Last Monday, the Fifth Circuit examined the relationship between primary and umbrella insurance policies, and held that under the specific language of the policies in question, exhaustion of the primary insurance triggered the umbrella policy even though the claims which exhausted the primary coverage were not covered under the umbrella policy.  In Indemnity Ins. Co. of N. America v. W&T Offhsore, Inc., --- F.3d---, 2014 WL 2853586, No. 13-20512 (5th Cir. June 23, 2014),  the insured purchased a primary CGL policy, a primary “Energy Package” policy, and an umbrella policy.  The Energy Package policy covered property damage and “operators’ extra expenses,” incurred by the insured itself, but the umbrella policy only covered claims made against the insured by third parties. 

After Hurricane Ike, the insured submitted claims for property damage and extra expense for over 150 offshore drilling platforms, which exceeded $150 million.  The insured was also legally required to remove the debris of the damaged platforms, for which it incurred another $50 million. After exhausting its total limits under the Energy Package policy with the $150 million in property damage and extra expense claims, the insurer tendered the debris removal claims to the umbrella carrier. The umbrella carrier refused the debris removal claims, asserting its coverage was not triggered because the claims which were paid by the underlying insurance were first-party claims, which are not covered by the umbrella policy.

The umbrella policy’s insuring agreement covered claims in excess of the Retained Limit, which was defined to mean the limits of the underlying insurance or SIR.  Nothing in the definition of the Retained Limit required that it be spent on claims which would be covered under the umbrella policy.  On the other hand, the umbrella carrier argued that the policy contained a drop-down clause which stated its obligations if the Retained Limit was exhausted “by payment of one or more claims that would be insured by our Policy,” and this clause showed that only covered claims could exhaust the underlying limits. 

After a careful parsing of the language, the court held the policy was unambiguous and the insuring agreement required the umbrella carrier to pay otherwise covered claims anytime the Retained Limit was exhausted, regardless of the type of claim that resulted in the exhaustion.  The court concluded the existence of the drop-down clause did not limit liability, but outlined additional duties in the event the retained limit was exhausted by claims which were covered under the umbrella policy.

This holding is not as broad as it may at first seem because it was based on a word-by-word parsing of highly specific policy language.  The court contrasted this result with another case, Westchester Fire Ins. Co. v. Stewart & Stevenson Services, Inc., 31 S.W.3d 654 (Tex. App.—Houston [1st Dist.] 2000, pet. denied) which involved different policy language  and a different outcome.  Nevertheless, all carriers who provide excess/umbrella coverage in Texas should study both opinions carefully.

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