A Qualcomm Case For Policyholders:  Texas Appellate Court Rules Oil Cleanup Settlement With Primary Insurers For Less Than Full Limits Does Not Preclude Access To Excess Coverage.

A Texas appellate court, applying Texas law, held that Plantation Pipe Line Company (“Plantation”) did not forfeit its excess insurance with Highlands Insurance Company (“Highlands”) by settling with underlying insurers for less than policy limits.

Plantation operates pipelines that carry petroleum products.  In 1975, it was discovered that there was a leak in one of Plantation’s underground pipelines.  Plantation repaired the leak after it was discovered and remediated the property.  In 1990, additional contamination was discovered, and Plantation was ordered to further remediate the leak site.  Plantation spent nearly $12 million in remediation costs.

During the relevant policy period, Plantation purchased several layers of insurance totaling $18 million.  Highlands issued a $10 million policy in excess of three underlying insurers who collectively issued $8 million in coverage.  Plantation settled with the three underlying insurers for $4.55 million.

Plantation demanded Highlands cover all remediation costs incurred in excess of $8 million.  Highlands refused, claiming it owed Plantation nothing because the policy limits of the underlying coverage had not been fully exhausted as required under the Highlands policy.  The trial court accepted Highlands’ argument and entered summary judgment in its favor.

On appeal, Highlands continued to argue that its policy required exhaustion of the “full policy limits” of underlying coverage.  The appellate court disagreed, finding that the Highlands policy did not contain those words.  The appellate court held that the Highlands policy did not require the payment of losses solely by the insurers up to the attachment amount.  It was enough that Plantation and its underlying insurers had incurred losses in excess of $8 million.  “We hold that, under the terms actually contained in the Highlands excess policy, coverage was triggered regardless of the settlement between Plantation and all of its other insurers.” Plantation Pipe Line Co. v. Highlands Ins. Co., No. D-1-GN-10-004057 (Tex. Ct. App. August 29, 2014).

The possibility of losing access to excess coverage by settling with underlying insurers for less than full limits has become known as the Qualcomm issue, due to the fact it was most famously applied in a case involving that company.  In Qualcomm, the policyholder forfeited its ability to access excess insurance by settling with underlying insurers for less than full policy limits.  A policyholder who wants to settle a multi-year, multi-policy case must consider the possibility that settling for less than full policy limits can result in losing all of the excess coverage in that year.  The law in this area is still developing, so policyholders should consult applicable law to determine how a settlement for less than full limits might impact their excess coverage.