Texas Supreme Court ruling is likely to have a big
impact on additional insured disputes
The dispute involved two excess policies
purchased by the contractor, one of which was
provided by the carrier which underwrote the primary CGL.
By Joseph S. Harrington, CPCU
Disputes over additional insured status loom large in insurance, and just about everything looms larger in Texas. So, we can be confident that a 2023 ruling by the Texas Supreme Court will loom large over additional insured litigation well beyond the Lone Star State.
The question at issue was the extent of umbrella coverage for burn injuries to two oil refinery workers. Although the final resolution might seem obvious to policyholders and producers, it took nine years to reach the result, and insurers prevailed at various points along the way.
In the case, oil giant ExxonMobil contracted with a firm to operate one of its refineries.[1] The contract required the operator to have at least $2 million in commercial general liability (CGL) coverage. At the time of the accident, the refinery operator had $4.5 million in CGL coverage plus at least $25 million in excess liability coverage.
Interplay of provisions
What makes this case significant is that it involved the interplay of contractual provisions with insurance policy language, prompting the Texas Supreme Court to posit “three principles” for determining the application of coverage when extrinsic documents affect the amount and allocation of coverage.
In paraphrase, the three principles are:
- To consider first the text of the policy at issue;
- To refer to extrinsic documents only if the policy clearly requires doing so; and
3. To refer to such extrinsic documents only to the extent their provisions are incorporated into the policy and no further.
Taking the principles in reverse order, the contractor was required to maintain the greater of $2 million or “its normal and customary” CGL limits. The primary CGL policy then committed the insurer to extend coverage to any person or organization the insured was obliged to add as an additional insured “as a result of any contract or agreement.”
The dispute involved two excess policies purchased by the contractor, one of which was provided by the carrier which underwrote the primary CGL. At first, the excess carriers disputed that ExxonMobil was entitled to coverage, arguing that the agreement with the refinery operator effectively limited its additional insured status to primary coverage.
Failing to carry that point, the excess insurers cited a common provision in excess policies that coverage applies only to the extent of the underlying insurance. The insurers argued—successfully, in the appeals court—that this provision incorporated the underlying CGL limit of insurance, as well as its extent of coverage. Under that reasoning, only a small fraction of the excess limits would have been paid.
In arriving at its decision, the appeals court reasoned as follows:
[t]hat the umbrella policy incorporated the primary policy’s limits, and that the primary policy in turn incorporated the limits of the underlying service agreement, which . . . required only commercial general liability insurance of a specified minimum amount.[2]
This reasoning would substantially limit coverage under both the CGL and the excess policies.
In response, ExxonMobil argued that the contract’s insurance provision was a minimum, not a limit, and that the excess coverage limitation only applied to a type of loss not covered under the CGL. The Texas Supreme Court agreed with ExxonMobil, and the insurers ended up paying the full CGL limit and more than $20 million of the $25 million available under the excess policies.
Simple formula
This outcome may seem like common sense to agents and producers. After all, what point would there be to have an umbrella limit if its application was restricted by an underlying limit?
What made the case both difficult and significant, however, was the way in which a chain of document provisions came into play, and the manner in which the Texas justices formulated a simple three-step process for considering how those provisions should affect coverage.
The formula is simple enough to guide agents, brokers, and their clients as they seek to place additional insured coverage with confidence and clarity.
[1] ExxonMobil Corp v. National Union Fire Ins. Co., Texas Supreme Court, Docket No: No. 21-0936, decided April 14, 2023; accessed at https://www.txcourts.gov/media/1456242/210936.pdf
[2] Ibid. p. 4
The author
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.
