In a recent decision, the Fifth Circuit held that a primary policy was not exhausted, after the primary insurer made settlement payments that did not exceed the primary policy limits, even though the insured contributed amounts to the settlement that (together with the primary insurer’s payments) exceeded the primary policy limits. See Martin Res. Mgmt. Corp. v. AXIS Ins. Co., 803 F.3d (5th Cir. (Tex.) 2015). However, whether the opinion is consistent with the Fifth Circuit’s previous ruling in Federal Insurance Company v. Srivastava, 2 F.3d 98 (5th Cir. 1993), remains somewhat unclear.
Martin Resource Management Corporation (Martin) obtained an excess insurance policy from AXIS Insurance Company (AXIS). Section I of the AXIS policy provided that AXIS had no obligation to provide coverage until “after all applicable Underlying Insurance … has been exhausted by actual payment under such Underlying Insurance.” The coverage dispute arose out of a state court lawsuit accusing Martin and its employees of violating various securities laws. After settling that lawsuit for an undisclosed amount, Martin sued its three insurers, alleging it was entitled to coverage under a primary policy and two excess policies (including the AXIS policy), with each policy providing a $10 million limit.
In May 2014, Martin confidentially settled its claims against the second excess insurer. Martin later settled with the primary insurer for $6 million. Based on those settlements, AXIS moved for summary judgment arguing the primary policy was not exhausted because the primary insurer had not paid its full policy limits. Martin responded that the AXIS policy was ambiguous as to whether the $10 million primary policy limit could be exhausted by a combination of payments from the primary insurer and Martin itself. Ultimately, the Fifth Circuit found Martin’s argument “unavailing,” noting that “the use of the term ‘all’ in Section I clarifies that the entirety of the underlying insurance must be exhausted in order to trigger AXIS’s coverage.” Moreover, the court held that even if the primary insurer’s below-limit settlement constituted an “actual payment,” Martin’s argument that its own “gap” payments also were “‘actual payments under [the primary policy]’” was not reasonable.
Significantly, the Fifth Circuit did not comment on whether its holding in Martin Resource was consistent with its earlier decision in Srivastava. In that case, the Fifth Circuit refused to require the final excess insurer to “drop down” to cover gaps in coverage created by other insurers’ insolvencies. However, the court’s opinion also indicated that underlying insurance is exhausted when a loss exceeds the policy limit, regardless of whether the underlying insurer actually pays its policy limit. Notably absent from either case was a discussion of the merits of the coverage issues.
In summary, Martin Resource held that an insured’s settlement contributions could not satisfy the exhaustion requirement, based on the particular policy language at issue. This is contrary to the Srivastava opinion, which indicated an insured’s contributions might satisfy the exhaustion requirement, in that a layer of coverage is exhausted once the loss exceeds the limit, regardless of whether the insurer actually pays. While this tension may be the result of different policy language not articulated in the Srivastava opinion, the Fifth Circuit in Martin Resource did not distinguish or otherwise address Srivastava. As such, it remains somewhat unclear as to whether the two opinions are consistent. Until the Fifth Circuit squarely addresses the issue, we believe litigation will continue in relation to exhaustion by a combination of payments from insurers and insureds.