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Payment of Policy Limits and Covenants Not to Execute

By: Fred Shuchart

On November 11, 2019, the U.S. Court of Appeals for the Fifth Circuit issued its opinion in  Aggreko, L.L.C. v. Chartis Specialty Ins. Co., No. 18-40325, 2019 WL 5866880 (5th Cir. Nov. 11, 2019).  The Court ruled that, under both Texas and Louisiana law, payment of policy limits in exchange for a “covenant not to execute” may constitute a “settlement” under the primary policy and, therefore, exhaust the policy limits and extinguish the primary carrier’s duty to defend.

In the underlying lawsuit, Mr. Brenek, II, was electrocuted by an allegedly faulty generator on a rig.  At the time of his accident, Brenek was working for Guichard Operating Company, LLC, which had leased the generator involved in the incident from Aggreko, LLC. Under the rental agreement, Guichard had to name Aggreko as an additional insured under Guichard’s policies.  Aggreko tendered its defense of the lawsuit by Brenek’s survivors to The Gray Insurance Company as an additional insured.  Gray accepted the tender and provided Aggreko with a defense.  After defending the case for almost three years, and more than one mediation, Gray reached an agreement with the Plaintiffs.  Gray agreed to tender its policy limits for a full and final release of one of the defendants and a “covenant not to execute” against Aggreko.  Gray took the position that its policy limits were exhausted, and, therefore, it withdrew from the defense of Aggreko.

Indian Harbor, Aggreko’s primary carrier, sued Gray seeking a declaration that Gray had not exhausted its policy limits and still had a continuing duty to defend.  Both sides filed motions for summary judgment.  The trial court granted Gray’s and Indian Harbor’s motions, in part, concluding that Texas law applied and that, under Texas law, Gray’s payment in exchange for a “covenant not to execute” was a “settlement.”  Therefore, Gray had no further duty to defend.

Both parties appealed.  The issues before the Fifth Circuit were whether Texas law applied and whether, under Texas law, payment of the remaining policy limits constituted a “settlement” that would exhaust the duty to defend.  The Court answered unanimously “yes”:  that Texas law applied and that the payment would be considered a settlement for purposes of policy exhaustion.  

In reaching its conclusion, the Court rejected the argument that a “settlement” required a full release.  “We conclude that the lack of a release of Aggreko’s liability is not dispositive of whether Gray’s obligations to Aggreko under the Gray policy were exhausted.”  Instead, the Court looked to whether the agreement provided a benefit to Aggreko.  “Aggreko clearly received as a result of the covenant not to execute the benefit of the Breneks’ agreement not to execute any judgment directly against Aggreko.” 

The decision provides a tool for a primary carrier to pressure an excess carrier to participate in attempts to resolve lawsuits which cannot be resolved for the primary limits in the early stages, as opposed to waiting until the end stages to step in.  However, the decision is not a “get out of jail free card” for primary carriers to pitch and run.  As noted in the last paragraph of the decision:

[W]e recognize that, in some instances, insurers may be compelled to improperly and hastily hand over their policy limits to rid themselves of the duty to defend their insured. We reiterate that such a situation is not before us, as there is no suggestion or indication in the record that the Breneks’ damages do not exceed the Gray policy limit or that Gray did not properly investigate the Breneks’ claim on behalf of Aggreko. Thus, our decision should not be construed as in any way limiting remedies to insureds under Texas or Louisiana law against insurers who have improperly or in bad faith handled their claims.

Editor’s note:  Fred handled the case on behalf of the Gray Insurance Company.  If you have any questions regarding the decision, please contact Fred at fred.shuchart@cooperscully.com or 713-236-6810.


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