The 2012 Macondo Well blowout and Deepwater Horizon rig explosion gave rise to a slew of lawsuits. Our subject today is one of them. In Houston Casualty Company v. Anadarko Petroleum Corp. the Beaumont court of appeals construed an insurance policy’s excess liability coverage provision. At stake was whether Underwriters had to indemnify Anadarko for over $100 million in defense costs. In an opinion much-decried by energy companies, the court thought not.

The Texas Supreme Court will review the decision, so let’s look at what the court of appeals said. 

WARNING: If insurance coverage isn’t your thing, have a triple expresso within reach before reading, or proceed to the musical interlude.

The litigation history

Anadarko owned a 25 percent non-operating working interest and sued Underwriters to recover not-yet-determinable defense costs incurred in the blowout litigation.

The MDL court declared that Anadarko and operator BP were jointly and severally liable for damages under the Oil Pollution Act. Anadarko was also ordered to pay $159.5 million in civil penalties for violating the Clean Water Act. Underwriters paid $37.5 million of the CWA penalty and obtained a release from Anadarko from future liability under the policy, excepting defense costs.

The policy

The policy limited excess liability coverage for joint ventures to $150 million and had a scaling provision, which would reduce Underwriters’ liability. The scaling provision had two exceptions that would allow Anadarko to recover beyond the scaled amount.

Were defense costs subject to proportional scaling?

The first issue: What was the meaning of “liability”? The policy’s JV provision stated that “any liability” of Anadarko arising from joint ventures was subject to scaling. “Liability” was not defined.

The court looked at Black’s definition of “liability,” parsed the scaling provision and the connected definition of “Ultimate Net Loss” in the policy, and concluded that “liability” included first-party defense costs, which were thus subject to scaling. “Liability” did not mean third party liabilities owed to other parties. Agreeing with Underwriters, the court noted that the scaling provision was broad; no other policy provision indicated that defense expenses would be payable differently from other liability costs; and that the parties could have written the policy differently to exclude defense costs from scaling.

Did either exception apply?

Underwriters could not scale their obligation if either of two exceptions to the scaling provision applied. First, if Anadarko was “wholly” liable for Joint Venture liability. That exception did not apply.

The second exception expanded Underwriters’ liability up to the policy limit if Anadarko “becomes legally liable … for an amount greater than their proportionate ownership interest…”. Anadarko maintained that its liability had exceeded its 25 percent WI when a federal court declared joint and several liability for OPA removal and cleanup costs. But was a declaratory judgment a judgment for an amount of damages? The court agreed with Underwriters that it was not. The exception required that Anadarko be found liable for a fixed amount greater than its proportionate interest share. Anadarko was never ordered to pay a specific amount of a money judgment.

Takeaways

What lessons does this case present for Texas insurers and insureds?

• Define key terms such as “liability”.
• Should sophisticated insureds expect leeway from Texas courts in policy interpretation? We’ll see.
• The court might clarify how other rules of insurance law should be applied, for example, what is the effect of deleted contract language? Ordinarily, evidence that the parties deleted a clause from a form policy should be considered as part of the surrounding circumstances of the contract formation.

Could this musical interlude reflect the climate in our nation’s capital?

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