Amerisure Mutual Insurance v. Arch Specialty Insurance
784 F.3d 270
5th Cir.2015Background
- Admiral Glass & Mirror was insured under an Owner Controlled Insurance Program (OCIP) issued by Arch; Amerisure issued a separate commercial policy to Admiral in excess of OCIP coverage.
- OCIP had $2,000,000 per-occurrence and aggregate limits and originally stated supplementary payments "will not reduce the limits of insurance," but Endorsement 16 replaced that language to state supplementary payments "will reduce the limits of insurance."
- OCIP’s duty to defend provision stated the duty ends "when we have used up the applicable limit of insurance in the payment of judgments or settlements."
- Arch paid multiple prior settlements and defense costs under the OCIP (including a $1,555,000 wrongful-death settlement and claims for leaks), and later withdrew from defending an Endeavor suit, asserting the OCIP limits were exhausted. Amerisure continued defense and sued Arch for breach of contract.
- The district court held (per the magistrate) that: (1) defense costs were "expenses" that eroded limits; (2) the duty to defend ended only when limits were used up by judgments/settlements (not defense costs); and (3) Arch did not wrongfully exhaust the policy by paying certain claims. Arch appealed and Amerisure cross-appealed.
Issues
| Issue | Amerisure's Argument | Arch's Argument | Held |
|---|---|---|---|
| Whether "expenses" in Supplementary Payments includes defense costs | "Expenses" excludes attorneys' fees/defense costs; thus defense costs do not erode limits | "Expenses" includes defense costs; ordinary meaning and Texas authority support inclusion | Defense costs are "expenses" and count against policy limits (endorsement makes policy eroding) |
| Whether Endorsement 16 and general duty-to-defend clause create a non‑eroding defense limit | Even if endorsement makes payments erode limits, duty to defend ends only when limits are used up by judgments/settlements, so defense payments should not terminate defense | Endorsement 16 (specific) supersedes general language; supplementary payments reduce all limits including defense | Endorsement controls; policy is an eroding-limits policy and duty to defend can end when limits are exhausted by payments including defense costs (district court ruling on duty to defend reversed) |
| Whether Arch wrongfully exhausted the policy by paying claims Amerisure contends were uncovered (toilet and sprinkler leaks) | Payments for those claims were not covered under products-completed operations and thus were "wrongful exhaustion" | Payments were made under OCIP to an insured who demanded coverage; wrongful exhaustion claim not established here | Court declined to decide novel wrongful-exhaustion theory in depth and upheld district court that it did not apply here |
| Whether Arch breached duty to indemnify for the Endeavor suit | Arch breached by failing to indemnify after limits remained? | Arch had exhausted limits so no indemnity duty remained | Court affirmed district court that Arch had no duty to indemnify (limits exhausted) |
Key Cases Cited
- N. Am. Specialty Ins. Co. v. Royal Surplus Lines Ins. Co., 541 F.3d 552 (5th Cir. 2008) (distinguishing eroding vs. non‑eroding liability policies)
- Nat’l Union Fire Ins. Co. v. CBI Indus., 907 S.W.2d 517 (Tex. 1995) (insurance contracts governed by general contract‑construction rules; ambiguity resolved only after other rules applied)
- Starr Indem. & Liability Co. v. SGS Petroleum Serv. Corp., 719 F.3d 700 (5th Cir. 2013) (specific endorsement language controls over general policy language)
- Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010) (policy ambiguity requires two reasonable constructions)
- Mundy v. Knutson Constr. Co., 294 S.W.2d 371 (Tex. 1956) (historical Texas authority treating "expenses" to include attorneys’ fees)