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Mar 19, 2018

Covenants Not to Execute and Primary Policy Exhaustion

By: Fred Shuchart

The Plaintiffs’ claims greatly exceed the primary insurance policy limits.  The primary carrier attempts to get the excess carrier involved to settle the lawsuit, but to no avail.  The Plaintiffs’ counsel approaches the primary carrier with an offer:  tender your policy limits, and we will provide your insured with a covenant not to execute on their personal assets and will seek recovery of any judgment against only the excess carrier.  If the primary carrier accepts this offer, has it exhausted its limits so that it has no further duty to defend the insured?  The United States District Court for the Eastern District of Texas, Beaumont Division, recently answered the question “yes” in Aggreko, L.L.C. v. Chartis Specialty Ins. Co., No. 1:16-CV-297 (E.D. Tex. March 12, 2018).

In Aggreko, The Gray Insurance Company (represented by Cooper & Scully, P.C.) provided primary coverage to Aggreko as an additional insured.  Gray’s insured had an excess policy, and Aggreko had its own primary coverage.  After unsuccessful attempts to resolve the lawsuit, Gray tendered the remainder of its policy limits to Plaintiffs in exchange for a covenant not to execute on the personal assets of Aggreko.  Gray informed Aggreko that it would cease providing a defense after the agreement was executed and funded.  Aggreko’s primary carrier brought suit against Gray, seeking a declaration that Gray had a continuing duty to defend.

The Gray policy provided that its duty to defend ceased when it had “used up the applicable limit of insurance in the payment of judgments or settlements.”  Gray took the position that the agreement constituted a “settlement” and, therefore, exhausted the policy limits, while the other primary carrier took the positon that no “settlement” occurred because the insured did not receive a full release.  The District Court adopted Gray’s position, concluding that a “settlement” for purposes of the policy language does not necessarily require that all claims be resolved, but requires that some claim be fully resolved.  In this case, the claims against Aggreko’s own assets had been fully resolved by the covenant not to execute, even though the Plaintiffs retained the right to proceed against Aggreko’s insurance company and any policy proceeds.

In reaching its conclusion, the Court relied upon two previous cases that had reached a similar result: Judwin Properties, Inc. v. United States Fire Ins. Co., 973 F.2d 432 (5th Cir. 1992), and Kings Park Apartments, Ltd. v. Nat’l Union Fire Ins. Co., 101 S.W.3d 525 (Tex. App.—Houston [1st Dist.] 2003, pet. denied).  Importantly, the Court accepted Gray’s argument that the more recent decision in Continental Cas. Co. v. North Am. Capacity Ins. Co., 683 F.3d 79 (5th Cir. 2012), did not require a different result.  The Court acknowledged that the Fifth Circuit in Continental did not revise or overrule the Judwin decision.

The Court also faced a choice of law issue and the applicability of Section 21.42 of the Texas Insurance Code.  That Section provides, in essence, that any policy of insurance payable to a Texas resident and issued in the course of the carrier’s business in Texas is governed by Texas law.  The Court first concluded that the policy proceeds were payable to a Texas resident (the underlying suit Plaintiffs) as third-party beneficiaries because, by making the agreement with Gray as to Aggreko’s (the insured’s) liability, the Plaintiffs stepped into the shoes of Aggreko.  Thus, the proceeds were considered payable to the Plaintiffs. 

Second, Gray did not dispute that it did business in Texas.  Third, even though the policy was issued in Louisiana to a Louisiana insured, the Court concluded that the policy was issued in connection with Gray’s Texas business.  The Court concluded that, because the Rental Agreement between Aggreko and Gray’s insured was incorporated into the policy for additional insured purposes, and the Rental Agreement dealt with a rental in Texas, the policy was issued the course of Gray’s business in Texas.  Therefore, Texas law applied.