A recent Texas Lawyer story by Steven Meyerowitz, “Deepwater Horizon Defendants Drown in Legal Fees,” reports that the Supreme Court of Texas has ruled that an insurance policy issued to the minority owners in the Deepwater Horizon operation did not limit their right to recover for the legal fees and related expenses they incurred defending against liability and enforcement claims as argued by the policy’s underwriters. Pursuant to a joint venture arrangement with BP entities and MOEX Offshore 2007 LLC, Anadarko Petroleum Corporation and Anadarko E&P Company, L.P. (together, “Anadarko”) held 25% of the ownership interest in the Macondo Well in the deep waters of the Gulf of Mexico.
During drilling operations on April 20, 2010, the well below the Deepwater Horizon drilling rig blew out. Over the ensuing months and years, numerous third parties filed claims against the BP entities, Anadarko, and MOEX, seeking damages for bodily injury, wrongful death, and property damage. Many of those claims were consolidated into a multi-district litigation (MDL) proceeding in the federal district court for the Eastern District of Louisiana. The federal government also pursued civil penalties under the Clean Water Act and a declaratory judgment of liability under the Oil Pollution Act of 1990.
The MDL court granted a declaratory judgment, finding BP and Anadarko jointly liable under the Oil Pollution Act. BP and Anadarko then reached a settlement agreement in which Anadarko agreed to transfer its 25% ownership interest to BP and pay BP $4 billion. In exchange, BP agreed to release any claims it had against Anadarko and to indemnify Anadarko against all other liabilities arising out of the Deepwater Horizon incident. In light of that agreement, the United States agreed not to pursue claims against Anadarko. BP, however, did not agree to cover Anadarko’s legal fees and other defense expenses, which totaled well over $100 million, according to Anadarko.
Before the incident, Anadarko had purchased an “energy package” insurance policy through the Lloyd’s London market. The policy provided excess liability coverage limited to $150 million per occurrence. The policy did not require the underwriters to defend Anadarko against liability claims. But it did require the underwriters to reimburse Anadarko for expenses it incurred providing its own defense. The underwriters contended, however, that an endorsement within the policy reduced the $150 million limit when — as in this case — Anadarko’s liability arose out of the operations of a joint venture. Based on the product of Anadarko’s percentage interest in the Deepwater Horizon joint venture (25%) and the total coverage limit under Section III ($150 million), the underwriters contended that this endorsement capped their excess coverage liability at $37.5 million.
Anadarko agreed that the Joint Venture Provision reduced the amount the Underwriters had to pay to cover Anadarko’s joint venture liabilities to third parties. Anadarko contended, however, that the Joint Venture Provision capped the excess coverage only for Anadarko’s liabilities to third parties, and not for its “defense expenses.” Therefore, it argued, in addition to the $37.5 million already paid, the underwriters still had to pay all of Anadarko’s defense costs up to the total $150 million limit. When the parties could not resolve their dispute, Anadarko filed suit, seeking payment of its defense expenses up to $112.5 million ($150 million minus the $37.5 million already paid).
The trial court denied the Underwriters’ summary judgment motion and granted Anadarko’s summary judgment motion in part. Finding the Joint Venture Provision unambiguous, the trial court concluded that the clause at issue in the Joint Venture Provision applied to and limited coverage for Anadarko’s defense expenses, but that an exception also applied and increased the Underwriters’ liability to “the combination of Anadarko’s working interest percentage ownership and the additional percentage for which Anadarko becomes legally liable, . . . subject only to the limits of the policy after subtracting monies that Underwriters have already paid.”
The court of appeals reversed the trial court’s judgment and rendered judgment for the Underwriters. The dispute reached the Texas Supreme Court. The court reversed the court of appeals’ judgment, rendered judgment granting Anadarko’s motion for partial summary judgment, and remanded the case to the trial court. In its decision, the court explained that the primary issue was whether the clause at issue in the Joint Venture Provision limited Section III’s excess liability coverage only for amounts Anadarko was required to pay in response to third party claims or also for amounts Anadarko paid as defense expenses. The court concluded that the clause did not limit the coverage for defense expenses and that, as a result, it did not have to address any exception.
The court observed that the clause stated that “the liability of Underwriters under this Section III shall be limited to” $37.5 million (that is, the product of Anadarko’s 25% interest in the joint venture — and $150 million — the total limit under Section III). With a focusing on specific policy language, the court found that the clause only limited the underwriters’ liability for Anadarko’s “liability . . . insured,” which did not include its defense expenses.
The court was not persuaded by the underwriters argument that the reference to Anadarko’s “liability . . . insured” included defense expenses and that even if the term “liability” did not include defense expenses, the clause limited their liability for all of Anadarko’s Ultimate Net Loss, which included defense expenses.
The court observed that, although the policy did not define the term “liability,” it consistently distinguished between Anadarko’s “liabilities” and “expenses.” Based on the policy’s usage of the term “liability” and its distinguishing references to “expenses,” the court concluded that, consistent with the term’s “common meaning within insurance and other legal contexts,” “liability” referred in this policy to an obligation imposed on Anadarko by law to pay for damages sustained by a third party who submitted a written claim.
The case is Anadarko Petroleum Corp. Houston Casualty Co., No. 16-1013.