An insured named as a defendant in a shareholder derivative suit could not establish that coverage under its excess insurance policy was triggered after the insured settled with its primary insurer in a below-limit agreement, the U.S. Court of Appeals for the Fifth Circuit ruled, affirming the lower court (Martin Resource Management Corp. v. AXIS Insurance Co., October 21, 2015, Prado, E.).

Background. The insured, Martin Resource Management Corporation (Martin), held a primary liability policy from Zurich American Insurance Company and an excess liability policy from AXIS Insurance Company. AXIS denied coverage for the underlying suit, asserting that its policy was not triggered because the limit in Zurich’s policy was not exhausted. According to AXIS, Martin’s settlement with Zurich for less than the Zurich policy limit barred the insured’s ability to seek coverage under the excess policy.

The excess policy provided that coverage applied “only after all applicable Underlying Insurance…has been exhausted by actual payment under such Underlying Insurance….” The Zurich policy limit was $10 million, and it settled well below the limit for $6 million. The magistrate judge granted AXIS’s motion for summary judgment because the policy clearly provided that the underlying insurer, Zurich, must actually pay out its full liability limit ($10 million) to Martin to trigger coverage from AXIS. Martin filed the present appeal.

Analysis. The Fifth Circuit agreed that the excess policy unambiguously precluded exhaustion by below-limit settlement. According to case precedent, below-limit settlements are not “actual payments.” The appellate court explained that it would be unreasonable to construe the excess policy to allow exhaustion by a below-limit settlement because the policy required “actual payment” of “all applicable Underlying Insurance,” and the only policy within the definition of “Underlying Insurance” was the $10-million primary insurance policy. Thus, the use of “all” clarified that a settlement does not exhaust the primary policy when the settlement is below that liability limit.

Moreover, the excess policy’s “Reduction or Exhaustion of Underlying Limits” provision supported the determination that the below-limit settlement did not trigger coverage. This provision clarified that the phrase “actual payment” conveyed the understanding that only payment from the insurer could “reduce” or “exhaust” the underlying policy’s limits of liability. The appellate court remarked that the policy used different wording to distinguish the effects of exhaustion from simply reducing the liability limit and, thus, the insured could not demonstrate ambiguity.

Further, another provision of the policy in which the excess insurer would retain coverage for amounts not paid by the primary insurer did not apply because the primary insurer did not “fail[] to make payments.” The insured bargained for the settlement amount and agreed to release the primary insurer from further obligation under its policy. Because the plain terms of the excess policy applied and coverage was not triggered by the below-limit settlement with the primary insurer, the lower court’s ruling in favor of the insurer was affirmed.

The case is No. 14-40512.

Attorneys: Russell S. Post (Beck Redden, LLP) for Martin Resource Management Corp. Geoffrey W. Heineman (Ropers Maheski Kohn & Bentley) and Joseph F. Cleveland, Jr. (Brackett & Ellis, P.C.) for Axis Insurance Co.

Companies: Martin Resource Management Corp.; Axis Insurance Co.