Umbrella Policies Triggered Even When Underlying Policies Exhausted by Payment of Damages Not Covered by Umbrella Policies

Applying Texas law, the United States Court of Appeals for the Fifth Circuit held that umbrella policies were triggered when underlying policies were exhausted by payment of damages covered by the underlying policies even though those damages would not have been covered by the umbrella policies.  Indem. Ins. Co. of North Amer. v. W&T Offshore, 2014 WL 2853586 (5th Cir. June 23, 2014).

The insured, an offshore drilling company, suffered damages caused by Hurricane Ike in 2008 to over 150 offshore platforms in the Gulf of Mexico.  The insured was covered by $150 million in primary insurance and four umbrella policies.  The primary insurance provided coverage for property damages and owners’ expenses suffered by the insured, but the umbrella policies provided no coverage for property damages and owners’ expenses.  The limit of liability of the primary insurance was exhausted by payment of property damages and owners’ expense, and the insured sought coverage under the umbrella policies for removal of debris, which was covered under the umbrella policies.  The umbrella insurers filed suit seeking a declaratory judgment that the umbrella policies were not triggered because the primary policies were exhausted by payment of damages that were not covered by the umbrella policies.

The court held that, because the primary policies had been exhausted, the coverage under the umbrella policies was triggered.  The court held that the insuring agreement of the umbrella policies required only that the underlying limits of the primary policies be exhausted.  The umbrella policies did not require that the primary policies be exhausted by payment of damages that fell within the coverage of the umbrella policies.  So, the umbrella insurers were required to pay all damages covered by the umbrella policies after exhaustion of the limits of the primary policies.