An energy exploration and development company is entitled to more than $50 million in coverage under its umbrella and excess insurance policies in connection with damage sustained during 2008's Hurricane Ike, even though its underlying insurance was exhausted by claims not covered by those policies, says an appellate court, in reversing a lower court ruling.

Houston-based W&T Offshore Inc. had purchased three types of insurance policies to indemnify itself against hurricanes: a commercial general liability policy, five energy package policies and four umbrella/excess liability policies, according to Monday's ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in Indemnity Insurance Co. of North America et al. v. W&T Offshore Inc. Indemnity Insurance Co. Is a unit of the Philadelphia-based Ace USA.

While both the umbrella and energy/primary liability policies have been endorsed to cover removal of debris claims, the key difference between them is that the umbrella policies do not cover property damage or operators' extra expenses that are incurred by W&T itself. They cover only claims against W&T by a third party, according to the ruling.

On Sept. 12, 2008, Hurricane Ike struck the Gulf of Mexico, allegedly causing damage to more than 150 offshore platforms in which W&T had an interest, according to the ruling.

W&T's loss adjuster submitted more than $150 million in claims for operators' extra expenses and property damage under the energy packages. The energy package contains a $10 million self-insured retention, which W&T has to exhaust prior to submitting any claims, according to the ruling.

Once that threshold is met, coverage proceeds in order through five policies that provide a total of $150 million coverage over and above the $10 million self-insured retention, said the ruling.

Because submitted expenses for operators' extra expense and property damage exceeded $150 million, the loss adjuster forecasted that W&T would submit all of its removal of debris claims, which were estimated to exceed $50 million, to the umbrella policies, said the ruling.

In anticipation of these claims, the underwriters filed several separate lawsuits seeking declaratory judgments, arguing that the umbrella policies only take effect if W&T's underlying and primary insurance is exhausted by claims that would be covered by the umbrella policies.

“Because W&T's underlying insurance was admittedly exhausted by claims not covered by the umbrella policies, the insurers argued that they have no liability,” said the ruling.

W&T, however, “argued that the umbrella policies takes effect once all underlying insurance is exhausted, regardless of how that exhaustion occurred,” said the ruling.

The District Court in Houston granted summary judgment in favor of the underwriters, holding the umbrella policies' plain terms state they only take effect if the underlying policies are exhausted by claims that would be covered under the umbrella policy.

However, a three-judge panel of the 5th Circuit disagreed in a unanimous ruling. It said that under the policies' language, the umbrella insurers were obligated to provide coverage in four different ways.

“Although Underwriters' argument — embraced by the district court — has force at first glance, a careful reading of the contract unambiguously precludes underwriters' interpretation,” says the ruling, in reversing the lower court ruling and rendering summary judgment in W&T's favor.