In Martin Resource Management Corporation v. AXIS Insurance Company, an excess insurer was held by the United States Court of Appeals for the Fifth Circuit to have no obligation to indemnify its insured under the terms of its excess insurance policy after the insured settled with its primary insurer for an amount below the primary policy limits.
The insured had sought coverage from both its primary and excess policies for the cost of defending underlying litigation in Texas state court. The primary insurer settled with the insured for $6 million, or $4 million below the $10 million limits of the primary policy. The excess insurer then moved for summary judgment, asserting that its policy was not triggered because the limits of the primary policy were not exhausted.
The Court of Appeals held that the excess insurance policy unambiguously precluded exhaustion by below limit settlement with the primary insurer. Section I of the policy stated that:
“The insurance offered 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 insured’s argument that the gap between the settlement amount and liability limit could be paid by the insured and that this would constitute actual payments under the primary insurance policy was held to not be a reasonable interpretation of the policy. The court stated that the policy was unambiguous as to who must pay and the amount that must be paid in order to exhaust the policy.
This case is one of a number of recent decisions holding that even if the policyholder funds the gap created by a below-limits settlement with a primary insurer, the underlying insurance is not exhausted and accordingly the excess insurer’s obligations have not been triggered.