When faced with a catastrophic loss triggering multiple layers of coverage and recalcitrant insurers at the primary layer, a policyholder has strong incentives to settle with the first-layer carriers for less than the full limits of that layer, cover the “gap” out of its own pocket, and seek excess coverage from the insurers in the second layer. Despite the prudence of this approach, courts have, at times, held that excess policies are not triggered; the primary, or lower layer, carriers must satisfy their policy limits before the excess policy kicks in. Fortunately for the policyholder in Plantation Pipe Line Co. v. Highlands Insurance Co., a Texas state appellate court held that the policyholder had not surrendered its excess coverage by settling with lower layer carriers for less than their policy limits. Because the outcome of coverage disputes over this issue are likely to turn on the language of the policy, policyholders need to know exactly what that language says before settling with lower layer carriers and be mindful of this issue when purchasing or renewing excess coverage.
In Plantation Pipe Line, the policyholder, an oil pipeline operator, paid approximately $12 million to clean a site contaminated by an oil leak. It settled its insurance coverage claims stemming from the leak with its lower layer insurers for approximately $4.5 million, which was less than the full policy limits and below the $8 million limit to trigger Highlands’s excess policy. The pipeline operator looked to Highlands to reimburse the $4 million it paid above the Highlands trigger of coverage, but Highlands refused.
The Highlands policy stated that it would pay “after the Underlying Umbrella Insurers have paid or have been held to pay the full amount of their respective ultimate net loss liability.” The policy, however, did not define “ultimate net loss liability,” referring instead to the definitions in the underlying policies. Under an underlying policy, “ultimate net loss” was defined as “the full amount of all sums which the insured or any organization as his insurer, or both, become legally obligated to pay as damages, whether by reason of adjudication or settlement.” The Plantation Pipe Line court concluded, under this language, that the Highlands policy was triggered because the underlying insurers and the policyholder, in the aggregate, paid over $8 million.
Until fairly recently, the holding in Plantation Pipe Line would have been considered uncontroversial, as courts recognized obvious and compelling reasons to hold excess carriers to their promise to defend and indemnify their insureds once the underlying limits were satisfied, regardless of how those limits were met. Why should an excess carrier benefit from the recalcitrance of an underlying insurer that refuses to meet its obligations, forcing the policyholder to bear some of that carrier’s portion of the loss? They should not.
But in the last dozen years or so, carriers have persuaded some courts that the language of their policies entitles them to a windfall at the expense of their policyholders. Never mind that such an interpretation places the policyholder in a no-win situation: either litigate with the lower layer insurers to the bitter end, or agree to settle with those insurers for below their policy limits and risk waiving all coverage under your excess policies.
The result has been a fracturing of the case law in this area where the outcome is highly specific to the language of the policy at issue rather than the applicable state law. The Plantation Pipe Line decision is an example of this. The appellate court in the case found in favor of excess coverage applying Texas law. A few years earlier, the Fifth Circuit Court of Appeals, in Citigroup, Inc. v. Federal Insurance Company, reached the opposite result, also applying Texas law. What was different in Citigroup was the policy language. The excess policies, according to the Fifth Circuit, unambiguously required exhaustion of the underlying insurance policy. Specifically, those excess policies stated that there was coverage only after:
- “(a) all Underlying Insurance carriers have paid in cash the full amount of their respective liabilities, (b) the full amount of the Underlying Insurance policies have been collected by the plaintiffs, the Insureds or the Insureds’ counsel, and (c) all Underlying Insurance has been exhausted”;
- the underlying policy’s “total” limit of liability has been paid in “legal currency”;
- “any Insurer subscribing to any Underlying Policy shall have agreed to pay or have been liable to pay the full amount of its respective limits of liability”; and
- “[i]n the event of the exhaustion of all of the limit(s) of liability of such ‘Underlying Insurance,’ solely as a result of payment of loss thereunder.”
Before entering into a settlement with a lower layer carrier, policyholders should pay heightened attention to their excess insurance policy’s trigger language and find out how courts have interpreted such policy provisions. Better still, in seeking to purchase or renew excess insurance policies, companies should negotiate for policyholder friendly trigger language, like the Highlands policy language and not the language at issue in Citigroup.