Fifth Circuit Limits Excess Insurers Exposure Following Policyholder's Partial Allocation of Primary Limits
Several days ago, the Fifth Circuit Court of Appeals evaluated a primary liability carrier’s tender of its policy limits to its insured for covered claims and whether such a tender triggered an excess insurer's liability coverage when the insured allocated the primary limits across several years of losses. In Service Corp. Int’l v. Great Am. Ins. Co. of New York, 2008 WL 280900 (5th Cir. February 1, 2008), a funeral services company (SCI), with cemeteries throughout the United States, was sued by individual and class action plaintiffs for grave desecrations and improper burials at two specific cemeteries. Some, but not all, of the events giving rise to the lawsuits occurred between the policy period in question. SCI was covered by a $25 million primary liability insurance policy and a $50 million excess liability policy.
As the lawsuits were pending against SCI, the primary carrier determined that its covered claims would likely exceed its policy limit for the policy period. The carrier then tendered $25 million to SCI in exchange for an indemnity and hold harmless agreement. The lawsuits settled for $100 million, but only $13.75 million was allocated by the insured to claims arising during the policy period of the excess carrier in this suit. The rest were allocated to other years of losses.
SCI requested coverage from an excess liability carrier, but coverage was denied. The excess carrier argued because only $13.75 million was allocated to the policy period (and not the complete $25 million limit which had been tendered), the excess layer of coverage had not been triggered. In response, SCI filed suit against the excess carrier. The federal district court granted summary judgment in favor of the excess carrier.
On appeal, the Fifth Circuit noted the excess policy incorporated the primary policy’s definition of “loss,” which was “those sums actually paid in the settlement or satisfaction of a claim which the insured is legally obligated to pay as damages of injuries or offense.” The Fifth Circuit then concluded the parties intended any loss to be measured by the sums used for payment of covered claims during the policy period, not simply by the aggregate sums paid by the insureds. As such, the insured’s own allocation was used by the Court to determine the excess liability policy had never been triggered.
This is a potentially significant decision particularly for claims in those jurisdictions governed by the Fifth Circuit including Texas, Louisiana and Mississippi. Because policyholder allocations are common in coverage cases arising out of toxic tort cases and other mass torts, this holding gives excess liability carriers more protections than other courts have extended in recent years. It remains to be seen how the judicial pronouncements in this case will apply to other efforts to artificially allocate prior primary settlements by policyholders, but it is certainly a step in the right direction.
