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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 92-8342

FEDERAL INSURANCE CO.,
Plaintiff-Counter
Defendant-Appellee,
versus
SUDHIR SRIVASTAVA, M.D., ET AL.,
Defendants-Counter
Claimants-Appellants.

Appeal from the United States District Court
for the Western District of Texas

( September 3, 1993 )
Before GOLDBERG, HIGGINBOTHAM, and DAVIS, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
This case involves the efforts of insureds and judgment
creditors to allocate excess coverage to bridge the failure of
carriers with intervening coverages to reach a solvent, but higher
level, insurer--all after the entry of a large judgment against the
insured. In a previous lawsuit, Dr. Sudhir Srivastava won a $31.6
million judgment against Harte-Hanks Television, Inc., and Harte-
Hanks Communications, Inc. Those parties, co-appellants here,
reached an accord among themselves and some insurers of Harte-
Hanks. Federal Insurance Co., the final excess policy carrier, did
not participate in that agreement and brought this declaratory
judgment action to determine its liability. The district court

held that Federal was not liable where the amount actually paid by
the insured and underlying carriers did not reach Federal's layer
of excess coverage, and that Harte-Hanks did not act as a prudent
uninsured in settling the controversy. We affirm.
I
Srivastava sued Harte-Hanks Television and its parent, Harte-
Hanks Communications, for defamation and invasion of privacy
following a series of television broadcasts in 1985 that questioned
Srivastava's professional competence. On April 10, 1990, a Bexar
County jury awarded Srivastava $11.5 million in actual and $17.5
million in exemplary damages. The trial court entered a judgment,
including prejudgment interest, for $31,597,201. On or about April
12, Harte-Hanks informed Federal, the carrier of its highest layer
of excess insurance, of the verdict.
Harte-Hanks had several layers of insurance protection.
Continental Casualty Company provided $2 million of primary
insurance coverage. Mission Insurance Company and Western
Insurance Company provided the next two layers of coverage, with
policies covering an additional $10 million of loss. Columbia
Casualty Company1 and Hudson Insurance Company jointly provided
another $10 million layer. The final layer of excess coverage, for
losses in excess of $22 million, was provided by Federal. These
layers of coverage are summarized by the following table:
Insurer
amount of coverage
layer of coverage
Continental
$2 million
$0 - $2 million (primary)
1This firm is now known as Commercial Union Insurance
Company.
2

Mission*
$5 million
$2 - 7 million
Western*
$5 million
$7 - 12 million
Columbia/Hudson

$10 million
$12 - 22 million
Federal
$30 million
$22 - 52 million
The second and third layers of insurance, however, proved hollow.
Mission and Western are insolvent, a major cause of the controversy
now presented.
Three provisions of Federal's excess liability policy appear
to be relevant. The policy's coverage language stated:
[Federal] agrees to pay on behalf of the insured LOSS
resulting from any occurrence insured by the terms and
provisions of the First UNDERLYING INSURANCE policy . .
. . The insurance afforded by this policy shall apply
only in excess of and after all UNDERLYING INSURANCE . .
. has been exhausted.
The policy defined a "LOSS" as:
the amount of the principal sum, award or verdict,
actually paid or payable in cash in the settlement or
satisfaction of claim for which the Insured is liable,
either by adjudication or compromise with the written
consent of [Federal] . . . .
Finally, the following provision governed Federal's obligation to
pay: "Upon final determination of LOSS, [Federal] promptly shall
pay on behalf of the insured the amount of LOSS falling within the
terms of this policy."
After the judgment in favor of Srivastava, Harte-Hanks
requested each of its solvent insurers to participate in an appeal
of the judgment and to post part of the supersedeas bond. The
insurers hesitated, however, noting potential coverage issues. The
major concern involved responsibility for the $10 million gap in
coverage caused by the insolvencies of Mission and Western. Also,
Federal expressed concern about late notice to it of Srivastava's
claim. Nonetheless, to prevent the execution of the trial court
3

judgment, Federal, Continental, Columbia/Hudson, and Harte-Hanks
executed an "Agreement Regarding Appeal."
The Agreement recited that each party "is dissatisfied with
the judgment, wishes to appeal the Judgment, and elects to
participate in the appeal of the Judgment." It stipulated,
however, that it "does not alter the Parties' obligations, if any,
regarding the prosecution of an appeal except as expressly stated."
At the same time, the Agreement preserved all reservations of
rights regarding coverage issues, being "made without prejudice to
each of the Parties' respective contentions vis-a-vis each other .
. . ." Each party agreed to contribute to the supersedeas bond.
Federal agreed to act as surety for $18 million, including the
portion of the judgment in excess of $22 million plus post-judgment
interest on the entire judgment. Harte-Hanks then perfected its
appeal in state court.
Before briefs were filed in the court of appeals, Srivastava
initiated settlement negotiations. All of the insurers were
invited to participate. Srivastava opened with an offer to accept
$21 million for the entire judgment. Federal responded that this
demand was below its layer of coverage. Federal requested that
Harte-Hanks and the underlying insurers make a good faith effort to
settle within the underlying policy limits. Federal itself
declined to participate in negotiations. Harte-Hanks nonetheless
urged Federal to contribute to a settlement. Federal viewed this
as a demand that Federal drop down in place of the insolvent
carriers, and refused.
4

Despite Federal's absence from the bargaining table, the
negotiators did not consider Federal "off the hook." They agreed
to only a partial settlement, which would not extinguish the entire
$31.6 million judgment. In exchange for a total payment of $8.5
million from Harte-Hanks, Continental, and Columbia/Hudson,
Srivastava agreed to release Harte-Hanks' liability for the first
$22 million of the judgment.2 The partial settlement agreement
provided that "all rights of actual recovery under the existing
Judgment or any future judgment . . . by [Srivastava] against
[Harte-Hanks] will be satisfied by collection from the upper-most
carrier involved in the present controversy, [Federal] . . . ."
Thus, Srivastava would receive $8.5 million from the settling
parties and retain the right to collect the remainder of the
judgment--more than $9 million--from Federal.
By settling, Harte-Hanks believed that it had fixed its
liability and so lost interest in prosecuting the appeal. By the
settlement, Federal would remain liable if the judgment were
enforceable. Federal demanded that Harte-Hanks continue to
prosecute the appeal. Harte-Hanks responded that it would not
dismiss the appeal if Federal would substitute its own counsel and
unequivocally acknowledge its obligation to pay the amount of an
2Under this settlement, Continental agreed to pay $2.1
million and Harte-Hanks to pay $1 million to extinguish the first
$7 million in liability. Harte-Hanks agreed to pay $2.4 million
more to extinguish the next $5 million in liability. Finally,
Columbia/Hudson agreed to pay $3 million to extinguish the
liability between $12 million and $22 million. Thus, Srivastava
would receive $8.5 million in satisfaction of the first $22
million of the judgment.
5

affirmed judgment in excess of $22 million. Federal construed this
as a demand to waive the reservation of rights, in violation of the
Agreement Regarding Appeal, and refused.3
As a result of the partial settlement, Harte-Hanks dismissed
its appeal of the $31.6 million judgment.4 The supersedeas bond
had been modified on motion of the settling parties in March, and
all parties agreed to terminate the bond on April 25, 1991.
On that day, Federal filed this declaratory judgment action,
resting jurisdiction on diversity of citizenship. After a bench
trial, the district court held that Federal was not obligated to
pay the judgment, because (1) the partial settlement agreement did
not exhaust the underlying insurance coverage, as required by
Federal's excess policy; and (2) Federal was not bound by the
settlement because Harte-Hanks did not act as a prudent uninsured
by settling on these terms. The court also found that Harte-Hanks
breached the Agreement Regarding Appeal by dismissing the appeal;
thus, "Federal rightfully chose not to participate in the Partial
Settlement Agreement." Finally, the court rejected counterclaims
that Federal breached duties of good faith and fair dealing due
Harte-Hanks. Harte-Hanks and Srivastava appealed.
II
As an excess policy carrier, Federal accepted the risk that
3Federal declined to substitute its own counsel, but offered
to pay attorney's fees subject to an arbitration of its liability
for them, referring to the arbitration clause of the Agreement.
4The Texas Fourth Court of Appeals granted this dismissal on
May 15, 1991.
6

Harte-Hanks would suffer a loss that exhausted the underlying
insurance polices. We must determine the meaning, under the
policy, of exhaustion and loss.
Texas law governs this diversity case. In construing
insurance policies, we must favor the insured when the language of
the policy is susceptible to more than one reasonable
interpretation. Ramsay v. Maryland Am. Gen. Ins. Co., 533 S.W.2d
344, 349 (Tex. 1976). "Of course, when the language of the policy
permits only one reasonable construction and that construction
favors the insurance company, recovery is denied." Ideal Mut. Ins.
Co. v. Last Days Evangelical Ass'n, Inc., 783 F.2d 1234, 1238 (5th
Cir. 1986) (citing Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936,
938 (Tex. 1984)). When policy terms are not ambiguous, they are
"given their plain, ordinary and generally accepted meaning unless
the instrument itself shows that the terms have been used in a
technical or different sense." Ramsay, 533 S.W.2d at 346.
"'[C]ourts will not so construe plain language as to make a
contract embrace that which it was intended not to include.'"
Royal Indem. Co. v. Marshall, 388 S.W.2d 176, 181 (Tex. 1965)
(quoting British America Assurance Co. v. Miller, 44 S.W. 60, 62
(Tex. 1898)).
"Excess liability insurers contract to provide inexpensive
insurance with high policy limits by requiring the insured to
contract for primary insurance with another carrier." Harville v.
Twin City Fire Ins. Co., 885 F.2d 276, 278 (5th Cir. 1989). In
this case, the bargained-for policy with Federal also required that
7

Harte-Hanks maintain several underlying layers of excess coverage.
Federal contemplated the risk--since actualized--that a jury would
award damages against Harte-Hanks in excess of $22 million. We
must be careful not to shift contracted-for risks. See id. at 279.
Our first task is to locate the starting point of Federal's
coverage layer. An excess policy's coverage usually begins when
all of the underlying insurers have exhausted their policies by
paying to their policy limits. Thus, Federal's policy states that
it shall apply only "after all UNDERLYING INSURANCE . . . has been
exhausted." Here, there are two large complications. The first is
that two of the underlying insurance carriers are insolvent. The
other is that, while a judgment in excess of the policy limits of
the underlying policies was awarded against the insured, a portion
of the judgment equalling their limits was extinguished by
settlement at a substantial discount.
Mission and Western were to provide coverage for losses
between $2 million and $12 million. Under Texas law, their
insolvencies cannot cause Federal to assume coverage for the
resulting gap in coverage. Texas courts do not require excess
insurers to "drop down" in the place of insolvent primary carriers.
See, e.g., Emscor, Inc. v. Alliance Ins. Group, 804 S.W.2d 195
(Tex. App.--Houston [14th Dist.] 1991, no writ). Likewise, in
cases arising in Texas and Louisiana, we have found no duty to drop
down. See e.g., Harville, 885 F.2d at 278; Steve D. Thompson
Trucking v. Twin City Fire Ins. Co., 832 F.2d 309 (5th Cir. 1987);
Mission Nat'l Ins. Co. v. Duke Transp. Co., 792 F.2d 550 (5th Cir.
8

1986); Continental Marble & Granite v. Canal Ins. Co., 785 F.2d
1258 (5th Cir. 1986). These holdings do not control this policy,
but offer a powerful guide to the reading of policy language.
Harville, 885 F.2d at 278. We are not the first court to consider
a Federal Insurance Co. policy with these terms. The Seventh
Circuit has done so, and concluded that the policy unambiguously
denied any obligation to drop down. New Process Baking Co. v.
Federal Ins. Co., 923 F.2d 62, 63 (7th Cir. 1991). According to
New Process, the insolvency of an underlying carrier, by itself,
has no effect on where the layer of excess coverage begins.
Since Federal has no duty to drop down in place of Mission and
Western, we conclude that its coverage begins when a loss exceeds
the policy limits of all underlying policies. Here, the layer of
coverage begins when a loss exceeds $22 million.
T h e c o v e r a g e
layer begins there regardless of whether the underlying insurers
actually pay those policy limits. This does not complete the
matter. We must determine whether the loss, as defined by the
policy, reached that layer of coverage. The amounts payable by
underlying insurers will be relevant to that determination in this
case.
Here, the underlying insurers, and the insured itself, have
agreed to a payment. Their partial settlement, however, does not
provide a payment that is equal to the policy limits of the
underlying insurance policies. Nonetheless, appellants argue that
their payments have exhausted the underlying policies. According
to them, the effect of the partial settlement is to extinguish a
9

judgment obligation equal to those policies.
Appellants rely upon a sixty-five-year Second Circuit
decision, holding that actual payment of underlying policies is not
required in order to exhaust them and trigger excess coverage. See
Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir.
1928). In Zeig, the insured had primary burglary policies
totalling $15,000 in coverage, plus an excess policy. The insured
settled claims against the primary policies for $6,000. The excess
carrier disputed its liability, because the underlying insurers had
not paid the insured their policy limits. Judge Augustus Hand
wrote:
The [excess carrier] argues that it was necessary for the
[insured] actually to collect the full amount of the
policies for $15,000, in order to "exhaust" that
insurance. . . . But the [insurer] had no rational
interest in whether the insured collected the full amount
of the primaries policies, so long as it was only called
upon to pay such portion of the loss as was in excess of
the limits of those policies.
. . . The clause provides only that [the primary
insurance] be "exhausted in the payment of claims to the
full amount of the express limits." The claims are paid
to the full amount of the policies, if they are settled
and discharged, and the primary insurance is thereby
exhausted. . . . [The word "payment"] often is used as
meaning the satisfaction of a claim by compromise, or in
other ways. . . . Only such portion of the loss as
exceeded, not the cash settlement, but the limits of
these policies, is covered by the excess policy.
Id. at 666.
As expressed in the last sentence of the quote, Judge Hand
assumed that the insured's loss was fixed before any settlement
with the primary insurers. With the loss set, there was little
danger that primary insurers could, contrary to the contracted-for
risk, shift any part of their burden to excess carriers. With a
10

burglary of property, the insured loss was established. A
defendant may liken a judgment on a jury verdict to burglary or
robbery--fashionable hyperbole. Yet, the insured defendant has not
realized a loss.
Appellants argue that the loss occurred when the trial court
entered its judgment for $31.6 million. They contend that entry of
the judgment established an amount payable in cash, an amount
exceeding the threshold of Federal's layer of coverage. This
reading of the policy is untenable. The policy requires Federal to
pay "[u]pon final determination of loss." A trial court judgment
on appeal with execution suspended by supersedeas is not a final
determination of loss under the policy. We conclude that a loss
occurred when the state court of appeals issued the mandate
following the dismissal of the appeal, after the partial
settlement. At that time, there was a fixed amount "payable in
cash."
When the supersedeas bond was terminated, the judgment had
been partially extinguished by settlement. We are not persuaded
that the nominal value of the extinguished portion of the judgment
establishes the loss. Rather, Harte-Hanks' loss is determined by
the actual value of the settlement with Srivastava--which includes
both the amounts payable by the settling parties and the
unextinguished portion of the judgment. That loss does not reach
the threshold of Federal's excess policy.5
5This does not mean that underlying insurers must actually
pay before excess policies are triggered. It means that their
obligation to do so must be finally determined. Nor need we
11

Since the insured's loss does not reach the layer of Federal's
coverage, Federal has no liability. We do not address Federal's
alternative argument that it may challenge the reasonableness of
the partial settlement.
Finally, we affirm the district court's holding that Federal
did not violate the insurer's duty of good faith and fair dealing
under Texas law. Federal had a reasonable basis for refusing to
participate in the settlement with Srivastava. While the absence
of policy coverage does not foreclose recovery for the breach of
the duty of good faith and fair dealing, Federal's decisions were
supported by reasonable bases at the time they were made. See
generally Harbor Ins. Co. v. Urban Const. Co., 990 F.2d 195, 202
(5th Cir. 1993).
AFFIRMED.
pause here to treat the issue of what portion of the judgment is
actually unextinguished.
12