When a policyholder settles with its primary insurance carrier for less than the policy limits, can the umbrella and excess policies be triggered? It depends.

Numerous courts follow Zeig v. Mass. Bonding & Insur. Co., 23 F.2d 665 (2nd Cir. 1928) which held that an excess insurance company must pay if the claim costs reach the excess insurance company layer even though the underlying carrier pays less than its policy limits. Umbrella and excess insurance carriers often argue that unless the underlying primary policy pays all of its limits, their policies are not triggered. Some courts agree with this argument. See Citigroup, Inc. v. Federal Insurance Co., 649 F.3d 367 (5th Cir. 2011). The excess insurance carriers make this argument even if the policyholder pays the delta, the difference between the amount of the settlement and the insurance policy limit.

Reviewing the policy language is key.

In Plantation Pipe Line Co. v. Highlands Ins. Co., 444 S.W.3d 307 (Tex. App. Aug. 29, 2014), the policyholder, Plantation Pipe Line, had sought coverage from its primary and excess general liability insurance carriers seeking coverage for millions of dollars in remediation clean-up costs it had incurred. Plantation Pipe Line settled its claim with the primary, first layer and second layer excess carriers for less than the policy limits. When it sought coverage from the third layer excess carrier for the amount in excess of that carrier’s policy attachment point, the third layer excess carrier argued that the underlying coverage was not exhausted because the underlying carriers had not paid, nor been found to pay, their full policy limits. While the trial court agreed with the third layer excess carrier, the appellate court reversed and found in favor of Plantation Pipeline. The appellate court reviewed the policy language and found that the policy language did not require that the payment of losses be made solely by the underlying insurers. Thus, Plantation Pipe Line’s payments, combined with the payments made by the underlying insurers for the remediation costs, could trigger the third layer excess carrier’s policy.

A careful review of policy language, as well as applicable case law, should be undertaken to ensure that a policyholder can trigger umbrella and excess policies when the policyholder wants to settle a claim for less than the primary insurance carrier’s policy limits.