Decision by Fifth Circuit Notable for Primary and Excess Insurers Alike

A decision by the Fifth Circuit Court is notable for primary and excess insurers alike, providing primary insurers a tool to push excess insurers to participate in settlement negotiations early in litigation.

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, slip op. (5th Cir. Nov. 11, 2019), wherein it affirmed the Texas District Court’s finding that a “Covenant Not to Execute” was a settlement that relieved the primary insurer of its duty to defend the insured, and also recognized, for the first time, the well-established Louisiana practice known as the Gasquet Release.

As Eric Winder Sella covers in his article, “Louisiana First Circuit Court of Appeal Reviews Effect of Settlement on Insurer’s Duty to Defend,” the Gasquet Release is seen often in transportation litigation, especially when there is a smaller personal insurance policy providing primary coverage and other sources of insurance in addition to or in excess of the primary policy. In a Gasquet Release, a primary insurer will usually obtain a release of its insureds’ excess exposure and allow claimants to still pursue claims against remaining available insurance, including any excess or umbrella policies.

Background of Aggreko, L.L.C. v. Chartis Specialty Ins. Co. 

This lawsuit arose out of a wrongful death lawsuit when the decedent was killed in an electrocution accident while on the job. Although the primary insurer initially defended the defendant-insured, it later paid the plaintiffs the remainder of the policy limits ($950,000.00, $50,000.00 of which had been paid in prior settlement) in exchange for the plaintiffs’ agreement to collect any judgment only against the defendant-insured’s excess insurer.  As a result, the primary insurer stopped defending the defendant-insured.

Because there was a conflicts of law question, the court analyzed the issue of whether the “covenant not to execute” agreement could be considered a settlement under both Texas and Louisiana law. Because the Fifth Circuit held that both Texas and Louisiana would likely find that the payment by the primary-insurer was a settlement, a three-judge panel unanimously ruled there was no conflict and that Texas law applied, and found that a liability insurer can exhaust its duties to its insured without releasing the insured’s tort liability. In so holding, the Fifth Circuit found that the defendant-insured “clearly received . . .  the benefit of the [plaintiffs’] agreement not to execute any judgment directly against [the defendant insured]”, and “the lack of a release of [the defendant insured’s] liability is not dispositive” of whether the primary-insurer’s obligations to its insured were exhausted.

A Notable Decision

This decision is notable for primary and excess insurers alike. While the Fifth Circuit cautioned that its decision does not mean that the primary insurer can hurry to pay its limits simply so it can discharge its obligation to defend its insured (and not rack up defense costs), its decision provides primary insurers a tool to push excess insurers to participate in settlement negotiations early in litigation (even if, in that stage of litigation, the value of the case does not exceed the primary layer).