| Dear Colleague,
A recent Fifth Circuit case addressed whether an insured could “fill the gap” and pay the difference between the below-limit amount paid by an underlying policy and the policy limit in order to “effectively exhaust” the underlying policy and trigger an excess policy. In Martin Resource Management Corp. v. AXIS Insurance Co., No. 14-40512, 2015 WL 6166661 (5th Cir. Oct. 21, 2015) (hereinafter “MRMC”), the Fifth Circuit held “that the AXIS policy unambiguously precludes exhaustion by below-limit settlement.” Id. at *3. The court’s analysis was driven by the language in the excess policy issued by AXIS Insurance Company (“AXIS”) and precedent applying similar language.
Martin Resource Management Corporation (“MRMC”) sought coverage for the cost of defending itself in a suit filed in Texas state court. MRMC purchased a primary insurance policy from Zurich American Insurance Company (“Zurich”) and excess insurance policies from AXIS and Arch Insurance Company (“Arch”). All three policies had limits of liability of $10 million. The AXIS coverage was triggered only after the underlying Zurich policy had been “exhausted by actual payment under [the Zurich policy].” The Arch policy was not at issue in the case.
Initially, Zurich denied coverage of defense costs for the underlying litigation, causing MRMC to file a declaratory judgment action in federal court seeking coverage under the terms of the Zurich, AXIS, and Arch policies. Zurich settled with MRMC for a release of any past, present, or future claims under the policy. The terms of the settlement agreement required Zurich to pay MRMC $6 million, an amount below Zurich’s $10 million policy limit.
Thereafter, AXIS moved for summary judgment, arguing that MRMC could not exhaust the underlying limit in the Zurich policy because the full limit had not been paid. MRMC filed a cross-motion for summary judgment, contending that the AXIS policy allowed for MRMC to “fill the gap” by paying the difference between Zurich’s $10 million liability limit and the below-limit settlement. The magistrate judge, hearing the case by consent, granted summary judgment for AXIS. MRMC appealed to the Fifth Circuit.
The Fifth Circuit began its analysis by reviewing the policy language to determine (1) whether the policy language was ambiguous and (2) what the policy required in terms of exhaustion of the underlying policy. Section I of the AXIS policy stated:
The Insurance afforded under this Policy shall apply only after all applicable Underlying Insurance . . . has been exhausted by actual payment under such Underlying Insurance, and shall only pay excess of any retention or deductible amounts provided in the Primary Policy and other exhausted Underlying Insurance.
The AXIS policy defined the term “Underlying Insurance” to mean the Zurich policy. The court analyzed this section of the policy in light of its prior holding in Citigroup Inc. v. Federal Insurance Co., 649 F.3d 367, 373 (5th Cir. 2011), and found that the AXIS policy was “unambiguous as to who must pay and the amount that must be paid in order to exhaust the Zurich policy.” MRMC, 2015 WL 6166661, at *3.
The court held that the exhaustion requirement in the AXIS policy required Zurich to pay under its policy. The court relied on the phrase “exhaustion by actual payment under [the Zurich Policy]” in reaching its conclusion that “Zurich must make payments to MRMC pursuant to its contract.” Id. The court further stated that MRMC’s argument that its gap payment was an “actual payment under [the Zurich Policy]” was not a reasonable interpretation of the policy. Id.
Moreover, the AXIS policy, like the policies analyzed in Citigroup, made clear what actually must be paid by the Underlying Insurance. The policy required “actual payment” of “all applicable Underlying Insurance.” The use of the word all required complete exhaustion of the entire available policy limit under the Underlying Insurance. As such, Zurich’s payment of anything less than its $10 million policy could not be payment of all of its applicable insurance and, thus, could not satisfy the exhaustion requirements under the AXIS policy.
Having ruled that the term was unambiguous and required Zurich to pay its entire limit of insurance to satisfy the exhaustion requirement, the court then addressed several additional arguments. First, the court distinguished the holding in Maximus, Inc. v. Twin City Fire Insurance Co., 856 F. Supp. 2d 797, 801–02 (E.D. Va. 2012), in which the court found the exact same provision in an AXIS policy was ambiguous, stating that the Maximus court incorrectly applied the Fifth Circuit’s analysis in Citigroup. The Citigroup opinion addressed several policies, two of which stated that the excess policies did not attach until the insurer paid the policy limit and another policy (the “Steadfast policy”) stated that the excess policy only attached where there was exhaustion “solely as a result of payment of loss [under the Underlying Insurance].” Citigroup, 649 F.3d at 373. The Fifth Circuit found that all of the policies required payment by the underlying insurer to attach the excess policy. The Maximus court completely failed to address the Fifth Circuit’s analysis of the Steadfast policy (the policy closest to the AXIS policy) and the Citigroup holding that such policy language was unambiguous and required payment by the underlying insurer.
The court also found support for its conclusion in other provisions of the AXIS policy. In particular, the court looked at the “Reduction or Exhaustion of Underlying Limits” provision. That provision addressed the effects of a partial reduction or complete exhaustion of the Underlying Insurance on the application of the excess policy. The court found that the provision did not create an ambiguity with the exhaustion requirement and supported the position that the term “all” requires complete exhaustion of the underlying policy.
Additionally, the court addressed MRMC’s argument that the AXIS policy allowed MRMC to make a gap payment when Zurich failed to pay the full underlying limit. MRMC relied on the following provision found in the Limits of Liability section of the AXIS policy:
If any Underlying Insurer fails to make payments under [its] Underlying Insurance for any reason whatsoever, including without limitation the insolvency of such Underlying Insurer, then the Insureds shall be deemed to have retained any such amounts which are not so paid.
The court rejected MRMC’s argument that Zurich’s failure to make “for any reason whatsoever” permitted MRMC to make a gap payment. The court stated that the “threshold question here is whether Zurich has ‘fail[ed] to make payments under’ its policy.” MRMC, 2015 WL 6166661, at *6. Because Zurich had made payment, albeit below limits, and because MRMC had released Zurich from further liability, the court held that MRMC could not argue that Zurich had failed to make full payment under its policy in order to satisfy the provision.
Commentary:
MRMC is a reminder that policy interpretation is driven first and foremost by the actual language of the policy. In MRMC, and Citigroup before it, whether the insured could make a gap payment to trigger the excess policy when an underlying insurer settled with the insured below-limits depended in large part on the word “all” and the meaning of the phrase “actual payment under such Underlying Insurance.”
In contrast to MRMC, a Texas Court of Appeals held that a Highland Insurance Company excess policy was triggered despite the fact that none of the underlying policies had completely exhausted because the insured had made payments sufficient to make up the difference between the amounts the underlying carriers had actually paid and their total limits underlying the last Highlands policy. See Plantation Pipe Line Co. v. Highlands Ins. Co., 444 S.W.3d 307, 309 (Tex. App.—Eastland 2014, pet. granted). The Plantation Pipe court reviewed Citigroup and determined that the language in the Highlands policy was distinguishable from the policy language addressed in that case. The court looked at the Limit of Liability—Underlying Limits provision in the Highlands policy and terms that were incorporated from the underlying policy, and the court read the provision as follows:
It is expressly agreed that liability shall attach to the Company only after the Underlying Umbrella Insurers have paid or have been held liable to pay 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, because of personal injury, property damage or advertising liability (emphasis added).
Id. at 313. Based on that language, the court stated that “the language in the Highlands policy is unambiguous, and we see nothing that requires payment of losses solely by the insurers up to the attachment amount in the Highlands policy.” Id. Notably, the Supreme Court of Texas granted petition for review in Highlands and, as of October 9, 2015, the parties have fully briefed the merits before the Court. We are not placing bets on whether the Supreme Court will affirm or reverse, but whatever the Court decides, we are certain the analysis will be driven by the policy language.
As always, stay tuned . . . We’ve Got You Covered.
Sincerely,
Lee Shidlofsky
Member of Shidlofsky Law Firm
Douglas P. Skelley
Member of Shidlofsky Law Firm
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