What effect does limiting the amount of required insurance in a construction contract have on an insurer writing umbrella coverage?  The Texas Supreme Court recently considered this issue, answering that the limitation was not incorporated into the umbrella policy and was of no effect.

The Court was very familiar with facts of the underlying dispute, ExxonMobil v. National Union Fire Insurance Company of Pittsburgh, PA, as it was the second coverage dispute the Court had heard and decided involving the same incident.  Exxon retained Savage Refinery Services (Savage) to perform work at Exxon’s Baytown refinery pursuant to Exxon’s Standard Procurement Agreement (the Service Contract). While working at the facility, two of Savage’s employees were injured by an accidental discharge of hot water. Both workers sought tort damages from Exxon.

One of the employees settled with Exxon without instituting formal legal proceedings. The other sued Exxon, but ultimately settled out of court. The combined settlement exceeded $24 million, with Savage’s primary commercial general liability (CGL) insurers exhausting their policy limits and paying about $5 million under additional insured obligations they owed to Exxon. Although Exxon requested Savage’s excess CGL insurers pay the settlement amount, they declined coverage.  Exxon initiated the current lawsuit to recover settlement money it paid out-of-pocket.

National Union Fire Insurance Company of Pittsburgh, PA (National Union), one of the excess insurers for Savage, argued that the Service Contract limited the amount of insurance Savage was required to carry for the Exxon project.  The Service Contract required Savage “carry and maintain in force at least the following insurances and amounts…(2) the normal and customary Commercial General liability insurance coverage and policy limits or at least $2,000,000, whichever is greater….”

At the trial court level, the court granted summary judgment to Exxon, finding that National Union was obligated under the umbrella policy to reimburse Exxon the approximately $20 million in out-of-pocket settlement costs it incurred.  The court of appeals reversed, finding that Exxon was not insured under the National Union policy. The issue the Supreme Court considered was whether the “payout” or policy limits in the underlying Service Agreement were incorporated into the umbrella insurance policies.

The crux of the dispute was the definition of Insured in National Union’s umbrella policy, as follows.

Insured means:…any person or organization, other than the Named insured, including as an additional insured under the Scheduled Underlying Insurance, but not for broader coverage than would be afforded by such Scheduled Underlying Insurance.

Exxon argued and the Texas Supreme Court held that the Service Contract was incorporated for limited, but not all, purposes.  The Scheduled Underlying Insurance included the primary CGL policy,  which provided additional insured coverage to any person or organization to which Savage was obligated by “any contract or agreement” to provide insurance.  The Service Contract, “the contract or agreement” referenced in the definition, required Savage provide additional insured coverage for Exxon. Incorporation of the Service Agreement, according to the Texas Supreme Court, was for the limited purpose of identifying who was entitled to receive additional insured coverage, not the type or limits of coverage to be provided.

Exxon also argued, and the Court agreed, that the term, “not for broader coverage”, was not intended to include the $2 million per occurrence limit seemingly included in the Service Agreement.  The Court held that the umbrella policy does not mention anything about the Service Agreement’s policy limitations. To graft extrinsic evidence, such as the Service Agreement, into the umbrella policy, the parties must clearly state their intent.  That level of clarity did not exist in the National Union umbrella policy.

The Court’s decision is an excellent reminder that clarity of intent matters.  When incorporating other documents in agreements, whether into an insurance contract or a construction contract, specifying the terms and conditions that are incorporated is seminally important.  At least in the insurance context, Texas will not wholesale incorporate all insurance provisions in an underlying contract between the parties unless the parties’ intent is clear.

The attorneys in our Dallas and Austin offices routinely assist clients in preparing contracts that evidence the parties’ intent clearly and expressly.  Please contact us with any questions you may have at info@gstexlaw.com.

Legal Disclaimers

This blog is made available by Gerstle Snelson, LLP for educational purposes and to provide general information about the law, only.  Neither this document nor the information contained in it is intended to constitute legal advice on any specific matter or of a general nature.  Use of the blog does not create an attorney-client relationship with Gerstle Snelson, LLP where one does not already exist with the firm.  This blog should not be used a substitute for competent legal advice from a licensed attorney.

©Gerstle Snelson, LLP 2023.  All rights reserved.  Any unauthorized reprint or use of this material is prohibited.  No part of this blog may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system without the express written permission of Gerstle Snelson, LLP.