In a recent opinion the U.S. Fifth Circuit Court of Appeals, applying Texas law, held that an excess carrier’s coverage was not triggered where the primary carrier settled claims against its insured for less than policy limits.

In Martin Resource Mgmt. Corp. v. Axis Ins. Co., 803 F.3d 766 (5th Cir. 2015), Martin Resource Management Corp. (“Martin”) held a primary liability policy from Zurich American Insurance Co. (“Zurich”) and an excess liability policy from AXIS Insurance Co. (“AXIS”). Martin sued in federal court seeking coverage for the cost of defending an underlying suit in Texas state court. Zurich settled with Martin for an amount below Zurich’s $10 million policy limits.

AXIS denied coverage for the underlying suit, claiming the excess policy was not triggered because Zurich did not pay out its full liability limits to Martin. According to the language in the AXIS excess policy, coverage began only after the underlying Zurich policy had been “exhausted by actual payment.” The District Court agreed with AXIS and granted its motion for summary judgment. Martin appealed the decision.

The sole question considered by the Fifth Circuit was whether the Zurich policy was exhausted by below-limit settlement. Martin argued its payment of the difference between the amount paid by Zurich and the limits of the policy “filled the gap,” and therefore triggered the excess policy. After considering the language in the AXIS policy, the Fifth Circuit held the policy required that the amount of the liability policy limit must be paid by the primary carrier itself. Further, the Court found the excess policy required payment of “all applicable Underlying Insurance.” Because Zurich did not pay the full $10 million policy limit, the policy was not exhausted and excess coverage was not triggered.

While this decision considered only the specific “exhausted by actual payment” language in the AXIS policy, it should be noted by Texas policy holders with excess policies containing similar language. Settling with a primary carrier for below policy limits may result in a loss of the policy holder’s excess coverage.

Author: Lynette Stahl