Umbrella Insurers Must Pay Insured’s Expenses Although Primary Insurance Was Exhausted by Claims the Umbrella Policies Did Not Cover

July 31, 2014 | Insurance Coverage

The U.S. Court of Appeals for the Fifth Circuit, reversing a district court’s decision, has ruled that umbrella insurance carriers were obligated for removal of debris (“ROD”) expenses under their umbrella policies even where the underlying insurance had been exhausted by claims the umbrella policies did not cover. 

The Case

W&T Offshore, Inc., an energy exploration and development company, alleged that it sustained significant damage to its operations as a result of Hurricane Ike. Anticipating that W&T would seek recovery for its ROD expenses under its umbrella insurance policies, W&T’s four umbrella insurers sought a declaratory judgment that they were not liable for W&T’s ROD damages.

In their motion for summary judgment, the carriers argued that their umbrella policies only took effect if W&T’s underlying primary insurance was exhausted by claims that would be covered by their policies. Because W&T’s underlying insurance had been exhausted by claims not covered by the umbrella policies, the insurers argued that they had no liability.

In its cross-motion for summary judgment, W&T countered that the umbrella policies must respond once all underlying insurance was exhausted, regardless of how that exhaustion occurred.

The district court granted summary judgment in favor of the insurers, holding that the plain terms of the umbrella policies stated that they only responded if the underlying policies were exhausted by claims that would be covered under the umbrella policies themselves.

W&T appealed.

The Fifth Circuit’s Decision

The Fifth Circuit reversed, and awarded summary judgment in favor of W&T.

In its decision, the circuit court explained that, under their policies, the insurers were obligated to pay “sums in excess of” the “total of the applicable limits of the underlying policies listed,” i.e., sums in excess of the $161 million of underlying coverage. The circuit court found nothing in the policies that specified how the $161 million “limit[] of the underlying policies” had to be reached or that it referred exclusively to sums covered by the umbrella policies.

Therefore, the circuit court concluded, because the underlying limits had been exhausted, the insurers were liable for W&T’s ROD damages.

The case is Indemnity Ins. Co. of North America v. W & T Offshore, Inc., No. 13-20512 (5th Cir. June 23, 2014).

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