Why it matters

A Texas appellate court, reversing the trial court, ruled that a policyholder is entitled to coverage under a high-level excess policy even though the underlying insurers had not paid their full policy limits. The trial court had ruled that the insured forfeited its excess coverage by settling with its lower-level insurers for less than the full limits of those policies, even though the insured paid the resulting gap and was not asking the high-level excess insurer to “drop down.” The appellate court ruled that the policyholder could establish exhaustion through a combination of payments by insurers and the insured itself. This case is important in that a few recent cases from other jurisdictions had reached a contrary conclusion.

Detailed Discussion

Plantation Pipe operates pipelines that transport petroleum products across many southern states.

Plantation bought insurance consisting of levels of insurance with total limits of $8 million and a higher-level excess policy from Highlands Insurance Company that attached after exhaustion of the first $8 million in coverage.

One of Plantation’s pipelines leaked, and Plantation was required to remediate the site of the leak. Plantation notified all of its carriers, which all denied coverage. Before it knew the full extent of its loss, Plantation filed suit against the insurers at the first three levels based on the belief that its loss would not reach the Highlands policy.

Each of the three insurers underlying Highlands settled by agreeing to pay less than its full policy limit. Plantation received $4.55 million from those three insurers. The remediation costs, however, continued to mount, and Plantation eventually notified Highlands that it had incurred losses in excess of $8 million.

Highlands denied coverage on the ground that the underlying policies had to exhaust by payments by the insurers themselves. Plantation filed suit against Highlands, and the trial court ruled in favor of Highlands.

The appellate court reversed, holding that, under the language of the Highlands policy, exhaustion was appropriate as long as the underlying insurers and Plantation, collectively, paid the amount of the underlying limits ($8 million). “We believe that the language in the Highlands policy is unambiguous, and we see nothing that requires payment of losses solely by the insurers up to the attachment amount in the Highlands policy.”

To read the opinion in Plantation Pipe Co. v. Highlands Insurance Co., click here.