In a win for policyholders relying on multiple coverage layers, the Fifth Circuit held on June 23, 2014 that an excess liability insurance policy could be triggered by exhaustion of a “retained limit” - equal to the limits of underlying insurance - even if the amounts paid to meet the “retained limit” were not covered by the excess policy. Indemnity Insurance Co. of N. Am., et. al. v. W & T Offshore Inc., -- F.3d --, No. 13-20512 (5th Cir. June 23, 2014).
In W&T, the insured had submitted more than $150 million in property damage and operators extra expense claims to its primary “energy” carrier resulting from Hurricane Ike. W&T’s umbrella carriers did not insure property damage or operators’ extra expense incurred by W&T itself. The umbrella carriers therefore sought a declaratory judgment that the “retained limit,” necessary to trigger the umbrella coverage, had not been met. Instead, the umbrella carriers argued, only payments for claims that would have been covered by the umbrella policies could count toward proper exhaustion. While the district court agreed with the excess carriers, the Fifth Circuit reversed and rendered judgment for the insured.
In doing so, the court conducted a plain language analysis of the insuring agreement and ultimately determined that any damages in excess of the “retained limit” - whether covered or not covered by the umbrella policy - triggered the umbrella coverage. The Fifth Circuit found that the insured’s interpretation of the policies “fit neatly with (1) the plain text of the Coverage provision, (2) the definition of a Retained Limit, and (3) other contract provisions relating to coverage and payment.”
The plain text of the Coverage provision stated that the insurers are liable for “those sums in excess of the Retained Limit [defined as the greater of (1) the limits of underlying insurance, or (2) a specified self-insured retentions resulting from claims not covered by underlying insurance] that the Insured becomes legally obligated to pay by reason of liability imposed by law . . . .” But in denying coverage, the carriers relied upon a “limits of insurance” provision stating:
If the applicable limits of insurance of the policies listed in the SCHEDULE OF UNDERLYING INSURANCE or of other insurance providing coverage to the Insured are reduced or exhausted by payment of one or more claims that would be insured by our Policy we will:
- In the event of reduction, pay in excess of the reduced underlying limits of insurance; or
- In the event of exhaustion of the underlying limits of insurance, continue in force as underlying insurance. (emphasis added)
Because nothing in the Coverage provision specified how the limits of the underlying insurance must be exhausted, the Fifth Circuit rejected the insurers’ argument that exhaustion of the “retained limit” must occur through payment of claims covered by the umbrella insurance policy. In construing the “limits of insurance” provision relied upon by the carriers, the court held that the section simply describes what obligations the insurer will have “if” the limits of the underlying policies are reduced or exhausted by payment of claims insured under the umbrella policy. This reading, the court found, was consistent with other provisions in the umbrella policy requiring the insurer to defend the insured when the underlying policy limits are exhausted by claims covered by the umbrella policy.
The court’s decision turns on the specific terms in W&T’s umbrella policies, which the court contrasted with other umbrella contracts expressly denying exhaustion by uncovered claims. While policy terms may vary, depending on how the “retained limit” and related policy terms are phrased in a given policy, insureds may be able to pursue coverage under excess insurance policies as soon as the “retained limit” is exhausted, even when claims not covered by the excess insurance policies exhaust the underlying limits.