Exhaustion Of Primary Coverage:

5th Cir. Rejects Excess Insurers’ Assertion That Their Policies Are Only Triggered When Underlying Policies Are Exhausted By Claims Covered By Their Excess Policies

The Fifth Circuit Court of Appeals, applying Texas law, held that the retained limits of excess policies are satisfied where the underlying policies are exhausted by claims that are not covered under the excess policies.

In September 2008, W&T Offshore, Inc. (W&T), an energy exploration and development company, sustained substantial damages to its offshore operations as a result of Hurricane Ike.  W&T purchased three types of insurance policies to indemnify itself against hurricanes:  (1) a primary level commercial general liability policy; (2) five energy package policies; and (3) four umbrella/excess policies (umbrella policies).  The primary and energy package policies covered first-party property and Operators’ Extra Expenses (OEE) that are incurred by W&T itself.  The umbrella policies did not cover first-party risks such as property damage and OEE; they provided coverage for third-party claims against W&T.  All policies, however, covered Removal of Debris (ROD) expenses.

Hurricane Ike allegedly damaged 150 offshore platforms in which W&T had an interest.  W&T submitted enough claims for property damage and OEE to exhaust the limits of its primary and energy package policies.  Thus, W&T planned to submit its $50 million in ROD expenses to the umbrella insurers.

The umbrella insurers filed suit seeking declaratory judgments that W&T’s claims are not covered under the umbrella policies, because the Retained Limit of those policies had not been exhausted.  The district court agreed with the umbrella insurers and granted summary judgment in their favor.  W&T appealed.

The umbrella policies were subject to a Retained Limit, which was the greater of either:  (1) the total applicable limits of underlying insurance, or (2) the amount stated in the declarations as a self-insured retention (SIR) as a result of an occurrence not covered by underlying insurance.  The total amount of underlying insurance exceeded the SIR stated in the declarations.  Relying on Section III.D of the policy, the umbrella insurers argued that the retained limit was only satisfied if the underlying insurance was exhausted through the payment of claims that were covered by their umbrella policies.  Section III.D of the umbrella policies provides that “the Each Occurrence Limit” is the most the insurers will pay for claims covered under the insuring agreement.  The umbrella insurers argued that the “covered under the insuring agreement” language of Section III.D requires that the underlying limits be exhausted by claims “covered under” the umbrella policies’ insuring agreement.

TThe Court of Appeals rejected the umbrella insurers’ argument, finding that Section III.D outlines the most the umbrella insurers will pay under various scenarios, but it makes no claim regarding the breadth of coverage or the requirements for exhausting the Retained Limit.  The Court found that other provisions in the umbrella policies supported W&T’s interpretation, and determined W&T had satisfied the Retained Limit, thereby triggering coverage under the umbrella policies.  Indemnity Insurance Co. of North America v. W & T Offshore, Inc., No. 13-20512, (5th Cir. June 23, 2014).



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