Reversing a district court decision for the excess insurance carriers, the U.S. Court of Appeals for the Fifth Circuit has rendered judgment in favor of a company that owns 150 offshore oil platforms damaged in Hurricane Ike. Indemnity Ins. Co. of North America v. W & T Offshore, Inc., — F.3d —-, 2014 WL 2853586 (5th Cir. 2014). The court of appeals held that the company’s excess insurance covers claims brought against the insured by others for “removal of debris” even though the company’s primary coverage limits were exhausted by other types of claims that are not covered by the excess policies. Id.
W & T Offshore is an energy exploration and development company with an interest in many offshore oil platforms. The company sustained significant damage to its operations as a result of Hurricane Ike in 2008. W & T had purchased three types of insurance policies to indemnify itself against hurricanes: (1) a commercial general liability policy (the “primary” policy); (2) five Energy Package Policies; and (3) four Umbrella/Excess Liability Policies. The key difference between the Umbrella Policies and the Energy/Primary Liability policies was that the Excess/Umbrella Policies did not cover (1) property damage or (2) “operators’ extra expenses” that are incurred by W & T itself. Rather, the Excess/Umbrella policies covered only claims against W & T by a third-party. All of the relevant policies covered claims for “removal of debris” brought against W & T by third-parties.
Hurricane Ike damaged over 150 offshore platforms in which W & T had an interest. The submitted expenses for W & T’s “operators’ extra expenses” exceeded the total available under the company’s Energy/Primary Liability policies. As noted, the Excess/Umbrella policies did not cover “operators’ extra expenses.” However, W & T faced claims against it by third-parties for “removal of debris” claims. Thus, the Company would be turning to its Excess/Umbrella carriers to cover any claims asserted against it for “removal of debris.”
Anticipating that W& T would seek coverage for such “removal of debris” claims, the underwriters for the excess carriers filed suits in federal court seeking declaratory judgments that W & T’s claims were not covered under the Excess/Umbrella Policies because the Retained Limit of those policies had not been exhausted. The policy underwriters involved are Indemnity Insurance Company of North America, New York Marine and General Insurance Company, Navigators Insurance Company, National Liability and Fire Insurance Company, XL Specialty Insurance Company and Liberty Mutual Insurance Company.
The excess insurers argued that the Excess/Umbrella policies only take effect if the retained limit of the primary/underlying policy is met first by claims that would be specifically covered in the particular excess insurance policy. Because W & T exhausted the Primary Liability limits on “operators’ extra expenses” claims that are not covered by the Excess/Umbrella policies, the excess carriers argued that the “retained limit” had not been met and thus the Excess/Umbrella policies did not apply. The district court agreed and granted judgment in favor of the excess insurance carriers. The Fifth Circuit has now disagreed and reversed, ruling that W & T has exhausted its primary coverage and the “removal of debris” claims at issue are covered by the Excess/Umbrella policies.
The Fifth Circuit based its decision largely on its of application of traditional rules for construing insurance agreements Texas law, which governed the policies at issue. First, a court construing a contract—including an insurance policy—must read that contract in a manner that confers meaning to all of its terms, rendering the contract’s terms consistent with one another. A court should examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless. No single provision taken alone will be given controlling effect, rather all the provisions must be considered with reference to the whole instrument. Under Texas law, a court must enforce an insurance policy according to its plain meaning if the terms of the policy are unambiguous after reading the terms and giving meaning to all provisions. Finally, if the terms of the contract are ambiguous, a court should adopt the interpretation that is most favorable to the insured.
After examining the precise language of the contract between W&T and the underwriters, the court of appeals found that the contract does not specify “how the limit of the underlying policies must be reached” or “state that the retained limit refers exclusively to sums covered by the umbrella policy.” Because the contract remains at best ambiguous regarding the requirements for exhausting the retained limit of underlying/primary policies, the Fifth Circuit held that the Excess/Umbrella insurance policies took effect once all underlying insurance was exhausted, regardless of how that exhaustion occurred. In short, it did not matter that the underlying coverage was exhausted on claims that are not covered by the excess polices. Thus, the court of appeals ruled that the excess carriers were liable for “removal of debris” damages incurred by W&T.
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