Texas Supreme Court: Deepwater Horizon Insurer Can't Limit Defense Cost Coverage

Background

Plaintiffs ("Anadarko") had a 25 percent ownership interest in the Macondo Well in the Gulf of Mexico pursuant to a joint venture arrangement. This well was the site of the 2010 Deepwater Horizon drilling rig explosion.

Anadarko sought recovery for the settlements, judgments, and defense costs arising out of this incident from its insurer (the "Underwriters"), which had issued a policy with a $150 million per occurrence limit. The Underwriters argued that the coverage available to Anadarko was restricted by an endorsement that limited the available amounts for "any liability of [Anadarko]" arising from a joint venture in accordance with Anadarko's percentage equity stake in such joint venture (the "Joint Venture Endorsement"). Here, since Anadarko was a 25 percent stakeholder in the joint venture, the Underwriters limited available coverage for this incident to 25 percent of the total per occurrence limit ($37.5 million). This amount was quickly exhausted through the payment of settlements and left no remainder to cover Anadarko's defense costs. Anadarko conceded that the endorsement restricted coverage for settlements and judgments to 25 percent of available limits, but argued that the remaining $112.5 million was available for payment of Anadarko's defense costs.

The Texas Supreme Court agreed with Anadarko. It explained that the policy provided insurance coverage for Anadarko's "liability" arising from an occurrence, as well as its "expenses" (i.e., attorneys' fees) related to such occurrence. The court further stated that the policy "consistently distinguishes between Anadarko's 'liabilities' and 'expenses'" and that the Joint Venture Endorsement stated only that it applied to "any liability" of Anadarko. Therefore, the court determined that "any liability" in the Joint Venture Endorsement referred only to any "obligation imposed on Anadarko by law to pay for damages sustained by a third party who submits a written claim" and that the Joint Venture Endorsement placed no restriction on amounts available for attorneys' fees, since the endorsement made no mention of "expenses." Therefore, while the amount available for "liability" for this occurrence had been exhausted ($37.5 million), the court agreed with Anadarko that the remaining limits ($112.5 million) were available for payment of Anadarko's "expenses."

Closely Examine Coverage Determinations

The Anadarko opinion highlights the importance of closely reviewing insurance carriers' coverage determinations and, when appropriate, challenging them. In particular, policyholders should keep the following in mind:

• Your insurance carrier may deny coverage based on its interpretation of a term in isolation, as the Underwriters attempted here with the term "liability" as used in the Joint Venture Endorsement. Always closely examine how your insurance carrier is interpreting the terms relevant to your claim and make sure that the carrier has not selected an inappropriate interpretation that limits or eliminates coverage.
• If your insurance policy does not provide a clear definition of the relevant terms, examine how these terms have been interpreted by courts in the relevant jurisdiction. Here, the Texas Supreme Court bolstered its decision by pointing out that the "common legal meaning" of "liability" does not include attorneys' fees. See slip op. at 16-17.
• If it is unclear whether your insurance carrier is employing an unduly restrictive interpretation of a provision, consider challenging the carrier's coverage determination. Most states require that ambiguous terms of an insurance policy be interpreted in favor of the policyholder. Therefore, if both the policyholder and insurance carrier put forth reasonable interpretations of a provision, most courts will adopt the policyholder's interpretation.

If you need assistance with interpreting your insurance policies or determining the scope of coverage available to you, please contact the authors of this client alert.