Who’s on First – The Continuing Dilemma of Primary/Excess Issues
In a recent decision, Judge Sparks of the Western District of Texas addressed allocation of insurance coverage among purportedly primary and excess policies. Starnet Ins. Co. v. Fed. Ins. Co., A-16-CA-664-SS, 2017 WL 1293578, at *5 (W.D. Tex. Apr. 6, 2017). Three policies were relevant to coverage for local pollution damage caused by an oil well blow-out for which the insured, BBX, was responsible. Two of the policies were not typical CGL policies but were specialty coverages written for oil and gas risks. The “Burke-Daniels Policy” issued by “Lloyds”, provided “Cost of Well Control and Extra Expense Coverage” with limits of $25 million. The “Vigilant Policy” provided “Energy Industries Liability Insurance” for BBX with a limit of $1 million per occurrence. The third policy, the Federal Policy, was a Commercial Excess and Umbrella Policy with two coverages, one for excess coverage over scheduled insurance and one for excess coverage over risks not covered by underlying insurance.
Following the blowout, approximately $4.056 million of the clean-up expense was allocated to BBX’s working interest. Vigilant paid BBX its single occurrence policy limits of $1 million under the Vigilant Policy. Lloyds, however, declined to pay the balance of $3.056 million under the Burke-Daniels “Cost of Well Control” policy, but agreed to pay only 50% of the cleanup expenses, something over $2 million. Federal then refused to pay BBX the remaining $1,028,274.49, asserting its policy was excess over the other policies and the Burke-Daniels policy had remaining limits available. Lloyds paid the difference and sued Federal in subrogation, asserting Federal’s coverage was not excess but co-primary with the other two policies.
The Court noted that the Burke-Daniels Policy contained an “other insurance” clause providing “[i]n the event there is other insurance, which insures to the Assured’s benefit covering any loss, damage, liability or expense covered hereunder, this insurance shall not pay until such other insurance is exhausted.” Id. at 2. The Vigilant Policy included the more standard “other insurance” provision stating the insurance “is primary, except to the extent that the Excess Insurance provision” applies. It also provided that, as to co-primary insurance, it “will share with all that other insurance by the method described in the Method of Sharing provision”. That clause provided for sharing with other insurance in “equal shares” if permitted by the other policies, or pro rata according to limits if the other insurance did not provide for equal shares.
The Federal Policy was not an entirely standard follow-form excess policy. Coverage A was “Excess Follow-Form” coverage, which was excess over scheduled underlying insurance and scheduled only the Vigilant Policy, but not the Burke-Daniels Policy. Coverage B covered “loss by reason of liability … [i]mposed by law . . . or [a]ssumed in an insured contract . . . for . . . property damage caused by an occurrence” but explicitly excluded a “loss to which underlying insurance would apply. . ..” The Federal Policy had a limit of $5 million per occurrence, and $5 million under each of the two coverages. Its other insurance clause provided the coverage “is excess over any other insurance, whether primary, excess, contingent or on any other basis” and explicitly covered only the excess over “amount that all other insurance would pay for loss in the absence of this insurance; and of all deductible and self-insured amounts under all other insurance.” Id. at *2-3.
Lloyds argued its Burke-Daniels Policy covered half of the cleanup costs and the other two policies were co-primary and responsible for the other half of the costs. The Court held, however, that under Texas law the Burke-Daniels and Vigilant Policies shared primary responsibility while the Federal Policy provided excess coverage. Id. at *5.
An interesting and creative argument the court rejected was Lloyds’ assertion that the Federal Policy was co-primary with the Burke-Daniels and Vigilant Policies because both Federal and Vigilant are affiliated Chubb Companies. This was the basis for its argument that the Burke-Daniels Policy was responsible for half the claim and the Chubb Companies’ policies for the other half. Judge Sparks, however, rejected that argument because it “allocates insurance liability based on a shared parent company rather than via the insurance policies for which the parties contracted.” 2017 WL 1293578 at *6.
In order to apply the basic rule of primary exhaustion – that primary policy limits must be exhausted before excess policies respond – the court had to determine if the Federal Policy was excess or co-primary. The court reasoned that the Burke-Daniels and Vigilant Policies were co-primary because they were intended to protect BBX from risks associated with pollution events and liability. The Federal Policy was excess because it protected BBX “against the risk a loss exceeded underlying insurance or was not covered by underlying insurance.” Id. at *5. Lloyds argued the Federal Policy was not excess over the Burke-Daniels Policy because the Federal Policy listed only the Vigilant Policy as underlying insurance for Coverage A and Coverage B did not apply. Id. at *6. The Court rejected that argument because the Federal Policy’s language plainly set it up as an excess policy and because the Burke-Daniels Policy’s other insurance clause stated that it was excess only if another primary policy applied and the “other insurance” clauses did not conflict. Id. The court applied the rule in Hardware Dealers Mut. Fire Ins. Co. v. Farmers Ins. Exch., 444 S.W.2d 583, 586 (Tex. 1969), which holds policies are co-primary if their other insurance clauses are “mutually repugnant”. The Court held that because a reasonable construction of the two policies’ “other insurance” clauses “from the insured’s perspective could result in full coverage under each policy but for the existence of the other,” the policies conflicted and their other insurance clauses were voided, rendering them co-primary. Id. at *7.
Judge Sparks also rejected Lloyds’argument that Hardware Dealers made the Federal Policy co-primary. He noted that Hardware Dealers addressed two primary policies while the Federal Policy was clearly set up as an excess policy. The Judge held the “Hardware Dealers rule is triggered only where concurrent coverage, coverage protecting against the same layer of risk, exists. Scottsdale Ins. Co. v. Steadfast Ins. Co., No. CVH-16-0273, 2017 WL 661520, at *4 (S.D. Tex. Feb. 17, 2017).
While it does not break new ground, this case shows how atypical coverages such as the oil patch policies can fit within standard categories in order to uphold established rules of allocation. It also illustrates how apparently simple insurance layering can give rise to complex arguments that require many paragraphs to “briefly” explain!