What triggers excess insurance coverage?
A recent 5th Circuit case provides a sharp lesson for underwriters. Even one or two words can provide coverage – when it might not have been intended. In a Texas case, Indemnity Ins. Co. of North America et al. v. W & T Offshore, Inc., No. 13-20512 5th Circuit (June 23, 2014), the 5th Circuit overturned a summary judgment for the insurers and granted summary judgment for the policyholder. There, the policyholder, W & T, was an offshore energy exploration company that had platforms damaged during Hurricane Ike. The plaintiffs were a number of excess insurance companies that provided policies to W & T to cover losses over the primary coverage. W & T exhausted the primary policy coverage amounts of $150 million, as well as its SIR of $10 million. It then looked to the excess insurers for coverage for removal of debris due to the Hurricane. It was expected that this cost would be well over $50 million.
The excess insurers argued that removal of debris is not a covered loss according to the terms of the excess policies. Thus, there was no amount due. It also argued that the policyholder admitted that it did not “exhaust” the underlying policy with removal costs. As such, there was no coverage.
The policyholder argued to the contrary. It claimed that the excess policy coverage takes effect once all underlying insurance is exhausted, regardless of how that exhaustion occurs. In other words, the excess policies did not specify that “exhaustion” of underlying limits can only occur by paying out on losses which were covered and actually paid by the primary insurance.
The trial court agreed with the insurers. But the 5th Circuit overturned. It granted summary judgment to the policyholder. It found that the language of the excess policies controls. More specifically the definition of “retained limit” was key.
Nothing in the text of the Coverage provision or the definition of ‘Retained Limit’ specifies how the $161 million limits of the underlying policies must be reached or stated that the ‘Retained Limit’ refers exclusively to sums covered by the Umbrella Policy.
The plain text of the Coverage provision states that Underwriters are liable for any damages in excess of the ‘Retained Limit’ that are covered by the contract. Because the ‘Retained Limit’ has been exhausted, this suggests that Underwriters are liable for W &T’s (removal of debris) damages.
Id.,slip op. at 9.
(The Excess Policies) state that its obligation begins when the Underlying Insurance ‘is obligated to pay the Retained Limit.’ It does not qualify how the Retained Limit must be paid, or that it must be met with claims covered under the Umbrella policy; it simply states that it must be met….If the terms of the Umbrella policy also governed how the Retained Limit must be exhausted, one would expect to find similar language to that effect.
Id., slip op. at 12-13.
If an excess insurer wants to limit its coverage to only those claims in excess of the amounts paid on specific underlying claims in the primary policy, it should say so within the policy.
The addition of a few simple words in the policy definition of “Retained Limit” would have provided coverage here, such as: Retained Limit means only those losses covered and paid for by the underlying insurance.