As you negotiate your master service agreements are you confident that you know how insurance choices might affect indemnity obligations? Me neither. That’s why I turn to my Gray Reed partner Darin Brooks and his insurance coverage lawyers. I didn’t consult them about this post so all errors are on me, not them.

A basic principle of Texas insurance law is that a separate contract may be incorporated by reference into an insurance policy only if that reference is clearly manifested in the terms of the policy itself.  A court will consult the separate contract only to the extent that the policy requires it.

The question in Exxon Mobil v. National Union Fire Insurance Company was whether an insurance policy incorporated payout limits in an underlying service agreement. It did not.

The facts

Savage Refinery Services was an independent contractor at the Exxon refinery in Baytown. In the service agreement Savage promised to obtain at least a minimum stated amount of liability insurance for its employees and to name Exxon as an additional insured. Fulfilling its obligation, Savage procured five different insurance policies. Two Savage employees were severely burned in a workplace accident, sued Exxon for compensation for their injuries, and settled for $24 million. $5 million was paid from Savage’s primary insurance policies. National denied Exxon coverage under an umbrella policy. Exxon sued for breach of contract.

Summary judgments were heard on the question of Exxon’s status as an insured under the umbrella policy and whether the Exxon-Savage service agreement otherwise limited Exxon’s entitlement to further policy proceeds.

The Court’s reasoning

The policies defined “Insured” as “any person or organization, other than the Named Insured, included as an additional insured under Scheduled Underlying Insurance, but not for broader coverage than would be afforded by the Scheduled Underlying Insurance.”

The first question was easily resolved: National had recognized Exxon as an additional insured under its primary policy. The primary policy was incorporated for the limited purpose of identifying who was an insured.

The real inquiry was invited by the umbrella policy’s reference to the primary policy. The umbrella policy disclaimed “broader coverage” than what the primary policy offered. Exxon was not demanding broader coverage. It sought only the same coverage as the primary policy but at the umbrella policy’s higher limits because the primary policies had been exhausted.

National Union argued that the limit on “broader coverage” invoked payout limits of the service agreement, but the umbrella policy did not say anything about the service agreement’s payout limits.

To the extent it could read the umbrella policy to reference the service agreement, the Court found no limits that the umbrella policy could adopt. The primary policy had its own payout limits, which was the very reason that the parties needed an umbrella policy. Interpreting “broader coverage” to refer to payout limits would give the umbrella policy a self-defeating meaning.  An umbrella policy springs into action only when the primary policy is exhausted. To conclude that “broader coverage” referred to payout limits could be the result only if the language the parties use clearly required it. There was no such language here.

The Court considered conventional usage of the words “coverage” and “umbrella insurance”. The former contemplated the risks covered, the latter was triggered only by reason of the limits under other policies. Coverage does not include payout limits in this context. The umbrella policies provide greater limits for risks already covered by primary policies.

The Court of Appeals’ decision in National’s favor was reversed and the case remanded.

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