
The Fifth Circuit further explained that the term “expenses” appeared in a specific endorsement regarding policy limits that took precedence over other general language in the policy. Id. The Fifth Circuit disagreed with the district court’s construction of the policy, under which legal costs could exhaust the insurer’s duty to indemnify but only “payment of settlements and judgments” could exhaust the insurer’s duty to defend. Id. Such a construction, the court explained, effectively read the endorsement on expenses out of the policy, as the insurer’s duty to defend would continue regardless of the amount of defense costs it incurred. Id. The more reasonable interpretation was that “the endorsement transforms the policy into an ‘eroding limits’ policy.” Id.
Finally, the Fifth Circuit rejected Amerisure’s argument that Arch had “wrongfully exhausted” the policy by paying for claims that were not covered under the policy’s “products-completed” coverage. Id. at *5. The Fifth Circuit expressed doubts about whether Amerisure could make such a claim under Texas law, but ultimately held that, even assuming such a claim could be made, it did not apply on the facts of the present case. Id.
Amerisure clarifies that the ordinary meaning of “expenses” under Texas law includes attorneys’ fees and other defense costs. This interpretation of expenses can be of particular significance where, as in Amerisure, expenses erode policy limits.