FIFTH CIRCUIT HOLDS EXCESS INSURER HAS NO OBLIGATION TO MAKE PAYMENTS AFTER PRIMARY INSURER SETTLES INSURED’S CLAIMS FOR LESS THAN THE PRIMARY POLICY LIMIT

Recently, the Fifth Circuit held that an excess insurer had no obligation to make any payments after a primary insurer settled an insured’s claims against it for less than its policy limits.

In, Martin Res. Mgmt. Corp. v. AXIS Ins. Co., 14-40512, 2015 WL 6166661, at *1 (5th Cir. Oct. 21, 2015),  Martin Resource Management Corporation (“MRMC”) purchased excess insurance from AXIS Insurance Company (“AXIS”).  The AXIS coverage began only after the underlying primary policy was “exhausted by actual payment under [the primary policy].”  After suffering losses in a state lawsuit, MRMC sued to recover under its primary and excess insurance policies.  MRMC eventually settled with its primary insurer for less than the liability limit in the primary policy. AXIS moved for summary judgment, arguing that settlement for less than the underlying policy limit does not trigger coverage under the terms of the AXIS policy. Summary judgment was granted in favor of AXIS, and MRMC appealed.  The Court of Appeals was asked to answer the sole question whether the primary policy was exhausted, triggering the excess coverage afforded by AXIS.

After reviewing the language in the AXIS policy, the Fifth Circuit held the AXIS policy unambiguously precluded exhaustion by below-limit settlement.  The Court noted the phrase “exhaustion by actual payment under [the primary policy]” made clear that the primary insurer must make payments to MRMC pursuant to its contract.  The Court also rejected MRMC’s argument that its below-limit settlement constitutes “actual payment,” and that MRMC's “gap” payments, the difference between the settlement amount and MRMC’s liability, could also constitute “actual payments under [the primary contract]” when the policy required exhaustion by actual payment.

The Court noted that the threshold question was whether the primary insurer failed to make payments under its policy.  MRMC bargained for a below-limit settlement with its primary insurer and in exchange released it from further obligations under primary policy. Because MRMC agreed to absolve the primary carrier, it is foreclosed from arguing that the primary carrier failed in its obligations to make full payments under its policy.