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Liberty Mutual on the Hook for Attorney Fees in Gulf Oil Spill

December 1, 2015 | Posted in : Coverage of Fees, Defense Fees / Costs, Fee Entitlement / Recoverability, Fee Issues on Appeal, Fee Reduction, Fee Request

A recent Business Insurance story, “Liberty Mutual on Hook for Gulf Oil Spill Attorney Fees” reports that a federal appeals court has ruled against an insurer in its quest to avoid paying attorneys’ fees in litigation stemming from 2010’s Deepwater Horizon oil spill.

The U.S. Court of Appeals for the Fifth Circuit in New Orleans found hollow Liberty Insurance Underwriters Inc.’s (LIU) argument that it should not pay attorneys’ fees for Cameron International Corp., maker of a faculty blowout preventer used on the Deepwater Horizon to connect the rig to the Macondo well owned by oil giant BP.  Cameron’s blowout preventer was previously found by the U.S. Chemical Safety Board to be a factor in the 2010 Gulf of Mexico oil spill.

The Fifth Circuit also ruled that LIU breached its contract as one of Cameron’s insurers by refusing to cover its share of settlement costs the manufacturer has reached with BP after the Macondo blowout off the coast of Louisiana, which caused an explosion that killed 11 rig workers and spilled millions of barrels of oil into the Gulf.

Additionally, in In Re: Deepwater Horizon, Cameron International Corp. v. Liberty Insurance Underwriters Inc., the appellate court has asked Texas Supreme Court to certify whether by wrongfully denying Cameron’s claim under its policy, the Boston-based insurer violated the Texas insurance code.

The 2010 Deepwater Horizon spill has generated thousands of lawsuits against BP,  Transocean Ltd., owner of the Deepwater Horizon rig, Cameron and others.  In its written opinion, the Fifth Circuit described the background in the Cameron/LIU litigation:

“This case turns, in part, on a complicated arrangement of indemnification between some of the parties involved in the spill.  BP (a nonparty here) owned the Macondo oil well and the lease on the continental shelf.  BP contracted with Transocean (also a nonparty here), which owned Deepwater Horizon, to drill the well, and to indemnify Transocean for liability associated with drilling.  Cameron manufactured and sold Transocean the blowout preventer connecting the rig to the well, and Transocean indemnified Cameron for liability associated with the blowout preventer.  In short, Cameron was indemnified by Transocean, which was in turn indemnified by BP.”

Cameron had purchased an insurance tower of $500 million to protect its interests in the event litigation arose out of its involvement in the Deepwater Horizon project.  The tower consisted of multiple layers of insurance coverage obtained from multiple insurers.

“Liberty sold Cameron a policy covering the $50 million in losses between the first $100 million and $150 million in losses.  In other words, Liberty’s $50 million policy was excess of the policies covering the first $100 million in losses, and Cameron obtained other policies that were excess of Liberty’s policy,” the Fifth Circuit explained.

After the spill, BP, Transocean and Cameron sued and countersued each other.  Cameron also sought indemnification from Transocean and notified LIU “of a potential loss covered by the policy,” the court said.

BP and Cameron ultimately reached a $250 million settlement, to which all of Cameron’s insurers agreed with the exception of LIU.  Cameron’s quest for indemnity from Transocean remained unsettled.

The appeals court wrote that LIU claimed, among other things, that its obligation to pay Cameron had not been triggered because the Other Insurance Clause in its policy “provided that ‘[i]f other insurance applies to a ‘loss’ that is also covered by this policy, this policy will apply excess of such other insurance.’”  LIU considered indemnity from Transocean to be “other insurance,” and maintained that Cameron had not “exhausted its legal remedies” with regard to securing payment from Transocean.

Cameron nevertheless settled with BP, “putting up $50 million of its own money in addition to the $200 million its other insurers contributed.”  The company then filed suit against LIU “asserting claims for breach of contract and for violations of the Texas Insurance Code,” the court wrote.

The district court sided with Cameron on the $50 million breach of contract claim but ruled in favor of LIU on Cameron’s Texas Insurance Code claims and ultimately denied Cameron payment of attorney’s fees resulting from the litigation.

Both sides appealed.  “Cameron appealed the district court’s judgment against it on its claim under Chapter 541 of the Texas Insurance Code and on its claim for attorney’s fees.  Liberty cross-appealed the district court’s judgment in favor of Cameron on its breach of contract claim,” the court wrote.

The appeals court, however, rejected Liberty’s arguments on the breach of contract claim, letting the $50 million judgment stand, and ruled that the insurer was also on the hook for Cameron’s attorney’s fees.