“Qualcomm Rule” Applied Again: Excess Insurance Not Triggered Due to Insured’s Settlement With Underlying Primary Insurer For Less Than Policy Limitsshoke2013
The Fifth Circuit, applying Texas law, held that an excess insurance policy issued by Axis Insurance Company (“AXIS”) was not triggered because the insured, Martin Resource Management Corporation (“MRMC”), settled with the underlying primary insurer, Zurich American Insurance Company (“Zurich”), for less than the policy limits and therefore the primary policy was not exhausted as required by the terms of the excess policy.
The case centered on the interpretation of an AXIS policy provision which provided that Axis’ coverage only began “after all applicable Underlying Insurance…has been exhausted by actual payment under such Underlying insurance.” MRMC suffered losses in a state stock-dilution lawsuit for presumably more than the primary policy limit of $10 million. After Zurich denied coverage for the underlying litigation, MRMC filed a coverage action in federal court to recover under its primary and excess insurance policies. MRMC eventually settled with its primary insurer, Zurich, for less than the liability limit of the primary policy. The settlement included a release of any past, present or future claims under the policy and obligated Zurich to pay MRMC $6 million, an amount that was below the policy’s $10 million liability limit. After MRMC settled with Zurich, Axis brought a motion for summary judgment, arguing that its excess policy could not be triggered to provide coverage for the underlying litigation because the $10 million in limits of the underlying Zurich primary policy had not been “exhausted by actual payment.” MRMC argued that it could “fill the gap,” pay the $4 million difference between the $6 million settlement and the $10 million attachment point of the Zurich policy. The district court agreed with AXIS that MRMC could not pay the difference.
On appeal, the Fifth Circuit rejected MRMC’s argument that it could “fill the gap.” The appellate court held that the policy language was unambiguous and that the language “actual payment under such Underlying Insurance” required Zurich to pay the full $10 million in limits for the AXIS policy to be triggered. The appellate court also found that other provisions of the Axis policy confirmed that it unambiguously barred MRMC from exhausting Zurich’s policy by paying the difference between the underling limit of liability and the below limit settlement, such as: “If the Underlying Limits are partially reduced solely due to actual payment under the Underlying Insurance, this Policy shall continue to apply as excess insurance over the remaining Underlying Limits.” Moreover, the court rejected MRMC’s argument that the Limits of Liability section of the policy allows the insured to fill in the gap. The policy provides: “If any Underlying Insurer fails to make payments under [its] Underlying Insurance for any reason whatsoever, including without limitation the insolvency of such Underlying Insurer, then the Insureds shall be deemed to have retained any such amounts which are not so paid.” The court found that Zurich did not fail to make payments. Instead, MRMC released Zurich from paying the full $10 million in limits, in exchange for an amount less than policy limits. Martin Resource Mgmt. Corp. v. Axis Ins. Co., No. 14-40512 (5th Cir. Oct. 21, 2015).