Martin Resource Mgmt Corp. v. Zurich American Insu , 803 F.3d 766 ( 2015 )

Case: 14-40512 Document: 00513239934 Page: 1 Date Filed: 10/21/2015
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 14-40512 October 21, 2015
Lyle W. Cayce
MARTIN RESOURCE MANAGEMENT CORPORATION, Clerk
Plaintiff–Appellant,
v.
AXIS INSURANCE COMPANY,
Defendant–Appellee.
Appeals from the United States District Court
for the Eastern District of Texas
Before STEWART, Chief Judge, and BARKSDALE and PRADO, Circuit
Judges.
EDWARD C. PRADO, Circuit Judge:
This case centers on the interpretation of an excess-insurance-policy
provision designed to cover losses exceeding the limits of a primary-insurance
policy. Plaintiff–Appellant Martin Resource Management Corporation
(“MRMC”) purchased excess insurance from Defendant–Appellee AXIS
Insurance Company (“AXIS”). After suffering losses in a state lawsuit, MRMC
sued in federal court to recover under its primary- and excess-insurance
policies. MRMC eventually settled with its primary insurer for less than the
liability limit in the primary policy. AXIS moved for summary judgment,
arguing that settlement for less than the underlying policy limit does not
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trigger coverage under the terms of the AXIS policy. Summary judgment was
granted in favor of AXIS, and MRMC appealed. We affirm.
I. FACTUAL AND PROCEDURAL BACKGROUND
In this insurance dispute, MRMC seeks coverage for the cost of defending
a separate stock-dilution suit filed in Texas state court. MRMC purchased a
primary-insurance policy from Zurich American Insurance Company (“Zurich”)
and excess-insurance policies from AXIS and Arch Insurance Company
(“Arch”). All three policies have a liability limit of $10 million. The AXIS
coverage begins only after the underlying Zurich policy has been “exhausted
by actual payment under [the Zurich policy].” The Arch policy is the “second”
excess policy and provides insurance in excess of the Zurich and AXIS policies.
The sole question in this appeal is whether the Zurich policy was exhausted,
triggering the AXIS coverage.
After Zurich denied coverage of defense costs from the underlying
litigation, MRMC filed the instant suit seeking coverage under the terms of
the Zurich, AXIS, and Arch policies. Zurich settled with MRMC for a release of
any past, present, or future claims under the policy. The settlement obligated
Zurich to pay MRMC $6 million, an amount that was below Zurich’s $10
million liability limit. As a result of the settlement and release, Zurich has not
paid MRMC up to the full liability limit.
Based on this settlement, AXIS moved for summary judgment, arguing
that MRMC could not exhaust the underlying limit in the primary policy
because Zurich has not paid the full limit of its liability under the policy. 1
MRMC filed a cross-motion for summary judgment, contending that the AXIS
policy allows for MRMC to “fill the gap” by paying the difference between
1Arch also moved for summary judgment but reached a settlement with MRMC before
the magistrate judge ruled on its motion. The Arch policy is not at issue in this appeal.
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Zurich’s $10 million liability limit and the below-limit settlement. The
magistrate judge 2 granted summary judgment for AXIS, holding that “the
[AXIS] policy language clearly requires that the underlying insurer (i.e.,
Zurich) must actually pay out its full liability limit (i.e., $10 million) to [MRMC]
to trigger coverage from AXIS.” MRMC timely appealed.
II. STANDARD OF REVIEW
This Court has jurisdiction to review a district court’s final judgment
pursuant to 28 U.S.C. § 1291. This Court reviews de novo a district court’s
grant of summary judgment, viewing “all facts and evidence in the light most
favorable to the non-moving party.” Juino v. Livingston Par. Fire Dist. No. 5,
717 F.3d 431, 433 (5th Cir. 2013). This Court applies the same standard “as
the district court in the first instance.” Turner v. Baylor Richardson Med. Ctr.,
476 F.3d 337, 343 (5th Cir. 2007).
Summary judgment is appropriate “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment
as a matter of law.” Fed. R. Civ. P. 56(a). A genuine dispute of material fact
exists when the “evidence is such that a reasonable jury could return a verdict
for the nonmoving party.” Royal v. CCC & R Tres Arboles, L.L.C., 736 F.3d 396,
400 (5th Cir. 2013) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986)). “We review a district court’s interpretation of an insurance contract de
novo because it is a matter of law.” Kinsale Ins. Co. v. Georgia-Pac., L.L.C., 795
F.3d 452, 454 (5th Cir. 2015).
In a diversity case, this Court applies “the substantive law of the forum
state, here, Texas.” Citigroup, Inc. v. Fed. Ins. Co., 649 F.3d 367, 371 (5th Cir.
2011). “Under Texas law, the general rules of contract interpretation govern a
The parties consented to referral to a magistrate judge for proceedings and entry of
2
judgment pursuant to 28 U.S.C. § 636(c).
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court’s review of an insurance policy.” Id. A court’s “primary goal is to give
effect to the written expression of the parties’ intent.” Id. Where a policy “is not
ambiguous, . . . courts must construe it as a matter of law.” Id. A policy is not
ambiguous if “the policy language has only one reasonable interpretation.” Id.
“A reasonable construction is one that gives meaning to the disputed language
in the context of the writing, not one that strips the language of meaning
altogether.” Ideal Mut. Ins. Co. v. Last Days Evangelical Ass’n, Inc., 783 F.2d
1234, 1238 (5th Cir. 1986). If a policy “is susceptible to two or more reasonable
interpretations, it is ambiguous, and [courts] must resolve the uncertainty by
adopting a construction that favors the insured as long as that construction is
not unreasonable.” Delta Seaboard Well Servs., Inc. v. Am. Int’l Specialty Lines
Ins. Co., 602 F.3d 340, 343 (5th Cir. 2010) (footnotes omitted) (applying Texas
law). In other words, when construing an insurance contract, the court must
determine whether the contract is ambiguous and, if so, whether the insured’s
interpretation is reasonable.
III. DISCUSSION
Section I of the AXIS policy states:
The Insurance afforded under this Policy shall apply only after all
applicable Underlying Insurance 3 . . . has been exhausted by actual
payment under such Underlying Insurance, and shall only pay
excess of any retention or deductible amounts provided in the
Primary Policy and other exhausted Underlying Insurance.
The magistrate judge found that the language of the AXIS policy was
unambiguous and that it requires that Zurich actually pay $10 million to
MRMC to trigger AXIS coverage. MRMC argues that the Zurich policy was
“exhausted by actual payment” by “MRMC’s [below-limit] settlement with
3The Zurich policy is the primary policy and the only Underlying Insurance listed in
the AXIS policy.
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Zurich and MRMC’s payment of amounts greatly exceeding the remaining
policy limits.” That is, MRMC contends that it is reasonable to interpret the
AXIS policy to allow a below-limit settlement to exhaust the Zurich policy
where MRMC pays the difference between Zurich’s liability limit and the
settlement amount. AXIS counters that “actual payment under such
Underlying Insurance” shows that the $10 million must be paid by Zurich
because only Zurich can pay out under its policy.
We hold that the AXIS policy unambiguously precludes exhaustion by
below-limit settlement. Our analysis begins with an overview of the governing
case law. In Citigroup, Inc. v. Federal Insurance Co., this Court found that
numerous excess-coverage provisions unambiguously required the underlying
insurers to pay the full amount of the underlying limits. 649 F.3d at 371–73.
The insured, like MRMC here, had entered into a settlement with the primary
insurer for less than its liability limit. Id. at 370.
Of the policies discussed in Citigroup, the “Steadfast policy” presents the
language closest to the AXIS provision. It provided that excess-insurance
coverage “attaches ‘[i]n the event of the exhaustion of all of the limit(s) of
liability of such “Underlying Insurance” solely as a result of payment of loss
thereunder.’” Id. at 373 (alteration in original).
This Court emphasized that two aspects of the Steadfast policy made
clear that the policy is not triggered until the primary insurer pays the full
amount of its liability limits. First, the policy’s inclusion of the word “all”
indicated that “settlement for less than the underlying insurer’s limits of
liability does not exhaust the underlying policy.” Id. Second, the use of the
phrase “payment of loss” in the provision meant that “the underlying insurer
must make actual payment to the insured in order to exhaust the underlying
policy.” Id.
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In Citigroup, this Court quoted with approval Comerica Inc. v. Zurich
American Insurance Co., 498 F. Supp. 2d 1019 (E.D. Mich. 2007), in which a
Michigan district court read “the phrase ‘payment of losses’ to mean that actual
payment of losses by the insurer was necessary to trigger the excess coverage.”
Citigroup, 649 F.3d at 373. This was so because “settlements that extinguish
liability up to the primary insurer’s limits, and agreements to give the excess
insurer ‘credit’ against a judgment or settlement up to the primary insurer’s
liability limit are not the same as actual payment.” Id. (quoting Comerica, 498
F. Supp. 2d at 1032 (emphasis added)). Thus, “when a policy requires ‘payment’
to trigger coverage, actual payment must be made, and settlement does not
meet this requirement.” Id. (quoting Comerica, 498 F. Supp. 2d at 1032). This
Court then concluded that because the Steadfast policy (1) used the terms “all”
in reference to the underlying insurance and (2) required actual payment by
the insurer, a “settlement with [the underlying insurer] for less than the limit
of liability did not trigger Steadfast’s excess coverage.” Id.
In light of Citigroup, 4 the AXIS policy is unambiguous as to who must
pay and the amount that must be paid in order to exhaust the Zurich policy.
With regard to who pays, exhaustion requires Zurich to pay under its policy.
The phrase “exhaustion by actual payment under [the Zurich Policy]” makes
4 We are bound by Citigroup’s interpretation and application of Texas law to insurance
contract disputes. See Ford v. Cimarron Ins. Co., 230 F.3d 828, 832 (5th Cir. 2000) (“[A] prior
panel’s interpretation of state law has binding precedential effect on other panels of this court
absent a subsequent state court decision or amendment rendering our prior decision clearly
wrong.”). Appellant has not cited, and we have not found, a Texas state court decision that
has held Citigroup’s analysis of Texas contract law to be clearly wrong. To the contrary, a
recent state court of appeals decision regarding an excess-insurance contract quoted
Citigroup at length but did not disagree with its interpretation or application of Texas law.
Plantation Pipe Line Co. v. Highlands Ins. Co., 444 S.W.3d 307, 314 (Tex. App.—Eastland
2014, pet. filed). Rather, the state court concluded that Citigroup’s reasoning was not
dispositive because the policy at issue “did not contain language like the parties agreed to in
the policies in Citigroup.” Id. As explained below, we find that the operative portion of the
AXIS policy contains language substantively similar to the Steadfast policy in Citigroup.
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clear that Zurich must make payments to MRMC pursuant to its contract.
Even if we construed Zurich’s below-limit settlement to constitute “actual
payment,” MRMC’s contention that MRMC’s “gap” payments can also
constitute “actual payments under [the Zurich contract]” is not a reasonable
interpretation of the contract. See id. (finding that a contract requiring
“payment of loss [under the Underlying Insurance]” establishes that the
underlying insurer must make payment to the insured).
With regard to the amount that must be paid, it is unreasonable to
construe the AXIS policy to allow exhaustion by a below-limit settlement. The
AXIS policy requires “actual payment” of “all applicable Underlying
Insurance.” The AXIS policy defines “Underlying Insurance” as the policies
stated in the endorsement section. The endorsement section, in turn, only
contains the Zurich policy, which it identifies as MRMC’s primary policy with
a liability limit of $10 million. The word “all” makes clear that, under the AXIS
policy, a settlement does not exhaust the Zurich policy when it is for less than
the limit of liability.
Our holding is consistent with the ruling of state courts that have
analyzed language that is substantively identical to the AXIS policy. See JP
Morgan Chase & Co. v. Indian Harbor Ins. Co., 947 N.Y.S.2d 17 (App. Div.
2012). In JP Morgan, a New York appellate court analyzed numerous excess-
insurance policies, including one which stated that the excess insurance “shall
apply only after all applicable Underlying Insurance . . . has been exhausted
by actual payment under such Underlying Insurance.” Id at 21. Applying
Illinois law, the court found that the policies “unambiguously required the
insured to collect the full limits of the underlying polices before resorting to
excess insurance.” Id. at 23.
We are not persuaded by an out-of-circuit district court’s decision that
held the exact AXIS excess-insurance policy at issue to be ambiguous. See
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Maximus, Inc. v. Twin City Fire Ins. Co., 856 F. Supp. 2d 797, 801–02 (E.D. Va.
2012). Applying Virginia law, the Maximus court noted that AXIS’s policy did
not define the clause “actual payment under such Underlying Insurance.” Id.
at 801. The court concluded that the policy’s exhaustion clause did not
unambiguously preclude the insured party from filling the gap after a below-
limit settlement because the policy did not explicitly specify “actual payment
of the policy limit by the insurance carrier.” Id. at 802.
The Maximus court devoted the bulk of its analysis to contrasting the
AXIS policy with other excess-insurance policies that courts had held
precluded exhaustion by below-limit settlement. Such contracts, according to
the court, were “easily distinguishable” from the AXIS policy because the
exhaustion clause in those cases explicitly identified the insurer as the party
that must make the payment. 5 Id. at 802–03. In support, the court in Maximus
cited our decision in Citigroup and quoted only two of the four provisions
analyzed therein, both of which expressly stated that coverage did not attach
until the insurer paid or was obligated to pay the full liability limit. Id. at 803.
As the Maximus court noted, one provision analyzed in Citigroup provided that
coverage attached only after “the total amount of the Underlying Limit of
Liability has been paid in legal currency by the insurers”; the other provision
it cited established that the “policy was triggered when [the] underlying
insurers ‘shall have agreed to pay . . . the full amount of its respective limits of
liability.” Id. (quoting Citigroup, 649 F.3d at 372) (emphasis added).
Yet Citigroup compels us to reject Maximus’s rule of interpretation,
namely, that an exhaustion clause is ambiguous if it does not expressly specify
5With regard to the Maximus court’s interpretative method of comparing unrelated
contracts, we agree with the Second Circuit’s observation that “the fact that one contract is
even clearer than another does not make the other contract ambiguous.” Ali v. Fed. Ins. Co.,
719 F.3d 83, 93 n.17 (2d Cir. 2013).
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which party must make the requisite payments. As noted, Citigroup analyzed
the Steadfast policy, yet Maximus did not quote or mention it. Compare
Citigroup, 649 F.3d at 373, with Maximus, 856 F. Supp. 2d at 803. The
Steadfast policy, like the AXIS policy, did not expressly identify the underlying
insurer as the party obligated to make the “actual payment.” Citigroup, 649
F.3d at 373. It instead provided that the excess insurance attached where there
was exhaustion “solely as a result of payment of loss [under the Underlying
Insurance].” Id. Citigroup explained that the phrase “payment . . . [under the
Underlying Insurance]” “establishes that the underlying insurer must make
actual payment to the insured.” Id. Thus, the AXIS policy’s language requiring
exhaustion by “actual payment under [Zurich’s Policy]” is unambiguous:
exhaustion requires Zurich to make actual payment to MRMC.
Maximus also fails to persuade because it analyzed the Insuring
Agreement without reference to the other provisions of the AXIS policy. The
only AXIS provision cited in Maximus was Section I, the Insuring Agreement.
Yet Texas law disfavors isolated interpretations of contract provisions. Don’s
Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 23 (Tex. 2008) (“No
one phrase, sentence, or section [of the policy] should be isolated from its
setting and considered apart from the other provisions.” (alteration in original)
(internal quotation marks omitted)).
We find that the other provisions of the AXIS policy confirm that it
unambiguously bars MRMC from exhausting Zurich’s policy by paying the
difference between the underlying limit of liability and the below-limit
settlement. Section IV of the AXIS policy—“Reduction or Exhaustion of
Underlying Limits”—states in pertinent part:
A. If the Underlying Limits are partially reduced solely due to
actual payment under the Underlying Insurance, this Policy shall
continue to apply as excess insurance over the remaining
Underlying Limits.
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B. If the Underlying Limits are wholly exhausted solely due to
actual payment under the Underlying Insurance, this Policy shall
continue to apply as primary insurance . . . .
MRMC contrasts the language used in Section I—“exhausted by actual
payment”—with the language of Section IV(B)—“wholly exhausted solely due
to actual payment.” MRMC argues that the exclusion of the italicized words
from Section I shows that “exhausted by actual payment” in Section I can
“occur through a combination of (1) actual payment [by MRMC] and (2)
settlement.”
We find MRMC’s argument unavailing. The phrase “wholly exhausted”
in Section IV(B) must be contrasted with the phrase “partially reduced” in
Section IV(A). The policy uses different wording to distinguish the effects of
exhaustion from the mere reduction of the limits of liability. It does not create
an ambiguity as to whether exhaustion in Section I includes a below-limit
settlement. Indeed, 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. See Citigroup, 649 F.3d at 373.
MRMC also points to Section V, contending that it is reasonable to
construe that section to permit MRMC to make gap payments in this case.
Section V(C) of the AXIS policy, titled “Limits of Liability,” provides in
pertinent part:
If any Underlying Insurer fails to make payments under [its]
Underlying Insurance for any reason whatsoever, including
without limitation the insolvency of such Underlying Insurer, then
the Insureds shall be deemed to have retained any such amounts
which are not so paid.
MRMC contends this section supports its reading because it contemplates
excess coverage where Zurich fails to pay the full underlying limit by treating
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Zurich’s unpaid amounts as a retention. 6 Specifically, MRMC highlights the
apparent broadness of the phrase “for any reason whatsoever.” MRMC’s
argument is that Section V(C) encompasses instances where, as here, Zurich
does not pay the full policy limit because MRMC has agreed to release Zurich
of further obligations pursuant to a below-limit settlement.
MRMC’s emphasis on the phrase “for any reason whatsoever” is
misplaced. The threshold question here is whether Zurich has “fail[ed] to make
payments under” its policy. MRMC bargained for a below-limit settlement with
Zurich and in exchange released Zurich from further obligations under Zurich’s
policy. Because MRMC agreed to absolve Zurich, it is foreclosed from arguing
that Zurich failed in its obligations to make full payments under its policy.
Section V(C) is inapposite in this case because the below-limit settlement does
not constitute a “fail[ure] to make payment under [Zurich’s policy].”
Finally, although the parties dispute the applicability of Zeig v.
Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928) and the
public policy concerns it articulated, we find it unnecessary to reach the issue.
“Zeig stands for the proposition that, if an excess insurance policy ambiguously
defines ‘exhaustion,’ settlement with an underlying insurer constitutes
exhaustion of the underlying policy, for purposes of determining when the
excess insurance attaches.” 7 Citigroup, 649 F.3d at 371. This Court and Texas
state courts have refused to consider whether Zeig applies when the policy at
issue is unambiguous. See id.; Plantation Pipe Line Co. v. Highlands Ins. Co.,
444 S.W.3d 307, 314 (Tex. App.—Eastland 2014, pet. filed) (declining to decide
“as a matter of first impression, whether the Zeig doctrine applies in the State
6 Under Section I, AXIS “shall only pay excess of any retention or deductible amounts
provided in the Primary Policy and other exhausted Underlying Insurance.”
7 As the Second Circuit has observed, Zeig interpreted and applied “freestanding
federal common law” that the Supreme Court abrogated in Erie R.R. Co. v. Tompkins, 304
U.S. 64 (1938). Ali, 719 F.3d at 92, n.16.
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of Texas” because the excess-insurance contract at issue “is not ambiguous”).
We do not have to make an Erie guess whether Zeig controls because the AXIS
policy is unambiguous. Under the plain terms of the contract, the AXIS policy
is not triggered where MRMC pays the difference between Zurich’s liability
limit and a below-limit settlement releasing Zurich of any further obligations. 8
IV. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment in favor of AXIS.
8 Because the contract is unambiguous, we do not need to address the competing public
policy concerns that the parties raised. Under Texas law, “[a] court should not decide a public
policy question without first evaluating the contract language. Only if a contractual provision
violates public policy should a court not enforce it.” Westchester Fire Ins. Co. v. Admiral Ins.
Co., 152 S.W.3d 172, 182 (Tex. App.—Fort Worth 2004, pet. denied) (citing Tex. Farmers Ins.
Co. v. Murphy, 996 S.W.2d 873, 878 (Tex. 1999)). MRMC does not contend that an excess-
insurance contract that unambiguously precludes exhaustion by below-limit settlements
violates Texas’s public policy.
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