Fifth Circuit Rules That Excess Coverage Is Contingent Upon Payment of Full Policy Limits By Primary Insurer
11.30.15
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(Article from Insurance Law Alert, November 2015)
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Previous Alerts have reported on decisions addressing whether excess coverage is available when a policyholder has settled with a primary insurer for an amount less than primary policy limits. See June 2013 Alert; October 2012 Alert; September and October 2011 Alerts. In a recent decision, the Fifth Circuit followed what appears to be an emerging trend, ruling that applicable policy language requires actual payment of full policy limits by the primary insurer in order to implicate excess coverage. Martin Res. Mgmt. Corp. v. AXIS Ins. Co., 803 F.3d 766 (5th Cir. 2015).
The policyholder sought excess coverage from AXIS Insurance Company following a below-limits settlement with its primary insurer. In ensuing litigation, a Texas magistrate judge granted AXIS’s summary judgment motion, finding that the excess insurer owed no coverage because excess coverage was conditioned upon the primary insurer’s actual payment of full policy limits. Martin Res. Mgmt. Corp. v. Zurich Am. Ins. Co., No. 6:12-CV-758 (E.D. Tex. May 12, 2014) (discussed in our May 2014 Alert). The Fifth Circuit affirmed.
The operative policy provision stated that excess coverage applied “after all applicable Underlying Insurance . . . has been exhausted by actual payment under such Underlying Insurance . . . .” The court held that this language unambiguously precluded exhaustion by a below-limits settlement. The court reasoned that the phrases “actual payment” and “all applicable Underlying Insurance” required both full payment of primary policy limits, and payment by the primary insurer itself. The court cited its prior ruling in Citigroup Inc. v. Fed. Ins. Co., 649 F.3d 367 (5th Cir. 2011) (discussed in September 2011 Alert), which reached the same result. Although some courts have deemed primary insurance exhausted notwithstanding a below-limits settlement, the Fifth Circuit found these decisions were distinguishable in light of differing policy language, or not well reasoned. The court explicitly disagreed with decisions that deemed similar language ambiguous, emphasizing that an exhaustion clause is not ambiguous merely because it does not specify which party must make the requisite payments.