Hjalmar Jesus Gibeli Gomez: Insurance Coverage Under Umbrella Policy Extends Beyond Requirements of Service Contract
In ExxonMobil Corp. v. Natl. Union Fire Ins. Co. of Pittsburgh, PA, the Texas Supreme Court held that an insurance policy did not incorporate the payout limits of an underlying service agreement and thus the insured was entitled to the higher limits under the insurance policy. 2023 WL 2939596, at *1 (Tex. Apr. 14, 2023).
ExxonMobil involves a workplace accident at Exxon’s refinery in Baytown, Texas, involving two employees of an independent contractor, Savage Refinery Services. Id. The relationship between Exxon and Savage was memorialized in a service agreement under which Savage agreed to obtain at least a minimum amount of liability insurance for its employees and to name Exxon as an additional insured. Id. Specifically, the service agreement required Savage to “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[.]” Id. at n. 1.
Savage obtained the contractually required insurance. Id. During Savage’s performance of its contract, two of its employees were injured. Id. The employees sought compensation and settled with Exxon for an amount exceeding $24 million, with $5 million coming from Savage’s primary insurance policies, including policies underwritten by National Union Fire Insurance Company and Starr Indemnity & Liability Insurance Company, under which Exxon was an additional insured. Id. at 2. Exxon paid the balance of the settlement money because both insurers denied Exxon coverage under their umbrella policies. Id.
Exxon then sued both National Union and Starr for breach of contract, alleging that they wrongfully denied coverage under the umbrella policies. Id. The central issue was whether Exxon was entitled to coverage under the umbrella policies as an additional insured and whether the lower-dollar insurance requirement in the underlying service agreement were incorporated by reference into the insurance policies. Id. The trial court ruled for Exxon, finding that National Union had to reimburse Exxon for the roughly $20 million that Exxon had paid to settle with the injured claimants. Id.
National Union appealed the trial court’s decision. It argued that Exxon was not insured under its umbrella policy. The Court of Appeals of Texas agreed with National Union and reversed the trial court’s decision. Id. The appellate court held that the umbrella policy incorporated the primary policy’s limits and that the primary policy in turn incorporated the limits of the service agreement with Savage. The court found that because the service agreement required only commercial general liability insurance of a specified minimum amount, Exxon’s status as an additional insured was limited to primary coverage, and therefore Exxon was not entitled to coverage under the umbrella policies.
The Texas Supreme Court, however, disagreed with the Court of Appeals and reversed its decision. Id. The Supreme Court referred to longstanding principles of Texas law, including the cardinal rule that the policy is the contract and any incorporation of outside papers into the policy must be done in a clear manner that leaves no doubt of the parties’ intention to incorporate the outside papers. Id. The court relied on more recent cases, including In re Deepwater Horizon, 470 S.W.3d 452 (Tex. 2015), for the paradigm for policy interpretation. It explained that the basic principles for interpreting the meaning of an insurance policy include relying on the text of the policy at issue and referring to extrinsic documents only if the policy requires it, and only to the extent of the incorporation of those extrinsic documents and no further. Id. at 3.
Based on those principles of contract interpretation in the insurance coverage context, the court reasoned that Exxon was entitled to coverage as an additional insured under National Union’s umbrella policy because that policy followed the primary policy, under which Exxon was as an additional insured by virtue of its contract with Savage. Id. The court further concluded that the minimum limits of insurance set forth in the agreement with Savage did not reduce the limits available to Exxon under the umbrella policy. Id. 3-4. First, the court reasoned that the umbrella policy said nothing at all about the payout limits in the agreement with Savage, so the level of specificity required for incorporation by reference was not satisfied. Id. at 3.
Second, the court explained that even if it could read the umbrella policy to reference the agreement with Savage, it found no limits in the agreement that the umbrella policy could adopt—especially because, in the court’s view, the service agreement provided for a minimum amount of insurance, not a maximum. Id. at 4. Third, the court determined that the contractual language at issue did not require departure from the general understanding that umbrella policies provide greater limits of insurance for the risks covered by primary policies. Id.
The Texas Supreme Court’s decision in ExxonMobil Corp. clarifies the application of the incorporation by reference doctrine as applied to insurance policies interpreted under Texas law. It also underscores the importance of drafting specific and unambiguous contractual provisions, which is always critical, but especially so in the insurance context.