Strict “Policy Limits” Exhaustion for Umbrella Coverage Under Florida Law

I. Introduction

RLI Insurance Company v. John Lehman (11th Cir. Aug. 7, 2026) addresses a recurring dispute in excess/umbrella insurance: when an umbrella policy conditions coverage on underlying limits being “exhausted,” does a below-limits settlement with an underlying carrier satisfy that requirement?

The parties were RLI Insurance Company (issuer of an umbrella policy) and insureds John and Alicia Lehman. After Mr. Lehman suffered severe injuries in a Florida automobile accident, the Lehmans recovered the $200,000 UM limit from Mapfre and later settled a disputed $500,000 UM claim with Philadelphia for $50,001. RLI denied umbrella coverage and sought declaratory relief in federal court (diversity jurisdiction), contending the umbrella policy required (1) maintenance of specified underlying UM limits and (2) exhaustion of underlying policy limits before RLI’s coverage could attach.

The key issue on appeal was the meaning and application of the RLI policy’s exhaustion clause: whether the phrase “[t]he policy limits of any and all Underlying Insurance have been exhausted by payment of judgments or settlements” requires full payment up to the underlying policy’s stated limits, or whether a below-limits settlement can suffice.

II. Summary of the Opinion

The Eleventh Circuit vacated the district court’s sua sponte summary judgment for the Lehmans and remanded with instructions to enter summary judgment for RLI. The court held that, under Florida law and the plain meaning of “exhaust,” the RLI umbrella policy’s excess coverage does not apply unless the underlying insurers’ policy limits are fully consumed by payment of judgments or settlements.

Because the Philadelphia UM policy limit was $500,000 and the Lehmans settled for $50,001, the underlying limit was not exhausted; therefore, the umbrella policy did not attach. The court did not reach the separate “maintenance” issue (whether the Lehmans maintained required minimum underlying UM limits) because failure to exhaust was dispositive.

III. Analysis

A. Precedents Cited

1. Stanley v. City of Sanford, 83 F.4th 1333 (11th Cir. 2023), aff'd, 606 U.S. 46 (2025)

The court cited Stanley for the standard of review: summary judgment is reviewed de novo, and the record is viewed with all reasonable inferences in favor of the nonprevailing party. This framing mattered because the panel treated the legal question—how to interpret “exhausted” in an insurance contract—as a matter of law appropriate for summary judgment.

2. Towne Realty, Inc. v. Safeco Ins. Co. of Am., 854 F.2d 1264 (11th Cir. 1988)

Towne Realty supplied the Erie principle in diversity cases: the federal court must decide the issue as the state’s highest court would. This was central because Florida Supreme Court authority on this precise exhaustion wording was not directly cited, requiring the panel to predict how that court would construe the clause.

3. Winn-Dixie Stores, Inc. v. Dolgencorp, LLC, 746 F.3d 1008 (11th Cir. 2014) (quoting Studstill v. Borg Warner Leasing, 806 F.2d 1005 (11th Cir.1986))

These cases provided the rule that federal courts generally follow a state’s intermediate appellate decisions unless there is “some persuasive indication” the state supreme court would disagree. The panel used this framework to explain why it would not follow Reliance Insurance Co. v. Transamerica Insurance Co. despite its arguably insured-friendly approach to exhaustion.

4. Blanco v. Samuel, 91 F.4th 1061 (11th Cir. 2024)

Blanco was cited for terminology and posture: because the district court granted summary judgment sua sponte to the Lehmans, the panel used “prevailing” and “nonprevailing” rather than “moving” and “nonmoving.” While procedural, it underscores that the appellate court treated the district court’s action as fully reviewable under ordinary summary-judgment principles.

5. Penzer v. Transp. Ins. Co., 29 So. 3d 1000 (Fla. 2010)

Penzer provided the controlling Florida interpretive methodology: insurance contracts are construed according to their plain meaning, and when relevant terms are undefined, courts may consult commonly relied-on references such as dictionaries to supply accepted meanings. The panel treated Penzer as the lodestar and built its interpretation of “exhaust” directly from dictionary definitions.

6. Reliance Insurance Co. v. Transamerica Insurance Co., 826 So. 2d 998 (Fla. 3d DCA 2001)

The Lehmans relied heavily on Reliance, where the Third District held an insured “exhausted” underlying insurance despite settling for less than the underlying limits. The panel declined to treat Reliance as controlling for two articulated reasons:

  • Textual distinction: the exhaustion clause in Reliance required exhaustion of “all primary insurance” and did not refer to exhausting policy limits, whereas RLI’s clause expressly required that “policy limits” be exhausted by payment.
  • Methodological gap: Reliance did not analyze the plain meaning of “exhaust,” did not note any policy definition, and did not consult dictionaries; the panel treated this as a “persuasive indication” that the Florida Supreme Court—following Penzer—would not adopt Reliance for the clause at issue.

B. Legal Reasoning

  1. Start with the contract’s condition precedent. The umbrella coverage applied only if “[t]he policy limits of any and all Underlying Insurance have been exhausted by payment of judgments or settlements.” The dispute turned on “exhausted.”
  2. Apply Florida’s plain-meaning approach. Because “exhaust” was undefined, the court (per Penzer) consulted dictionary and legal dictionary definitions, all pointing to complete consumption/using up of the whole supply.
  3. Give effect to “policy limits.” The panel’s analysis tied “exhausted” to the “policy limits” reference: excess coverage attaches only after the full underlying limits are consumed by payments made in judgments or settlements.
  4. Apply the meaning to the undisputed numbers. Philadelphia’s UM limit was $500,000; the Lehmans received $50,001. Because $449,999 of the limits remained unconsumed, the underlying limits were not exhausted, and RLI’s umbrella layer did not attach.
  5. Distinguish contrary intermediate authority rather than follow it. The court explained why Reliance did not control—both due to different clause language and the lack of a plain-meaning analysis consistent with the Florida Supreme Court’s interpretive methodology.

Notably, the court did not adopt a functional or policy-based “settlement exhaustion” approach (i.e., treating a compromise settlement as “exhausting” for purposes of triggering excess). Instead, the decision reflects a textual rule: where the contract speaks in terms of “policy limits … exhausted,” exhaustion means full payment up to those limits.

C. Impact

This decision has practical consequences for Florida-governed umbrella/excess disputes (especially UM contexts) when policies contain “policy limits … exhausted” wording:

  • Strict exhaustion is enforceable by text. Insureds cannot trigger umbrella coverage through a below-limits settlement with an underlying carrier if the umbrella policy requires exhaustion of “policy limits.”
  • Settlement strategy shifts. When liability or coverage is disputed with an underlying insurer, insureds may need to (a) litigate to full limits, (b) negotiate a limits settlement, or (c) “fill the gap” (pay the difference themselves) if the umbrella policy and governing law require actual limits exhaustion (the opinion does not address gap-filling directly, but its reasoning heightens the issue).
  • Clause drafting becomes outcome-determinative. The court’s distinction from Reliance signals that small textual differences (“all primary insurance” vs. “policy limits … exhausted”) can control whether below-limits settlements suffice.
  • Predictive Erie analysis. The panel’s willingness to depart from an intermediate Florida decision based on methodology and clause language may influence how litigants argue “persuasive indication” in future diversity insurance appeals.

IV. Complex Concepts Simplified

Umbrella / excess insurance
Coverage that sits on top of underlying policies. It typically pays only after the underlying coverage is used up, and often provides broader protection or higher limits.
Underlying insurance
The primary layer(s) that must respond first (here, the Mapfre and Philadelphia UM policies).
Uninsured/Underinsured Motorist (UM) coverage
Coverage that pays the insured for damages caused by a driver who lacks insurance or has insufficient limits.
Exhaustion clause
A contractual condition that must be satisfied before the umbrella/excess insurer owes coverage. In this case, it required the “policy limits” of underlying insurance to be “exhausted by payment of judgments or settlements.”
Declaratory judgment
A lawsuit seeking a court declaration of rights and obligations under a contract—here, whether RLI owed coverage.
Diversity jurisdiction
Federal-court jurisdiction based on parties being from different states; the federal court applies state substantive law (here, Florida insurance-contract law).
Sua sponte summary judgment
Summary judgment entered by the court on its own initiative rather than on a party’s motion (here, entered for the Lehmans by the district court).

V. Conclusion

RLI Insurance Company v. John Lehman establishes a clear rule for Florida-law interpretation of umbrella exhaustion clauses that expressly refer to underlying “policy limits”: “exhausted” means fully consumed—a below-limits settlement does not satisfy the condition precedent to excess coverage. The opinion also demonstrates that Florida’s plain-meaning methodology (as articulated in Penzer v. Transp. Ins. Co.) can justify distinguishing an intermediate appellate decision like Reliance Insurance Co. v. Transamerica Insurance Co. where the policy language and analytical approach materially differ. In practice, the decision places heightened emphasis on the exact exhaustion wording in umbrella policies and will shape settlement and coverage-litigation strategy in multi-layer insurance disputes.