Excess Policies Triggered for Hurricane Ike Claims Even Where Underlying Policies Were Exhausted

Case: Indem. Ins. Co. v. W & T Offshore, Inc.
United States Fifth Circuit Court of Appeal (Texas)
2014 U.S. App. LEXIS 11775

On September 12, 2008, Hurricane Ike struck the Gulf of Mexico, causing damage to over 150 of W&T’s offshore platforms. At that time of the Hurricane, W&T had in place a tower of insurance coverage, including a primary General Liability policy, five Energy Package Policies, and four Umbrella Policies. Coverage under the Umbrella Policies was at issue in the case.

The key difference between the Umbrella Policies and the underlying policies was that the Umbrella Policies did not cover property damage or operators' extra expenses that were incurred by W&T itself. Rather, the Umbrella Policies only covered claims against W&T by a third-party. All relevant policies had been endorsed to cover removal of debris claims. Also important, a $10 million self-insured retention was in place under the Energy Package Policies, which W&T had to exhaust prior to submitting any claims. Once the Retained Limit was satisfied, coverage proceeded in order through five policies, which provided a total of $150 million in coverage over the Retained Limit.

In anticipation that the insured would exhaust the $150 million limits of its underlying insurance with property damage claims and then seek coverage from its Umbrella Insurers for an additional $50 million in separate losses from removal of debris expenses, the Umbrella Insurers filed a declaratory judgment action in federal court in the Southern District of Texas. The Umbrella Insurers maintained their policies took effect only if the primary insurance was exhausted by claims which would be covered by the Umbrella Policies themselves. Because the underlying limits were exhausted by property damage claims, which were covered by the primary insurance but not by the Umbrella Policies, the Umbrella Insurers claimed the Insured’s Retained Limit had not been exhausted for the purpose of triggering the Umbrella coverage for removal of debris expenses.

The Umbrella Policies stated coverage was afforded for “those sums in excess of the Retained Limit that the Insured becomes legally obligated to pay,” and defined Retained Limit, in pertinent part, as the total of the limits of the underlying primary policies. The Policies also provided: “If the applicable limits of insurance of are reduced or exhausted by payment of one or more claims that would be insured by our policy we will… pay in excess of the reduced underlying limits… or… continue in force as underlying insurance.” The Umbrella Insurers maintained this wording restricted the exhaustion of the Retained Limit to claims which were covered by the Umbrella Policies themselves. The trial court agreed, relying on prior Texas law that “allowing a non-covered claim to erode the underlying limits would accelerate the excess carrier’s obligations and effectively make it ‘primary’ on claims which its policy does not otherwise cover, thereby undercutting the excess nature of the policy.”

The Fifth Circuit reversed on appeal, finding, “merely outlines what will happen if the underlying insurance is entirely exhausted by claims covered under the policy” and “says nothing about what will happen if the Retained Limit is exhausted by non-covered claims” and “makes no claims about the breadth of coverage or requirements for exhausting the Retained Limit.” The court reasoned that if the Umbrella Insurers had intended to limit the manner in which the Retained Limit could be satisfied, they could have added specific language indicating the underlying insurance would not be considered exhausted unless it was exhausted by claims actually covered under the Umbrella Policies. Courts often look to the plain language of insurance policies and will not infer intent where actual wording is absent.