More and more excess insurers are taking the position that a policyholder which settles with primary or low level excess insurers for less than the full amount of the policy limits has waived its right to obtain coverage from any of the high level excess insurers. A Texas appellate court recently rejected this position in Plantation Pipe Line Company v. Highlands Insurance Company in Receivership. There, the policyholder had expended over $18 million to clean up a contaminated site in North Carolina. Because the policyholder had settled with the lower level insurers and recovered less than the full $8 million in their policy limits, Highlands claimed that its excess policy with an $8 million attachment point had not been reached.
Although the trial court granted summary judgment to Highlands, the appellate court concluded that the exhaustion language in the Highlands policy was not clear enough to warrant the conclusion that the underlying insurers had to pay out their full policy limits before the Highlands policy was triggered:
We believe that the language in the Highlands policy is unambiguous, and we see nothing that requires payment of losses solely by the insurers up to the attachment amount in the Highlands policy.
As here, courts faced with the argument like the one raised by Highlands typically look to the specific language in the policy to determine if the excess policy can only be triggered by the underlying insurers’ payment of the fully policy limits. Given that insurance policies are contracts, it is reasonable that courts would look to the policy language to resolve disputes. However, it seems fair to ask whether such an approach actually makes sense. An excess policy has an attachment point and the excess policy should not be triggered until the policyholder faces liability that exceeds that attachment point. It is far from clear why it would matter to the excess insurer whether that attachment point was reached by payment of the underlying policy limits by the insurer or the policyholder. Also it would be troubling if a creditor of a policyholder could not reach that policyholder’s excess coverage because the underlying insurer is insolvent and cannot pay the policy limit or the policyholder is limited in its ability to pay or itself in bankruptcy.
In the end, one would hope that courts would recognize that insurance policies are more than simple contracts. Those policies should not be construed as a “gotcha” against policyholders and third party claimants. Those policies are imbued with a public purpose to ensure that potential third party claimants can rely upon the protections of insurance coverage even where the policyholder may not have sufficient resources to pay its liabilities. State insurance regulators should be looking at these issues to make sure that expectations about insurance are realized and insurers do not obtain windfalls by overly fine interpretations of their policies.