In ExxonMobil Corporation vs. National Union Fire Insurance Company, the Texas Supreme Court recently held that ExxonMobil was an additional insured under an umbrella policy procured by its subcontractor. Additionally, the court held that the terms of the service agreement between Exxon and the subcontractor could not be incorporated by reference into the insurance policy absent clear manifestation of the reference in the terms of the policies itself.

The court further reasoned that assuming, arguendo, the terms of the service agreement were incorporated into the umbrella policy, the subcontractor’s obligation to procure a minimum amount of insurance did not limit Exxon’s entitlement to policy proceeds the subcontractor obtained in excess of the contractual minimum.

The court’s holding demonstrates the reluctance of courts in Texas to consider extrinsic documents when interpreting an insurance contract and states plainly the basic principles for interpreting an insurance policy under Texas law: (1) begin with the text of the policy at issue; (2) refer to extrinsic documents only if the policy clearly, i.e. explicitly, requires doing so; and (3) refer to the explicitly referenced documents only to the extent of the incorporation and no further.

Exxon After the Excess

In the case, Exxon hired the subcontractor to work as an independent contractor at a refinery, and the service agreement between the parties required the subcontractor to obtain at least a minimum stated amount of liability insurance with Exxon named as an additional insured. The subcontractor then procured primary policies and umbrella policies, among other insurance. Eventually, Exxon made settlement payments to two of the subcontractor’s employees that were injured on the job for a collective amount exceeding $24 million. Approximately $5 million of the payout came from the subcontractor’s primary insurance policies under which Exxon was recognized as an additional insured with the rest of the monies being paid by Exxon due to it being denied coverage under the subcontractor’s umbrella policies. Exxon then sued the excess insurers for breach of contract, asserting that both had wrongfully denied coverage.

The trial court ruled in Exxon’s favor holding that one of the umbrella policies owed Exxon coverage as an additional insured; however, the court of appeals reversed the trial court finding that the service agreement limited Exxon’s status as an additional insured and prevented coverage beyond the primary policy.

Texas Supreme Court Finds Exxon has the Excess

The Texas Supreme Court then considered the case and focused on two questions: (1) who is an insured under the umbrella policy and (2) for what coverage?

Applying the three basic principles for interpreting insurance contracts, the court determined that Exxon was an additional insured under the umbrella policy at issue because the umbrella policy covered additional insureds under “Scheduled Underlying Insurance,” which included the primary policy that in turn covered “any person or organization” the subcontractor was obligated by “any contract or agreement” to provide insurance. Stated otherwise, the service agreement could be incorporated into the umbrella policy for the limited reason of determining of who qualifies as an additional insured.

As to the second question, the court held that Exxon was entitled to the umbrella policy’s limits, despite a disclaimer of “broader coverage” than the primary policy offered. In its analysis, the court determined that the service agreement did not contain any limitation of coverage as the service agreement provided for a minimum amount of insurance, not a maximum. Further, the court noted that the umbrella policy was silent as to any limitation in the service agreement and thus, to the extent one existed, it could not be incorporated into the umbrella policy.

This result does not appear to the change the law in Texas and instead, details the analysis a court must perform when interpreting an insurance contract while also clarifying the court’s latitude when looking beyond the four corners of a policy.

Would Other State Supreme Courts Reach the Same Result?

Of note is that courts in other jurisdictions might well have reached a different result or at least ruled in Exxon’s favor for different reasons. For instance, the Louisiana Insurance Code specifies the requirements for how a party to an insurance contract may modify or extend coverage with a separate agreement, including by attachment or incorporation by reference. See La. R.S. 22:867.

That said, the Louisiana Supreme Court has held that a contract between a third party and a named insured may limit the third party’s coverage under the named insured’s policy regardless of whether the agreement is incorporated by reference in the insurance policy. See Lindsey v. Colonial Lloyd's Ins. Co., 595 So. 2d 606, 613 (La. 1992) (“We hold the proper test for determining the enforceability of a rental agreement between a named insured and a third party, which limits the third party's coverage under the named insured's policy, is to ask whether the provision derogates from public policy or particular statutes in the insurance code or elsewhere. Whether the rental agreement is incorporated into the policy is immaterial.”).