Below-Limit Settlement Does Not Exhaust Underlying Insurance

By Lindsey Dean, Esq. of Tressler LLP

A first layer excess insurance policy was not triggered by a primary insurer’s below-limit settlement with a mutual insured, as such settlement did not constitute actual payment of all underlying insurance. Martin Resource Mgt. Corp. v. AXIS Ins. Co., case no. 14-40512, 2015 WL 6166661 (5th Cir. Oct. 21, 2015).

Martin Resource Management Corporation (MRMC) sought coverage under its primary and excess policies for the cost of defending a stock-dilution lawsuit. Zurich American Insurance Company (Zurich) insured MRMC under a primary insurance policy with a $10 million policy limit. AXIS Insurance Company (AXIS) provided MRMC with first layer excess coverage with a $10 million limit of liability, triggered only after “all applicable Underlying Insurance” has been “exhausted by actual payment under such Underlying Insurance.” The AXIS policy defined “Underlying Insurance” only as the Zurich policy.

Zurich denied coverage for defense costs in the underlying litigation, and MRMC subsequently filed a lawsuit seeking coverage under the terms of the Zurich and AXIS policies. Zurich settled with MRMC for $6 million in return for MRMC’s release of any past, present or future claims under the Zurich policy. Following the settlement, AXIS moved for summary judgment on the grounds that MRMC could not exhaust the underlying primary policy limits because Zurich had not paid the full limit of its liability under the Zurich policy. MRMC argued that the AXIS policy allowed MRMC to pay the difference between Zurich’s $10 million limit and the below-limit settlement.

The U.S. Court of Appeals for the 5th Circuit agreed with AXIS, finding that the AXIS policy unambiguously precluded exhaustion by settlement below the limit of liability. Relying on its 2011 decision in Citigroup, Inc. v. Federal Ins. Co., the 5th Circuit reasoned that the phrase “exhaustion by actual payment under [the Zurich policy]” made clear that Zurich must actually make the payments to MRMC pursuant to its contract and any payments by MRMC could not constitute actual payments under the Zurich policy. The court focused on the phrase “all Underlying Insurance” in the AXIS policy, finding that the use of the word “all” supported a finding that a settlement for less than the limit of liability could not exhaust the Zurich policy.

The court refused to find a decision by the U.S. District Court for the Eastern District of Virginia persuasive, rejecting the District Court’s finding that an exhaustion clause is ambiguous if it does not expressly specify which party must make the requisite payments. It reasoned that the Citigroup decision found that, even where the exhaustion clause does not specify who must make the requisite payments under the policy, the use of the phrase “payment … [under the Underlying Insurance]” unambiguously requires that the underlying insurer make actual payment to the insured.

Finally, the 5th Circuit found that the other provisions in the AXIS policy confirmed its interpretation of the exhaustion clause. The court found that the AXIS policy used different wording to distinguish the effects of exhaustion from the mere reduction of limits of liability. As noted above, the court found that the use of the word “all” clarified that the entirety of the underlying insurance must be exhausted by actual payment. The 5th Circuit rejected MRMC’s reliance on the Limit of Liability in the AXIS policy, which provided, in relevant part, that “[i]f any Underlying Insurer fails to make payments under Underlying Insurance for any reason whatsoever . . . then the Insureds shall be deemed to have retained any such amounts which are not so paid.” Because MRMC bargained for a below-limit settlement with Zurich and agreed to release Zurich from further obligations under the Zurich policy, MRMC was precluded from arguing that Zurich failed to make payments under its policy pursuant to the Limit of Liability provision in the AXIS policy.

Tressler Comments

The 5th Circuit’s decision is consistent with a number of recent decisions by courts addressing this type of excess policy language. These decisions make clear that at least with certain excess polices, while an underlying insurer may settle with its insured for below policy limits, such a settlement will not constitute exhaustion of the underlying insurance, and may, in turn, release the excess insurer from any liability. Moreover, an insured may not seek to make payments to bridge the gap between the below-limit settlement and the underlying policy’s limits. Insureds should therefore closely examine its excess policy language and bear in mind the potential consequences of losing its excess coverage before it agrees to a below-limits settlement with the primary insurer.

For more information, please contact Lindsey at or (312) 627.4123.

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