IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 10-20445

CITIGROUP INC, as successor in interest to Associates First Capital

Corporation, 

Plaintiff - Appellant-Cross-Appellee 

v.

FEDERAL INSURANCE COMPANY; TWIN CITY FIRE INSURANCE

COMPANY; CHUBB ATLANTIC INDEMNITY, LTD; STEADFAST

INSURANCE COMPANY; SR INTERNATIONAL BUSINESS INSURANCE

COMPANY, LTD.,

Defendants - Appellees

ST. PAUL MERCURY INSURANCE COMPANY;

 

Defendant-Appellee-Cross-Appellant

Appeals from the United States District Court 

for the Southern District of Texas

Before SMITH and STEWART, Circuit Judges.*

CARL E. STEWART, Circuit Judge:

Associates First Capital Corporation (Associates) purchased integrated

risk policies from Certain Underwriters of Lloyd’s of London (Lloyd’s), the

United States Court of Appeals

Fifth Circuit

F I L E D

August 5, 2011

Lyle W. Cayce

Clerk

 This case is being decided by quorum due to the death of Judge William L. Garwood *

on July 14, 2011. 28 U.S.C. § 46(d).

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No. 10-20445

primary insurer, and nine excess insurers. Pursuant to the integrated risk

policies, Citigroup, Inc. (Citigroup), as successor-in-interest to Associates,timely

notified the insurers of two actions filed within the policy period and made

claims for coverage. Initially, all of the insurers denied coverage, but later,

Lloyd’s settled with Citigroup. The excess insurers continued to deny coverage,

and Citigroup filed suit. After the parties filed motions for summary judgment,

the district court dismissed Citigroup’s claims for coverage. We AFFIRM and

DISMISS as moot the cross-appeal of excess insurer St. Paul Mercury Insurance

Company.

I.

In July 1999, Associates, a nationwide consumer lender, purchased

integrated risk policies from ten insurers that provided a total of $200 million

in coverage. The policies were arranged in three layers. Associates’ primary

policy, issued by Lloyd’s, provided $50 million in coverage. Once Associates

incurred a covered loss exceeding the $50 million of primary coverage from

Lloyd’s, it could access $25 million in excess coverage from National Union Fire

Insurance Company of Pittsburgh (National Union) and $25 million in excess

coverage from Starr Excess Liability Insurance International, Ltd. (Starr),

known as the “Secondary Layer.” The third layer, or “Quota Share Layer,”

provided an additional $100 million of coverage, and was shared among seven

additional insurers as follows: Ace Bermuda Insurance, Ltd. (Ace), $25 million;

Federal Insurance Company (Federal), $17 million; Chubb Atlantic Indemnity

(Chubb), $17 million; Twin City Insurance Company (Twin City), $17 million; St.

Paul Mercury Insurance Company (St. Paul), $10 million; Steadfast Insurance

Company (Steadfast), $9 million; SR International Business Insurance Company

(SR), $5 million. 

Citigroup, which acquired Associates on November 30, 2000, sought

coverage from its insurers relating to two actions: (1) a statewide class action,

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filed against Associates in California Superior Court for San Francisco County

on June 25, 2001, entitled Morales, et al. v. Associates First Capital Corp., et al.,

that alleged violations of the California Unfair Business Practices Act, fraud and

deceit, negligent misrepresentation, breach of implied covenants of good faith

and fair dealing, and unjust enrichment, and (2) a Federal Trade Commission

(FTC) action, filed against Citigroup on March 6, 2001, that alleged that

Associates violated the truth in lending statutes by misrepresenting that

refinancing its customers’ debts into a single loan secured by their homes would

be beneficial. The insurers were timely notified of the Morales and FTC actions. 

Later, Citigroup entered into a settlement in these actions for $240 million plus

$23 million in class counsel’s fees and costs, without obtaining the consent of the

carriers. 

Each of the insurers initially denied coverage. However, Citigroup

eventually entered into a settlement agreement with Lloyd’s, pursuant to which

Lloyd’s paid Citigroup $15 million of its $50 million limits of liability in exchange

for a release from coverage for the FTC and Morales claims. The Secondary

Layer and Quota Share Layer insurers (collectively the excess insurers)

continued to refuse coverage, and Citigroup filed suit in Texas state court. 

Citigroup initially filed suit against each of the excess insurers. However,

it settled its claims with National and Starr, and its claims against Chubb 1

Atlantic and ACE proceeded to arbitration and are stayed pending

determination of this case. Accordingly, litigation proceeded with the five

remaining excess insurers—Federal, Steadfast, St. Paul, SR, and Twin City. 

The state court action was removed to federal court, and after a brief period of

Specifically, while the summary judgment motions, discussed infra, were under

1

submission to the district court, Citigroup entered into settlement agreements with National

Union and Starr Excess. Upon settlement, Citigroup’s claims against National Union and

Starr Excess were dismissed from this litigation in March 2009.

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discovery, Citigroup and the excess insurers filed cross-motions for summary

judgment. 

The district court granted summary judgment in favor of the excess

insurers. Specifically, the district court held that, per the excess insurers’

policies, their liability to provide coverage did not attach, i.e. they were not liable

to provide Citigroup with coverage, until Lloyd’s paid its full $50 million limit

of liability. The district court determined that, because Citigroup settled with

Lloyd’s for an amount less than $50 million, Citigroup was not entitled to

coverage from the excess insurers as a matter of law. In the alternative, the

district court addressed Twin City’s, St. Paul’s, and Federal’s statute of

limitations claims. The district court held that Texas’s four-year statute of

limitations barred Citigroup’s claims for coverage against Twin City and that its

claims against St. Paul were barred only to the extent Citigroup seeks coverage

for losses stemming from the FTC action, but not those resulting from the

Morales action. The district court also held that Texas’s two-year statute of

limitations barred Citigroup’s claims for coverage against Federal. 

Citigroup appealed, and St. Paul cross-appealed, challenging the district

court’s holding that the Morales action claim was not time-barred.

II.

A.

This is an appeal of the district court’s summary judgment in favor of the

excess insurers. We review a district court’s grant of summary judgment de

novo. Holt v. State Farm Fire & Cas. Co., 627 F.3d 188, 191 (5th Cir. 2010). 

Summary judgment is appropriate “if the movant shows that there is no genuine

dispute as to any material fact and the movant is entitled to judgment as a

matter of law.” FED. R. CIV. P. 56(a). When a party seeks summary judgment

pursuant to an affirmative defense, such as a statute of limitation, the movant

must establish all of the elements of the defense. Fontenot v. Upjohn Co., 780

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F.2d 1190, 1194 (5th Cir. 1986). If the movant does so, the burden shifts to the

nonmovant to provide specific facts showing the existence of a genuine issue for

trial. FED. R. CIV.P. 56(c), (e). In reviewing summary judgment, “[w]e construe

all facts and inferences in the light most favorable to the nonmoving party.” 

Dillon v. Rogers, 596 F.3d 260, 266 (5th Cir. 2010) (citation and internal

quotation marks omitted). 

Because our jurisdiction is based on diversity, we apply the substantive

law of the forum state, here, Texas. See Erie R. v. Tompkins, 304 U.S. 64 (1938).

To determine Texas law, we look to decisions of the state’s highest court, or in

the absence of a final decision by that court on the issue under consideration, we

“must determine, in [our] best judgment, how the state’s highest court would

resolve the issue if presented with it.” See Holt, 627 F.3d at 191. We also

examine “the general rule on the issue, and the rules in other states that Texas

might look to, as well as treatises and law journals.” State Farm Fire and Cas.

Co. v. Fullerton, 118 F.3d 374, 378 (5th Cir. 1997). We review a district court’s

application of state law de novo. Holt, 627 F.3d at 191. 

After carefully reviewing the policies at issue in this case, we conclude that

the plain language of Federal’s, Steadfast’s, S.R.’s, and St. Paul’s policies

dictates that their coverage did not attach when Citigroup settled with Lloyd’s. 

We also conclude that Citigroup’s claim against Twin City is time barred.

B.

1.

Under Texas law, the general rules of contract interpretation govern a

court’s review of an insurance policy. Utica Nat’l Ins. Co. of Tex. v. Am. Indem.

Co., 141 S.W.3d 198, 202 (Tex. 2004). Therefore, the primary goal is to give

effect to the written expression of the parties’ intent. Balandran v. Safeco Ins.

Co. of Am., 972 S.W.2d 738, 741 (Tex. 1998). If the policy language has only one

reasonable interpretation, then it is not ambiguous, and courts must construe

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it as a matter of law. Fiess v. State Farm Lloyds, 202 S.W.3d 744, 746 (Tex.

2006). 

Citigroup argues that, because the excess insurers’ policies have more than

one reasonable interpretation, the policy language is ambiguous, and we must

construe the policies strictly in favor of the insured. Thus, Citigroup urges us

to apply the rule established in Zeig v. Massachusetts Bonding & Insurance Co.,

23 F.2d 665 (2d Cir. 1928). Zeig stands for the proposition that, if an excess

insurance policy ambiguously defines “exhaustion,” settlement with an

underlying insurer constitutes exhaustion of the underlying policy, for purposes

of determining when the excess coverage attaches. See TOD I. ZUCKERMAN,

SETTLEMENT WITH PRIMARY INSURER FOR LESS THAN POLICY LIMITS § 10:22 (2010). 

According to Citigroup, pursuant to the rule established in Zeig, its settlement

with Lloyd’s exhausted the primary insurance and the excess insurers were

obligated to provide it with coverage. 

Neither the Texas Supreme Court, nor this court sitting in diversity and

applying Texas law, has adopted the Zeig rule. In the present case, we need not

make an Erie guess to determine whether Texas courts would adopt the Zeig

rule because Federal’s, Steadfast’s, S.R.’s, and St. Paul’s policies are not

ambiguous. Reviewing each policy separately to give effect to the written

expression of the parties’ intent, as required by Texas law, see Utica Nat’l Ins.

Co. of Tex., 141 S.W.3d at 202, we conclude that the plain language of the

policies dictate that the primary insurer pays the full amount of its limits of

liability before excess coverage is triggered. Because the degree of specificity

varies among the four policies, we examine each separately. 

Federal. The Federal policy states that coverage attaches only after “(a)

all Underlying Insurance carriers have paid in cash the full amount of their

respective liabilities, (b) the full amount of the Underlying Insurance policies

have been collected by the plaintiffs, the Insureds or the Insureds’ counsel, and

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(c) all Underlying Insurance has been exhausted.” The Federal policy leaves no

ambiguity about how the underlying policy is exhausted. The policy clearly

explains that exhaustion occurs through payment, in cash, and of the full

amount of the underlying insurer’s limit of liability. 

Notably, part (b) of the policy provision requires that the “full amount” of the

underlying insurer’s limits of liability be exhausted before coverage attaches. 

If Federal’s coverage attached with a settlement for less than the underlying

insurer’s limits of liability, as Citigroup contends, then the phrase “full amount”

would be innocuous. Under Texas law, when interpreting the language of a

policy, we are to read all parts of the policy together in order to give meaning to

every sentence, clause, and word to avoid rendering part of the policy

inoperative. Balandran, 972 S.W.2d at 741. Thus, we interpret the use of the

phrase “full amount” in the policy to mean that settlement for less than the

underlying insurer’s limits of liability does not trigger Federal’s coverage. See

Utica Nat’l Ins. Co. of Tex., 141 S.W.3d at 202; see generally Qualcomm, Inc. v.

Certain Underwriters at Lloyd’s, London, 73 Cal. Rptr 3d 770, 778–79 (Cal. Ct.

App. 2008) (interpreting “full amount of $20,000” to mean that the insured must

pay the entire limit of liability to trigger its excess coverage (brackets omitted)).

Accordingly, Citigroup’s settlement with Lloyd’s for less than Lloyd’s full limit

of liability did not trigger Federal’s excess coverage. 

St. Paul. The St. Paul policy states that coverage does not attach until

the underlying policy’s “total” limit of liability has been paid “in legal currency.” 

The full provision reads: “The Insurer shall only be liable to make payment

under this policy after the total amount of the Underlying Limit of Liability has

been paid in legal currency by the insurers of the Underlying Insurance as

covered loss thereunder.” Like the Federal policy, the St. Paul policy clearly

states how the underlying insurance is exhausted. The St. Paul policy not only

requires payment, but also specifies that the “total” limit of liability, which is

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defined in the policy as $50 million, be paid “in legal currency.” Thus, the plain

language of the St. Paul policy dictates that payment by an underlying insurer

for less than $50 million will not trigger St. Paul’s excess coverage. See Utica

Nat’l Ins. Co. of Tex., 141 S.W.3d at 202; see generally Qualcomm, Inc., 73 Cal.

Rptr 3d at 778–79. Accordingly, St. Paul’s coverage did not attach when

Citigroup settled with Lloyd’s for less than Lloyd’s “total” limit of liability.

SR. Coverage under the SR policy attaches “only after any Insurer

subscribing to any Underlying Policy shall have agreed to pay or have been held

liable to pay the full amount of its respective limits of liability as set forth in

Item 5. of the Declarations.” Item 5 of the Declarations states that the “limit of

liability” for the underlying insurer is “$50,000,000.” Therefore, the plain

language of SR’s policy requires that Lloyd’s pay the “full amount” of its $50

million limit of liability before SR is liable to provide Citigroup with coverage. 

See Utica Nat’l Ins. Co. of Tex., 141 S.W.3d at 202; see generally Qualcomm, Inc.,

73 Cal. Rptr 3d at 778–79. Because Lloyd’s paid Citigroup less than the “full

amount” of its $50 million limit of liability, we hold that SR’s excess coverage did

not attach.

Steadfast. The Steadfast policy provides that coverage attaches “[i]n the

event of the exhaustion of all of the limit(s) of liability of such ‘Underlying

Insurance’ solely as a result of payment of loss thereunder.” Citigroup argues

that exhaustion occurs pursuant to the Steadfast policy simply upon the

payment of any loss. We disagree. To begin, similar to the other policies, the

Steadfast policy requires that “all” of the underlying insurer’s limits of liability

be exhausted before coverage attaches. Thus, settlement for less than the

underlying insurer’s limits of liability does not exhaust the underlying policy. 

See Utica Nat’l Ins. Co. of Tex., 141 S.W.3d at 202; see generally Qualcomm, Inc.,

73 Cal. Rptr 3d at 778–79. Furthermore, the use of the phrase “payment of loss”

establishes that the underlying insurer must make actual payment to the

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insured in order to exhaust the underlying policy. Although not binding on this

court, the district court’s reasoning in Comerica v. Zurich American Insurance

Co., 498 F. Supp. 2d 1019 (E.D. Mich. 2007), is persuasive and supports our

interpretation. 

In Comerica, the district court interpreted the phrase “payment of losses”

to mean that actual payment of losses by the underlying insurer was necessary

to trigger the excess coverage. Id. at 1032. The district court noted that

“settlements that extinguish liability up to the primary insurer’s limits, and

agreements to give the excess insurer ‘credit’ against a judgment or settlement

up to the primary insurer’s liability limit are not the same as actual payment.” 

Id. (emphasis added). Thus, the district court concluded in Comerica that, when

a policy requires “payment” to trigger coverage, actual payment must be made,

and settlement does not meet this requirement. Id. 

The plain language of the Steadfast policy dictates that its coverage does

not attach until the underlying insurer makes a payment equal to “all” the

underlying insurer’s limits of liability, which is defined in the policy as $50

million. Therefore, Citigroup’s settlement with Lloyd’s for less than the limit of

liability did not trigger Steadfast’s excess coverage. 

In sum, the plain language of Federal’s, Steadfast’s, S.R.’s, and St. Paul’s

policies requires that Lloyd’s pay Citigroup the total limits of Lloyd’s liability

before excess coverage attaches. Thus, Citigroup’s settlement with Lloyd’s for

$15 million of its $50 million limits of liability in exchange for a release from

coverage for the FTC and Morales claims, did not satisfy the requirements

necessary to trigger the excess insurers’ coverage.

2.

We apply state statutes oflimitations in diversity cases. Hensgens v. Deere

& Co., 869 F.2d 879, 880 n.3 (5th Cir. 1989). In Texas, the statute of limitations

for the breach of an insurance contract action is four years from the day the

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cause of action accrues. TEX. CIV. PRAC. & REM. CODE § 16.051; see also Stine v.

Stewart, 80 S.W.3d 586, 592 (Tex. 2002). A claim for breach of an insurance

contract accrues and limitations begin to run on the date coverage is denied. See

Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 828–29 (Tex. 1990). The

parties agree that section 16.051’s four-year statute of limitations applies to

Citigroup’s coverage claim against Twin City. However, they dispute when

Citigroup was denied coverage for purposes of the claim’s accrual. Citigroup

argues that its coverage claim against Twin City, regarding the FTC and

Morales actions, did not accrue until Twin City sent a denial letter on October

29, 2002 (hereinafter the October 2002 letter). Conversely, Twin City argues

that Citigroup’s claim accrued, at the latest, when Twin City sent a letter

denying coverage on April 30, 2002 letter (hereinafter the April 2002 letter). The

Texas Supreme Court’s decision in Provident Life and Accident Insurance Co.

v. Knott, 128 S.W.3d 211 (Tex. 2003), provides guidance. 

In Knott, the Texas Supreme Court explained that in order for a letter to

constitute a denial, the letter need not use the word “denial,” but only state that

there is not coverage for the claim and give reasons why coverage is being denied

(hereinafter the Knott rule). Id. at 221–22. Accordingly, courts applying the

Knott rule have focused on whether letters, addressing coverage, contain

language communicating that the insurer is denying coverage and not “magic

words . . . used to deny a claim.” Id. at 222; see also Lozada v. Farrall &

Blackwell Agency, Inc., 323 S.W.3d 278, 291 (Tex. App.—El Paso 2010, no pet.)

(claim accrued when the insured received a letter explaining that “no policy was

in force and no benefits are payable”); Pace v. Travelers Lloyds of Tex. Ins. Co.,

162 S.W.3d 632, 634 (Tex. App.—Houston [14th Dist.] 2005, no pet.) (A letter

stating that “‘we have determined that the damage to your property is not

afforded coverage under the insurance policy,’ provided a reason for the decision,

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then reiterated that ‘we will be unable to make payment[,]’ unequivocally

communicated a decision to deny coverage.”). 

The April 2002 letter contains statements clearly communicating Twin

City’s denial of coverage and the reasons for the denial. Notably, the letter

states:

Because the Claim was made nearly three years prior

to the July 15, 2000 inception date of the Twin City

Policy, we are constrained to advise that the Insuring

Agreements . . . of the Primary Policy have not been

triggered. Consequently, Twin City regrets that it

cannot extend coverage under its policy for this matter. 

The letter further states:

In light of the foregoing, Twin City is constrained to

advise that no coverage is afforded this matter under

the Twin City Policy. The foregoing statements of Twin

City should not be deemed as the only bases upon

which Twin City’s coverage position rests, but rather

that are based upon the allegations asserted in the

complaints referenced above, and presently known

facts. 

The language used in the April 2002 letter—“Twin City cannot extend coverage”

and “no coverage is afforded”—unequivocally communicates that Twin City

would not provide coverage to Citigroup. Therefore, Citigroup’s claims accrued

at the latest in April 2002. As the claims are governed by a four-year statute of

limitations, Citigroup’s suit filed in October 2006 against Twin City was

untimely. 

III.

For the foregoing reasons, we AFFIRM the district court’s judgment. 

Because we affirm the district court’s judgment, we DISMISS St. Paul’s crossappeal as moot.

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