A reoccurring issue with excess insurance is whether a policyholder can trigger excess coverage by agreeing to a below-limits settlement with an underlying insurer, and filling in the gap between the settlement amount and the underlying policy’s limits of liability. Excess insurers often argue that their coverage obligation attaches only after the underlying carrier pays its full policy limits. While recent court decisions in several jurisdictions support the excess insurers’ position, a Texas appellate court’s opinion in Plantation Pipe Line Co. v. Highlands Ins. Co., No. 11-12-00029-CV, 2014 WL 4346160 (Tex. App. Aug. 29, 2014) bucks this trend. Like the earlier decisions supporting excess insurers’ positions, however, the result in Plantationturned on the court’s careful scrutiny of the policy language, further demonstrating that policyholders should negotiate the terms of excess – as well as primary – coverage during the renewal process.
In Plantation, the insured pipeline operator incurred more than $8 million in remediation costs because of a gas pipe leak and sought coverage from its primary and excess general liability insurers. The policyholder settled its dispute with its primary, first- and second-layer excess insurers for less than policy limits. When the policyholder turned to its top tier excess insurer to recover remediation costs above that policy’s $8 million attachment point, the insurer refused to pay, claiming that the policy limits of the underlying insurance had not been fully exhausted. The lower court agreed with the excess insurer, finding that the policyholder’s below-limits settlement did not trigger excess coverage because the underlying insurers had neither paid, nor been found liable to pay, the full limits of their respective policies.
On appeal, the court closely analyzed the excess policy’s “exhaustion clause,” which provided that liability would attach after the “Underlying Umbrella Insurers have paid or have been held liable to pay the full amount of their respective ultimate net loss liability…” (emphasis in original). The primary policy defined the term “ultimate net loss” to include payments by reason of adjudication or settlement. In its interpretation of the exhaustion clause, the court held that the policy language did not require payment of losses solely by the underlying insurers up to the attachment point. Accordingly, the court found that the policyholder’s and the underlying carriers’ combined payments of remediation costs triggered the excess coverage.
The Plantation case confirms that a policyholder’s ability to fill in gaps created by a below-limits settlement with an underlying carrier will depend upon the wording in its excess policy. Today, many policyholders avoid these issues by obtaining excess coverage that specifically recognizes that payments of underlying limits of liability by the insurers or the policyholder can constitute exhaustion. Although the Plantation case concerned the interpretation of general liability policies, these attachment issues also arise under more highly negotiated policy forms, such as Directors’ & Officers’ and other managed liability insurance.
For these reasons, insureds should seek guidance from experienced coverage counsel who can analyze an existing insurance program and work with insureds and their brokers to ensure their program provides necessary protections.