Insurance Recovery Law - February 2015 #2

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In This Issue:

  • Separate Contract Serves to Limit Insurance Coverage for Deepwater Horizon Spill, Texas Supreme Court Rules
  • Consecutive Policies Not Triggered Where There Was No Evidence of When The Loss Occurred
  • In-Store Retail Displays Are Ads, Triggering Coverage
  • Pollution Exclusion Doesn’t Preclude Coverage Where Insured Transferred Waste to a Landfill Deemed Secure

Separate Contract Serves to Limit Insurance Coverage for Deepwater Horizon Spill, Texas Supreme Court Rules

Why it matters: The Texas Supreme Court rejected BP’s $750 million claim for coverage under Transocean insurance policies. Since the April 2010 Deepwater Horizon oil spill that killed eleven crew members and spilled millions of gallons of oil into the Gulf of Mexico, BP has paid tens of billions in claims. In order to recover some of its losses, BP filed claims of its own as an additional insured under a Transocean insurance policy seeking coverage for underground pollution losses. In a separate service agreement entered into by the parties, Transocean agreed to indemnify BP for above-surface losses regardless of fault and BP agreed to indemnify Transocean for underground losses. In contrast, the insurance policy, standing alone, had no such limitation. Accordingly, BP argued that the insurance policy’s additional insured provision was separate and distinct from the service contract and independently covered BP for all losses whether incurred aboveground or belowground. The court disagreed and held that the two contracts were inextricably intertwined and could not be independently considered. Reading the two contracts together, as required by the operative language, the insurance policy incorporated the service contract’s limitation. The Transocean policies required that the additional insured obligation arise from a contract involving an indemnity agreement and specify that additional insured coverage is extended as “obliged” and “where required” therein.

Importantly, the court’s decision was expressly dictated by the contractual language and the court distinguished other contradictory Texas case law on that basis. Thus, absent a finding that the contracts were inextricably bound, BP could have prevailed. It is important that all similarly situated policyholders review their existing indemnity agreements and any policies in which there may be additional insureds in order to understand ahead of time the relationship of such agreements. The court’s reasoning also should be taken into account when negotiating future indemnity arrangements.

Detailed discussion: Transocean owned Deepwater Horizon, a mobile offshore drilling unit which operated in the Gulf of Mexico pursuant to a 1998 contract between Transocean and BP.

In the indemnification provisions of the drilling contract, Transocean agreed to indemnify BP for above-surface pollution regardless of fault and BP agreed to indemnify Transocean for subsurface pollution.

To fulfill its obligations, Transocean maintained a $50 million general liability primary policy and four layers of excess policies with an additional $700 million in coverage. Each of the policies extended “Insured” status to those entities covered by an “Insured Contract.”

On April 20, 2010, the Deepwater Horizon rig suffered an explosion, caught fire, and then sank to the bottom of the Gulf. Eleven crew members died and millions of gallons of oil were discharged into the Gulf of Mexico, resulting in thousands of personal injury and environmental claims against BP and Transocean.

Both parties sought coverage under the primary and excess insurance policies. Although there was no dispute that BP was an additional insured, Transocean and the insurers argued that the drilling contract limited the scope of coverage for BP to those liabilities Transocean had expressly assumed—specifically, above-surface pollution and not subsurface oil releases as a result of the Deepwater Horizon incident.

A federal district court sided with the insurers and Transocean. The Fifth Circuit initially reversed, holding that the coverage dispute should be decided based solely on the insurance policy and not consideration of the drilling contract. But on rehearing, the federal appellate panel withdrew its prior opinion and certified contract interpretation issues to the Texas Supreme Court:

The Texas Supreme Court ruled that (1) the Transocean insurance policies include language that necessitates consulting the drilling contract to determine BP’s status as an “additional insured”; (2) under the terms of the drilling contract, BP’s status as an additional insured is inextricably intertwined with limitations on the extent of coverage to be afforded under the Transocean policies; (3) the only reasonable construction of the drilling contract’s additional-insured provision is that BP’s status as an additional insured is limited to the liabilities Transocean assumed in the drilling contract; and (4) BP is not entitled to coverage under the Transocean insurance policies for damages arising from subsurface pollution because BP, not Transocean, assumed liability for such claims,” the state’s highest court ruled.

The court rejected BP’s position that the existence—and extent— of coverage should be limited to consideration of the four corners of the Transocean insurance policies. Because the drilling contract was an “Insured Contract” and BP was an “Insured” under the policies, the company told the court its operations were automatically covered for all “liability imposed by law,” including subsurface pollution.

While the court started its coverage analysis with the policy itself, it noted that Texas has long held that insurance policies can incorporate limitations on coverage encompassed in extrinsic documents by reference.

Considering the insurance policies at issue, the Texas Supreme Court noted that BP was not named in any of them or expressly included as an additional insured in an endorsement or certificate of insurance. “[T]hus, if the coverage inquiry were constrained to the language in the insurance policy, BP would have no coverage at all,” the court pointed out.

Instead, the policies conferred coverage by reference to the Drilling Contract. “The language in the insurance policies providing additional insured coverage ‘where required’ and as ‘obliged’ requires us to consult the Drilling Contract’s additional insured clause to determine whether the state conditions exist,” the court explained. “It is immediately apparent from the plain language of this provision that BP’s status as an insured is inexorably linked, at least in some respect, to the extent of Transocean’s indemnity obligations.”

One judge filed a dissenting opinion in the case, writing that although he agreed with the majority’s principles applicable to construing insurance contracts, he would not have limited the liabilities Transocean assumed in the drilling contract. Instead, he would have limited his inquiry to the “coverage” section of the policies.

While providing that parties would be covered under an “Insured Contract,” the provision did not explicitly incorporate the language of the drilling contract and its limits, nor did the policy provide for other documents to become part of the policy, Judge Phil Johnson wrote.

To read the opinion in In re Deepwater Horizon, click here.

To read the dissenting opinion, click here.

Consecutive Policies Not Triggered Where There Was No Evidence of When The Loss Occurred

Why it matters: An insurer was required to indemnify the operator of a brine well facility in a suit brought by a neighboring landowner alleging damages resulting from the collapse of an underground cavern created by the insured’s mining operations, the federal court in New Mexico ruled on remand from the U.S. Court of Appeals for the Tenth Circuit. However, the court rejected the insured’s position that coverage was available under all of the general liability policies its insurer purchased from 2000 to 2009. The court ruled that the property damage resulted from a single occurrence, and under the terms of the policies, there was no basis for stacking all the policies issued to the insured, or for a finding that coverage exists under all the policies under a “continuous injury” theory. Accordingly, the insurer was required to cover the damages under one policy period. To ensure the policyholder received the full benefit of its premiums and reasonable expectations of coverage, the court concluded that the indemnity limit applied should be the highest that existed during the policy period—which in this case was enough to cover the insured’s entire liability.

Detailed discussion: I&W, Inc., owned and operated a brine well facility in Carlsbad, New Mexico. The operation involved the solution mining of salt from brine water by drilling a well in a salt zone and injecting fresh water into the salt zone, where it dissolved the salt. The resulting brine water is pumped out and sold. As a result of the mining process, however, the salt zone dissolves away from the earth and leaves an underground cavern.

I&W’s property was adjacent to land owned by Circle S Feed Store, LLC (“Circle S”). In a lawsuit against I&W, Circle S alleged that it sustained property damage when the roof of an underground cavern created by I&W’s operations collapsed. A jury found I&W to be negligent, as well as reckless or wanton, and awarded Circle S $703,000 in compensatory damages and $300,000 in punitive damages.

I&W purchased commercial liability policies from Mid-Continent Casualty (“MCC”) over a nine-year period between June 2000 and June 2009, all of which had limits of $1 million per occurrence and $2 million aggregate, with the exception of a single year with a $2 million-per-occurrence limit. The policies provided coverage for “property damage” caused by an “occurrence,” with “occurrence” defined as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.”

In an earlier proceeding, when I&W requested a defense, MCC relied on an Oil Endorsement exclusion in the policy to deny coverage. In the resulting declaratory action, the court originally sided with the insurer but the Tenth U.S. Circuit Court of Appeals reversed, finding that the exclusion did not preclude coverage.

On remand, the U.S. District Court reversed and granted summary judgment to the policyholder. The property damage was caused by an “occurrence” in the policy periods and the policies were triggered by Circle S’s damage, the court concluded. The amount of coverage remained a question: how much coverage was available—was it $19 million, as argued by the insured, seeking to stack the policies, or was coverage limited to just one policy, the position taken by MCC?

According to I&W, the policies already contemplated that an “occurrence” could be continuous and thus continually cause damage; therefore, as long as the damage occurred sometime during the policy period, coverage was triggered under all the policies that existed during that period. However, the court held that there was no evidence concerning exactly what damage took place during any policy period. Because I&W could not establish when any such “loss” occurred, the analytical framework of a “continuous injury” theory was inappropriate, and there was no support for a finding that coverage was triggered across all the policies.

In addition, the court further declined to allow I&W to stack its coverage. The court reasoned that there was no language in the MCC policies that could be interpreted as allowing stacking.

Following a Texas Supreme Court decision, the court explained that the MCC policies “were issued for consecutive years, did not overlap in time, and the injury to the Circle S property resulted from a single, indivisible injury. Even where an ‘occurrence’ triggers more than one policy because it covered different policy periods, the appropriate conclusion is not to stack the consecutive policies because ‘different limits may have applied at different times.’ ”

To read the decision in Mid-Continent Casualty Co. v. I&W, Inc., click here.

In-Store Retail Displays Are Ads, Triggering Coverage

Why it matters: An Illinois appeals court ruled that an insurer must defend its insured in a trademark infringement suit, finding that in-store retail displays for the product were “advertisements” that gave rise to the claims in the underlying suit. Relying on an exclusion for personal and advertising injury arising out of trademark infringement, the insurer denied coverage. Affirming the trial court, the appellate panel sided with the policyholder finding that the suit fell under a different provision that provided coverage for infringement in “advertisements.” The court found that the retailers’ displays were advertisements because they prominently showed the unique shape of the product which underlying plaintiff claimed infringed on a trademark it owns but also affirmatively served to attract customers. Further, because the underlying suit alleged that the retailers’ display of the product contributed to consumer confusion regarding the manufacturer of the product, the court concluded that the suit alleged a causal connection between the display and the alleged underlying injuries.

Detailed discussion: In April 2012, Too Marker filed a complaint against Creation Supply in Oregon federal court. Too Marker alleged trademark infringement, violation of trade dress, and unfair competition. Specifically, Too Marker claimed that its double-ended, square-bodied “COPIC” markers were being infringed by Creation Supply’s “MEPXY” markers. The suit sought a permanent nationwide injunction as well as corrective advertising.

Too Marker brought a claim under Section 43 of the Lanham Act, alleging that Creation Supply’s unauthorized advertisement and sale of its markers was likely to cause confusion and mistake, and to deceive consumers as to the source or origin of Too Marker’s products. The complaint specifically referenced Creation Supply’s “retail store displays in Oregon and the rest of the United States,” as well as websites and other online retailers, “causing confusion among potential purchasers of [Too Marker’s] products.”

Having purchased a business owners’ policy from Selective Insurance Company, Creation Supply requested a defense in the Too Marker suit. Selective denied coverage and filed a declaratory judgment contending that the underlying case did not claim a “personal and advertising injury” as defined in the policy and that two exclusions—the “trademark exclusion” and the “prior publication” exclusion—operated to bar coverage.

A trial court judge granted summary judgment for Creation Supply. Selective appealed, and a panel of the Illinois Appeals Court affirmed.

The Selective policy defined an advertisement as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.”

Three elements needed to be met to trigger coverage for an advertising injury, the court stated: “(1) the insured must have been engaged in advertising activity during the policy period when the alleged injury occurred; (2) the allegations in the underlying complaint must raise a potential for liability under one of the offenses listed in the policy; and (3) there must be a causal connection between the alleged injury and the advertising activity.”

Analyzing the in-store displays, which appeared at retail locations across the country, the panel said the placards “serve as an announcement disseminating the product to the public, which fits within the definition of ‘advertisement’ under the Selective policy.”

“The placards are more than the mere display of the product itself and affirmatively serve to attract customers,” the court explained. “The shape and design of the marker is prominently displayed in the placard, which is the source of the underlying trade dress claim. If, for example, the retail product display merely included a large bin containing the markers and nothing more, then Selective would have a valid argument that the retail product display did not constitute advertising as contemplated under the policy. That is not the case here.”

Not all retail product displays will constitute advertising activity for purposes of triggering the duty to defend, the court noted, limiting its finding to the facts of the case and the “particular display configuration” at issue.

For the second requirement, the court stated that the underlying complaint’s claim under the Lanham Act specifically alleged trade dress infringement in Creation Supply’s advertisement of MEPXY markers.

Finally, the panel found that Too Marker’s complaint alleged a causal connection between the alleged injury and Creation Supply’s advertising activity.

“The underlying plaintiffs alleged that Creation Supply advertised MEPXY markers, which misled and confused the public as to the source or origin of those markers,” the court held. “In other words, the underlying plaintiffs complained the injury, trade dress infringement, is alleged to have been caused by advertising. As we have found that the retail product display constitutes an ‘advertisement’ under the definition of the policy, it is reasonable to infer that Creation Supply’s advertising activity contributed to the alleged injury of consumer confusion, thereby meeting the causal connection requirement.”

The panel also rejected application of the policy’s intellectual property exclusion, which excludes “personal and advertising injury” “[a]rising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights,” followed by a statement that “this exclusion does not apply to infringement, in your ‘advertisement,’ of copyright, trade dress or slogan.”

Because the court previously found that the underlying complaint alleged trade dress infringement in Creation Supply’s advertisements, the exception to the exclusion applied, the court held, affirming an order that Selective had a duty to defend.

To read the decision in Selective Insurance Co. of the Southeast v. Creation Supply, Inc., click here.

Pollution Exclusion Doesn’t Preclude Coverage Where Insured Transferred Waste to a Landfill Deemed Secure

Why it matters: The Western District of Michigan court held that an insurer was required to indemnify its insured for cleanup costs at a Michigan landfill-turned-Superfund site. The insurer’s primary defense against coverage was that a pollution exclusion in its policies barred coverage. Under the pollution exclusion, there was no coverage for property damage stemming from “any discharge of waste that was expected or intended” from the insured’s standpoint. The court disagreed with the insurer that the relevant “discharge” was the moment the insured transferred its waste into the landfill. Rather, the court agreed with the policyholder that the discharge occurred later when contamination seeped into the groundwater, accepting the company’s argument that it believed the landfill was safe and secure when it deposited the waste there.

Detailed discussion: Beginning in 1966, Decker Manufacturing Company disposed of its waste materials at the Albion Sheridan Township Landfill until the landfill closed in 1981. The waste included oil, paper, magazines, broken wood pallets, and sludge—consisting of oil residue, lime soap, and metal shavings—that could be pumped.

After the landfill was closed, the Environmental Protection Agency (“EPA”) designated it a Superfund site. In 1988, the EPA issued its first request for information from Decker pursuant to the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”); a supplemental response came in 1992, followed by a notice of liability in 1995 asserting that Decker was a potentially responsible party for remediation costs connected with cleanup of the landfill and an administrative order mandating the company undertake certain actions.

During the four-year period of 1973 through 1977, Decker was insured under comprehensive general liability policies issued by Travelers Indemnity Company. Decker notified Travelers when it received the administrative order, but the insurer responded that it had no duty to defend or indemnify the company.

Decker later entered into a consent decree with the EPA, expressly denying liability but promising to reimburse the agency for past and future response costs and to finance and perform remediation activities for a 30-year period.

The policyholder then filed a declaratory action seeking reimbursement for defense and indemnity costs related to the landfill, including past and future costs arising out of its obligations under the consent decree. Both parties filed for summary judgment.

Travelers argued that a pollution exclusion found in each of the policies operated to preclude coverage. The exclusion at issue denied coverage for property damage arising out of any discharge of any waste or pollutant that is “either expected or intended from the standpoint of any insured or any person or organization for whose acts or omissions any insured is liable.”

Because Decker intentionally discharged its waste into the landfill, the pollution exclusion was triggered, the insurer argued. Alternatively, Decker took the position that the exclusion should not apply as the company placed its waste in what it believed was a safe and secure location—it never expected or intended for the waste to leave the landfill.

“There is no factual dispute that this landfill … conformed to then-contemporary standards when it was built. There is also no dispute that it was licensed by the State throughout the time it was used by Decker. The Court is satisfied that Decker’s placement of its waste in the landfill is equivalent to the placement of waste in a container.” The court concluded that the relevant discharge is the discharge from the landfill into the environment rather than the placement of waste into the landfill.

Travelers failed to meet its burden of showing the exclusion applied, the court added, as “there is no evidence to suggest that Decker was on notice of any problems at the landfill or that Decker ‘intended or expected’ that its wastes would be discharged from the landfill into the environment.”

Therefore, the court held that Travelers owed Decker a duty to defend and indemnify with respect to all of the landfill claims.

To read the decision in Decker Manufacturing Corp. v. The Travelers Indemnity Co., click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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