On July 9, 2009, a Texas federal court awarded in excess of $5.5 million in damages to an insured under a second-layer excess insurance policy, for claims arising out of Hurricane Katrina related damage. One of the main issues in contention was whether the second-layer excess insurer’s liability attached even if the underlying insurers had paid out their full limits of liability because they did not correctly determine coverage. ARM Properties Management Group v. RSUI Indemnity Co., Case No. A-07-CA-718-SS (W.D. TX, July 9, 2009). (Click here for a copy of the Opinion).
The Insured, ARM Properties Management Group, sustained damage to nine of its Mississippi-run properties, which were insured under the following policies: a primary insurance policy with a $20 million limit of liability; a first-layer excess insurance policy with a $10 million limit of liability; and a second-layer excess insurance policy with a $470 million limit of liability. Both the primary and first-layer excess insurers agreed to provide coverage for the damages, and each paid out its full limit of liability. The second-layer excess insurer, however, refused to provide coverage for the damages. ARM sued its second-layer excess insurer seeking a declaration from the court that coverage was owed.
The second-layer excess insurer filed three motions for summary judgment, each of which were denied in early 2009. The parties filed cross-motions for summary judgment on May 7, 2009. One of the main disputes at issue involves exhaustion of the underlying insurance and the second-layer excess insurance policy's attachment of liability. In its cross-motion, ARM argued that payment of the full limit of liability by the primary and first-layer excess insurers established that liability automatically attached to the second-layer excess insurer under its policy. However, the second-layer excess insurer argued that liability under its policy is not triggered if the underlying insurers did not correctly determine coverage.
As to the attachment of liability, the Court ruled in favor of ARM, determining that the second-layer excess policy did not provide the second-layer excess insurer with the right to determine whether coverage was properly determined by the underlying insurers. According to the Court:
This problem could have been easily remedied by a clarification in the RSUI [second-layer excess] policy that the policy attaches only upon full payment of claims properly covered by the underlying policies. But as the RSUI [second-layer excess] policy now stands, it simply states that it attaches when the underlying insurers have paid or admitted liability for the full limits of their respective policy. (Emphasis in original.)
In addition to the issue of policy exhaustion and attachment of liability, the Court ruled on issues relating to the valuation method to be used by the second-layer excess insurer, the second-layer excess insurance policy’s failure to adopt certain policy provisions in the primary policy, issues involving the anti-assignment clause and issues relating to settlement agreements entered into between ARM and the property owners. The Court ruled in favor of ARM on each issue, awarding ARM in excess of $5.5 million in damages.