Why it matters

In a significant victory for policyholders, the Fifth Circuit ruled that the retained limits of a company’s underlying umbrella/excess liability insurance policies could be satisfied by payment of claims the umbrella policies themselves did not cover. The policies provided that the insurers were liable for damages in excess of the retained limits, but nothing in the policies specified how the retained limits could be satisfied. Thus when the policyholder faced claims arising from a hurricane, some of the claims were covered by the umbrella policy and some were not. Since payments up to the retained limits were not restricted to sums exclusively covered by those policies, the policyholder was credited with the payments made to satisfy the uncovered claims. The excess policies were deemed reached by those payments and required to pay the remainder of the claims that were covered by their policies. It is noteworthy that the excess carriers have just filed a request for rehearing of the case by the en banc Fifth Circuit.

Detailed Discussion

According to the underlying complaint, W&T allegedly sustained significant damage to over 150 of its offshore platforms as a result of Hurricane Ike. W&T, the insured, submitted more than $150 million in property damage and operators’ extra expense claims to its primary “energy” carrier, which satisfied the excess policies retained limit. While both the umbrella and energy/primary liability policies have been endorsed to cover removal-of-debris claims, the key difference between them is that the umbrella policies do not cover property damage or operators’ extra expenses that are incurred by W&T itself. They cover only claims against W&T by a third party.

The umbrella carriers, therefore, sought a declaratory judgment that the “retained limit,” necessary to trigger the umbrella policies, 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.

The district court ruled in favor of the plaintiffs, holding that umbrella policies take effect only when the primary/underlying policy’s retained limit is depleted first by claims also covered in the umbrella policies themselves.

The Fifth Circuit, however, reversed and rendered judgment in favor of W&T, ruling that where the terms of the contract are ambiguous, the court should adopt the interpretation that is most favorable to the insured. After examining the precise language of the contract between W&T and the underwriters, the appeals court ruled that the contract does not specify “how the limit of the underlying policies must be reached” or “state that the retained limit refers exclusively to sums covered by the umbrella policy.” Furthermore, the court ruled that the phrases from the coverage provision actually “fit neatly” into the policyholder’s argument, declaring W&T’s interpretation as “consistent” with the contract as a whole.

To read the decision in Indemnity Insurance Co. of North America v. W&T Offshore, Inc., click here.