The Texas Supreme Court recently decided an insurance policy interpretation case involving an insurance company’s denial of coverage to a claimant as an additional named insured under an umbrella liability policy. In deciding for the claimant, the Court made it clear the terms of the contract in question will determine what is intended, and those terms are not to be expanded beyond their scope or interpreted in a way that is inconsistent with typical business practice.
The Backstory
The coverage controversy arose from personal injury claims made by two employees of Savage Refinery Services (Savage) who were badly burned on the job. Savage was performing services under a contract with ExxonMobil (Exxon) at the time of the accident. The two injured employees sued Exxon and settled their claims for more than $24 million.
The service agreement between Savage and Exxon required Savage to carry a minimum amount of liability insurance and to add Exxon as an additional named insured for any liability relating to the services Savage was to perform.
In addition to the primary insurance required by Exxon, Savage had purchased an umbrella policy as extra protection. Both policies were underwritten by National Union Fire Insurance (National). The primary policy had limits of $4.5 million, and the umbrella policy limits were $25 million.
National paid the primary policy limits on behalf of Exxon as an additional named insured but argued there was no coverage for Exxon under the umbrella policy. Exxon sued National for denying coverage. The trial court agreed that Exxon was an additional named insured under the umbrella policy and entitled to coverage.
National appealed the decision, and the appellate court reversed, basing its decision on language from the primary insurance policy and the service agreement between Exxon and Savage. The court said both documents were incorporated into the umbrella policy by reference. The Texas Supreme Court did not agree and found the appellate court’s interpretation went beyond the scope of the umbrella policy contract.
Why the Texas Supreme Court Decided in Favor of Exxon
There were two main issues the Texas Supreme Court decided in Exxon vs. National Union Fire Insurance. First, was Exxon entitled to coverage under the umbrella policy as an additional named insured? Second, as an additional named insured, was Exxon entitled to the full policy limits?
The language of the umbrella policy defined an insured to include an organization listed as an additional named insured on any underlying insurance policy. As required by the service agreement between Exxon and Savage, Exxon was listed as an additional named insured on the primary policy and, so, by definition, was also an additional named insured on the umbrella policy.
The analysis began with the Court recognizing established law that an insurance policy may incorporate some or all of the terms of another contract but only to the extent clearly referenced in the policy. Relying on case law going back to 1886, the Court identified the following three basic principles for interpreting an insurance policy:
- Start with the text of the policy
- Refer to outside documents only if the policy clearly requires doing so
- The scope of reference to outside documents is limited to only what is clearly authorized
The court stressed that the umbrella policy referenced the primary policy for the sole purpose of identifying any additional named insured persons or organizations who would also be insured as additional named insureds under the umbrella policy.
The umbrella policy went on to say the coverage afforded an additional named insured would not be broader than what was afforded by the primary insurance. National argued that the word ‘coverage’ was referring to the policy limits of the primary insurance, which had been paid already and meant Exxon was not entitled to any additional money.
Exxon argued the policy condition that coverage for additional named insureds was not to be any broader than coverage afforded by the primary policy referred to the scope of the risks being underwritten and not the policy limits to be paid. The Texas Supreme Court agreed with Exxon. The intention was to limit what was being insured, not for how much.
The court looked at how the word ‘coverage’ was typically used in insurance policies and concluded it usually refers to the risks being insured and not to the amounts to be paid. It also didn’t buy National’s argument the umbrella policy (absent a specific exclusion) would have been underwritten so as not to provide any additional limits to those insured under the primary policy when that is exactly why excess insurance is purchased.
What to Take Away from the Texas Supreme Court’s Decision
The court’s decision was a reminder that care should always be taken when drafting contracts to ensure they clearly express what the parties intend. The decision further clarified a court’s role is to determine an insurance company’s intent from the applicable policy and only look to outside documents if and to the extent the policy specifically directs it to.
The following are also some practical takeaways from the Texas Supreme Court’s decision:
- Contracts should be interpreted narrowly and only in accordance with the language in the document
- Contract language needs to be clear in its meaning and direction
- If a contract refers to another document to explain its terms, it must be specific about the scope of the reference so it is clear what is intended to become part of the contract
- Insurance policies covering the same risk should be read together to make sure they provide the desired coverage to the intended persons or organizations with limits appropriate to the risk
Texas Insurance Coverage Lawyers
MehaffyWeber has had a well-respected insurance defense practice for more than 75 years. Our attorneys have successfully argued and obtained favorable decisions in state and federal trial and appellate courts. When litigation is necessary, our talented team of seasoned litigators advocate on behalf of our clients from the inception of a case through appeal in both state and federal forums. Contact us for your Texas insurance coverage needs.