In a dispute between the excess and primary carriers, the Fifth Circuit determined the primary policy was exhausted, triggering coverage under the excess policy. Amerisure Mut. Ins. Co. v. Arch Spec. Ins. Co., 2015 U.S. App. LEXIS 6627 (5th Cir. April 21, 2015).

   Amerisure issued a CGL policy to Admiral Glass & Mirror Co. The policy provided excess over any coverage under a controlled insurance program policy. Arch issued an Owner Controlled Insurance Program (OCIP) policy to Endeavor Highrise, LP and to its contrators and subcontractors for bodily injury and property damage arising out of the construction of the Endeavor Highrise. Admiral was a subcontractor insured under the OCIP.

    The OCIP had combined bodily injury and property damage limits of $2,000,000 per occurrence, a general aggregate limit of $2,000,000 and a products-completed operations aggregate limit of $2,000,000.  The OCIP contained a Supplementary Payments provision which provided that Arch would pay "[a]ll expenses we incur" in connection with any covered claim, and that "[t]hese payments will not reduce the limits of insurance." Endorsement 16, however, expressly deleted and replaced this statement with: "[supplementary payments] will reduce the limits of insurance." The OCIP also provided that Arch's duty to defend ended "when we have used up the applicable limit of insurance in the payment of judgments or settlements." 

   In June 2010, Endeavor sued Admiral and others for faulty work. Amerisure tenered the lawsuit to Arch as the primary insurer. In April 2012, Arch withdrew from the defense of the Endeavor lawsuit asserting that attorneys' fees, defense costs, and settlements of prior matters had exhausted policy limits. 

    Amerisure sued Arch for breach of contract, contending Arch wrongfully refused to defend and indemnify Admiral. Amerisure filed a motion for partial summary judgment seeking a declaration that: (1) Arch had not exhausted the policy because defense costs did not erode the policy limits; or (2) Arch had a continuing duty to defend after the policy was exhausted. Arch filed a cross-motion for summary judgment on the same issues.

   The district court accepted the recommendations of the magistrate, determining that: (1) defense costs and attorneys' fees were "expenses" under the Supplementary Payments provision and therefore eroded the policy limits; and (2) though subject to the same policy limits, the duty to defend ended only when the policy limits were exhausted by judgments and settlements alone (i.e., not by defense costs). Finally, the district court held that Arch did not breach its duty to indemnify, but did breach its duty to defend Admiral. 

   Arch appealed the finding that it had breached its duty to defend Admiral. Amerisure cross-appealed the part of the judgment holding that Arch had no duty to indemnify Admiral with respect to the underlying lawsuit filed by Endeavor. 

   The Fifth Circuit agreed with Arch that "expenses" in the Supplementary Payments provisions included defense costs and that the Endorsement controlled over any contrary language. Therefore, the Endorsement converted the policy into an eroding policy. Given its ordinary meaning, when an insurer paid costs of defense, including attorneys' fees, that was an "expense" to the insurer.

   Accordingly, the Fifth Circuit affirmed the district court's judgment regarding the duty to indemnify, reversed the district court's judgment regarding the duty to defend, and rendered judgment for Arch.