The United States Court of Appeals for the Fifth Circuit, applying Texas law, has held that an excess insurer had no obligation to make any payments when a policyholder settled its claims against a primary insurer for less than the underlying limit, even if the policyholder paid the difference to “fill the gap” between the primary insurer’s payment and the underlying limit. Martin Res. Mgmt. Corp. v. AXIS Ins. Co., 2015 WL 6166661 (5th Cir. Oct. 21, 2015). In so holding, the court held that only the primary insurer can pay the full amount of the underlying limits in order to exhaust the underlying policy and trigger the excess policy.
The insured purchased a primary insurance policy and two excess insurance policies, each with a liability limit of $10 million. The excess coverage applied only after the underlying policy had been “exhausted by actual payment.” After settling the underlying stock-dilution litigation, the insured settled its claim for coverage with the primary insurer for payment of $6 million of its $10 million limit. The insured then sought payment from the excess insurer. The excess insurer moved for summary judgment that its policy was not triggered because the insured did not exhaust the primary policy. After the magistrate judge granted summary judgment in favor of the excess insurer, the insured appealed, arguing that it could pay the difference to “fill the gap” between the underlying limit and the below-limit settlement to exhaust the primary policy.
The Fifth Circuit affirmed, holding that the excess policy unambiguously required the primary insurer to pay the full amount of the underlying limits in order to trigger the excess policy. The court explained that the excess policy stated that its policy was triggered only after “all applicable Underlying Insurance … had been exhausted by actual payment under such Underlying Insurance.” The court ruled that such language was unambiguous, and it would be unreasonable to construe the provision to allow exhaustion when the primary insurer settled below its liability limit. The court also determined that because payment must be made “under such Underlying Insurance,” only the primary insurer could make payment. Thus, the policyholder’s own payments—purportedly to make up the difference between the underlying liability limit and the below-limit settlement—did not constitute “actual payment.” The excess policy also defined “Underlying Insurance” to specifically mean the primary policy with a liability limit of $10 million. As such, the court found that the word “all” made it clear that a settlement did not exhaust the underlying policy if it was for less than the $10 million limit of liability.