All it takes is a few words to frustrate the intent of contractors regarding the transfer of risk and additional insured coverage. Exxon recently learned this the hard way, spending 9 years in hard-fought litigation that required the rare involvement of the Texas Supreme Court to secure coverage. While Exxon prevailed in its quest for millions of dollars of additional insured coverage, the case is a cautionary tale for policyholders and insurers alike on the interplay, or lack thereof, of the contract terms between Exxon and its contractor and the terms of the insurance policies.
Importantly, the case involves the interpretation of common umbrella policy language affecting additional insured coverage. This commentary breaks down the significant factors in the case that influenced the court's decision and the impact on all contractual risk transfer vehicles.
The facts of the case are straightforward: ExxonMobile ("Exxon") hired Savage Refinery Services to work as an independent contractor at Exxon's refinery in Baytown, Texas. While performing work, two Savage employees were severely burned (the underlying claimants). The employees sought compensation for their injuries and later settled with Exxon for a collective amount exceeding $24 million.
Exxon sought to push this liability to Savage's liability insurers for these accidents via the additional insured requirement in the parties' service agreement. In that agreement, Savage promised to name Exxon as an additional insured as follows:
[Savage] shall carry and maintain in force at least the following insurances and amounts: … (2) its normal and customary Commercial General Liability insurance coverage and policy limits or at least $2,000,000, whichever is greater, providing coverage for injury, death or property damage resulting from each occurrence.… Notwithstanding any provision of an Order to the contrary, [Savage's] liability insurance policy(ies) described above shall: (i) cover [Exxon] and Affiliates as additional insureds in connection with the performance of Services; and (ii) be primary as to all other policies (including any deductibles or self-insured retentions) and self-insurance which may provide coverage. [Emphasis added.]
Significantly, the requirement to provide additional insured status under the "normal and customary Commercial General Liability insurance coverage and policy limits or at least $2,000,000" did not expressly mandate that Savage name Exxon as an additional insured under any umbrella or excess policies. Similarly, the requirements did not preclude Exxon from being entitled to additional insured coverage under the umbrella or excess policies.
Savage procured multiple insurance policies. Relevant to the case, National Union Fire Insurance Company underwrote two of them: a $4.5 million per occurrence commercial general liability (CGL) policy and a $25 million per occurrence umbrella policy.1
Primary CGL Policy
Chartis, Umbrella Prime Commercial Umbrella Liability Policy with Crisis Response (80517 (11/09))
National Union Fire Insurance, Manuscript Additional Insured endorsement (MAN002)
Regarding the $24 million settlement Exxon reached with the underlying claimants, the primary CGL policy paid its limits, and this payment left about $19 million remaining. However, National Union denied coverage under its umbrella policy, and Starr denied coverage under its bumbershoot policy. National Union contended that Exxon did not qualify as an "insured" under its policy.
The National Union umbrella policy defined "insured" as:
M. Insured means :
7. any person or organization, other than the Named Insured, included as an additional insured under Scheduled Underlying Insurance,but not for broader coverage than would be afforded by such Scheduled Underlying Insurance. [Emphasis added.]
Chartis Umbrella Prime Commercial Umbrella Liability Policy with Crisis Response, 80517 (11/09)
The umbrella policy's definition of "Scheduled Underlying Insurance" included National Union's primary CGL policy.
The "not for broader coverage" language in the umbrella policy is pivotal to the coverage dispute. Importantly, this language is commonly used in umbrella policies. Thus, the Texas Supreme Court's interpretation of this phrase will have lasting impacts on the industry.
Turning to the primary CGL policy, that policy included a blanket additional insured endorsement. The endorsement stated:
SECTION II - WHO IS AN INSURED, is amended to include as an additional insured:
Any person or organization to whom you become obligated to include as an additional insured under this policy, as a result of any contract or agreement you enter into which requires you to furnish insurance to that person or organization of the type provided by this policy, but only with respect to liability arising out of your operations or premises owned by or rented to you. However, the insurance provided will not exceed the lesser of the coverage and/or limits of this policy.
National Union's Manuscript Additional Insured endorsement, MAN002
The interplay between Exxon's service agreement with its contractor, the primary CGL policy, and the umbrella policy appears below.
Relying on the umbrella policy's definition of "insured," Exxon argued that it was entitled to coverage because it qualified as an additional insured under the primary CGL policy. Based on the umbrella policy's language, Exxon argued that the service agreement's additional insured requirements were only relevant to whether Exxon qualified as an "additional insured" under the CGL policy. In fact, Exxon pointed out that National Union recognized it as an additional insured under the primary CGL policy and paid out its limits.
In contrast, National Union contended that Exxon was not an additional insured under the umbrella policy because Exxon's and Savage's service agreement "expressly limit[ed] additional insured coverage for Exxon to insured Commercial General Liability coverage." National Union pointed out that its umbrella policy "incorporate[d] the coverage limitations" of the National Union CGL policy by including as an "'[i]nsured' any organization included as an additional insured under the [National Union CGL policy] but not for broader coverage than would be afforded by [the National Union CGL policy]." [Emphasis added.]
Exxon prevailed in its claims against National Union at the trial court level. National Union appealed to the Houston Court of Appeals (1st District). The intermediate appellate court reversed, holding that National Union did not owe additional insured coverage. Facing an uninsured exposure of almost $20 million, Exxon appealed to the highest court of the state—the Texas Supreme Court. The high court agreed to accept the case. This appeal was not guaranteed, as the Texas Supreme Court only accepts a small number of cases each year.
The Texas Supreme Court Rules in Exxon's Favor
The Texas Supreme Court ruled that Exxon was owed additional insured coverage under the National Union umbrella policy. The main issues focused on the extent that other extrinsic documents (i.e., the CGL policy and the service agreement) should be incorporated in determining additional insured status under the umbrella policy. In analyzing these issues, the high court announced the following three principles that are relevant to blanket additional insured status.
Begin with the text of the policy at issue (i.e., the umbrella policy);
Refer to extrinsic documents only if the policy language incorporates these extrinsic documents; and
Refer to such extrinsic documents only to the extent of the incorporation and no further.
The umbrella policy contained two instances where it incorporated the CGL policy and service agreement, which the court analyzed separately.
Umbrella Policy Incorporates CGL Policy for a Limited Purpose—To Determine Additional Insured Status
First, the Texas Supreme Court turned to the umbrella policy's coverage for "any person or organization" that is "included as an additional insured under Scheduled Underlying Insurance." According to the high court, the umbrella policy's "Scheduled Underlying Insurance" language incorporates an extrinsic document—the primary CGL policy to determine who is an "additional insured." Importantly, the high court stated that the umbrella policy incorporated "the primary policy for the limited purpose of identifying who is an insured." [Emphasis added.]
Next, the court analyzed the CGL policy's language regarding the limited issue of whether Exxon qualified as an additional insured. The CGL policy covered "[a]ny person or organization" to which Savage is obligated by "any contract or agreement" to provide insurance. Based on the CGL policy's reference to "any contract or agreement," the high court determined that the service agreement between Exxon and Savage was incorporated. Significantly, the court noted that the incorporation of the service agreement was relevant for the limited reason as to whether it obligated Savage to provide insurance for Exxon.
After stepping through this chain of documents, the court noted that National Union did not dispute that Exxon was an additional insured under the CGL policy. In fact, it paid the policy limits of the CGL policy. Thus, the court determined that Exxon qualified as an "insured" under the umbrella policy, as it was an organization included as an additional insured under the primary CGL policy.
Umbrella Policy Does Not Incorporate the Payout Limits of the Service Agreement
Next, the court grappled with the umbrella policy's second reference to the primary CGL policy. Specifically, the umbrella policy disclaimed "broader coverage" than would be afforded by the primary CGL policy. At issue was the meaning of "broader coverage." National Union argued that "broader coverage" referred to payout limits. In contrast, Exxon contended that "broader coverage" meant risks the CGL policy would not cover.
The court determined that the "broader coverage" language limited the umbrella policy's incorporation of the CGL policy to only its scope of coverage. The court reasoned:
Interpreting "broader coverage" to refer to payout limits, however, would give the umbrella policy a self-defeating meaning, as an umbrella policy springs into action only when the primary policy is exhausted. We could embrace such a result only if the language the parties used clearly required it. But no such language exists here, and there is no need to save the umbrella policy from "meaningless" language by adopting a construction that renders the policy itself largely meaningless. If "coverage" instead refers to the risks and liabilities that the primary policy reaches—and not any other kind of risk or liability—then the umbrella policy's limiting language protects the insurer from claims that are unlinked to the applicable primary policy. This conclusion follows from conventional usage of "coverage" and "umbrella insurance." The former contemplates the risks covered, and the latter is triggered only by reaching the limits of other policies. National Union points us to no authority providing that "coverage" must include payout limits in this context. Its own umbrella policy, in fact, distinguishes between "coverage" and "limits." In short, the contractual text before us does not require departure from the settled understanding that umbrella policies provide greater limits for the risks already covered by primary policies.
Based on this rationale, the court ruled that the umbrella policy's "broader coverage" language only prevented Exxon from demanding that National Union pay for losses the primary CGL policy would not reach. In other words, this was a true following form approach to additional insured coverage under the umbrella policy.
Drilling down further into Exxon's position, the court noted that Exxon did not demand "broader coverage" than the coverage available under the CGL policy. Instead, the court stated that Exxon sought "only the same coverage as the primary policy but at the umbrella policy's higher limits, given that the primary policies have been exhausted." After siding with Exxon on the two obstacles to coverage, the court ruled that additional insured coverage was owed under the umbrella policy.
Moreover, the high court rejected several other augments by National Union regarding the "broader coverage" language. First, the court held that the umbrella policy's incorporation did not include the policy limits of the CGL policy. According to the court, "the umbrella policy does not say anything at all, even by reference, about the service agreement's payout limits, much less with the clarity that our cases would require for incorporation." Moreover, even accepting that the service agreement's payout limits were incorporated, the court sternly ruled that it would not matter:
Second, to the extent that we could read the umbrella policy to reference the service agreement in this way, we find no limits in it that the umbrella policy could adopt. The service agreement provides for a minimum amount of insurance, not a maximum. Whether Savage had to buy as much insurance as it did is beside the point. What matters is that it did obtain that insurance.
Also, the court rejected National Union's argument that the umbrella policy's "limiting clause" would be "meaningless" if Exxon could recover under it, given that it had already exhausted the primary policies.
This Texas Supreme Court decision is significant for all entities seeking additional insured status based on the insurance requirements in a contract. Going forward, the incorporation of extrinsic documents, like service contracts and underlying policies, will be analyzed by the three-part test announced in the case. Careful attention should be paid not only to the terms of the contract but also to the incorporation language in the policies' additional insured provisions. The best practice for parties seeking the protection of additional insured coverage is to obtain the pertinent policies from the other party and closely scrutinize the additional insured language in conjunction with the contract. Failure to do so can result in a costly insurance dispute at best, or at worst, millions of dollars of uninsured losses.
Moreover, this case was a close call. It took 9 years of litigation, as the coverage suit was filed in 2014. Exxon lost at the intermediate appellate level and was forced to take the case all the way to the state's highest court to prevail on coverage—a rare feat. Exxon could have avoided these headaches had the service agreement specifically included a requirement for umbrella coverage. For example, it is unlikely that the insurer would have disputed coverage if the service agreement contained the following language in italics:
[Savage] shall carry and maintain in force at least the following insurances and amounts: (1) its normal and customary Commercial General Liability insurance coverage and policy limits or at least $2,000,000, whichever is greater; and (2) commercial umbrella insurance or excess liability with policy limits of at least $30,000,000 providing coverage for injury, death or property damage resulting from each occurrence.… Notwithstanding any provision of an Order to the contrary, [Savage's] liability insurance policy(ies) described above shall: (i) cover [Exxon] and Affiliates as additional insureds in connection with the performance of Services; and (ii) be primary as to all other policies (including any deductibles or self-insured retentions) and self-insurance which may provide coverage.
In contrast, the umbrella insurer could have prevailed in the case had it made a minor tweak to its policy language. For example, language specifically limiting additional insured coverage to the extent required by the service agreement would have likely made a difference to the court. Once again, this case demonstrates that simple changes by either party can materially alter the transfer of risk.
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1 A third policy was a $25 million bumbershoot liability policy underwritten by Starr Indemnity & Liability Insurance Company.