AUSTIN – (Sept. 18) – An insurance coverage dispute over whether Anadarko is entitled to recoup defense costs for Deepwater Horizon damages is the latest case involving the 2010 drilling disaster to reach the Texas Supreme Court.
The justices Monday heard arguments in the case, which involves the interpretation of an insurance policy establishing an indemnity obligation for defense costs resulting from the spill. The dispute involves high-risk surplus lines insurance commonly purchased by drillers and is being closely watched for its impact on that market.
Anadarko says it spent $100 million defending pollution claims stemming from the rig explosion that killed 11 workers and unleashed an estimated 4.9 million gallon underwater gusher of crude that fouled the Gulf of Mexico.
A federal court determined that Anadarko Petroleum Corp. and Anadarko E&P Co. were jointly and severally liable with certain British Petroleum entities for damages under the federal Clean Water Act and Oil Pollution Act. Anadarko paid BP $4 billon in exchange for Anadarko being released and indemnified for the pollution.
London Market Underwriters of the Deepwater Horizon joint venture, including Houston Casualty Co. and others, agreed to pay $37.5 million of the $150 million policy limits for Anadarko’s 25 percent interest in the offshore lease. The insurers refused to pay any more for defense costs, prompting Anadarko to file suit in 2012.
The trial court ordered the underwriters to pay Anadarko $112.5 million for its defense costs. In 2016, the 9th Court of Appeals in Beaumont reversed and rendered judgment that Anadarko could recover nothing for its defense costs. The Beaumont Court said the insurers owed only as much as the policy covered for Anadarko’s percentage interest in the well.
Marie Yeates, representing Anadarko, said the court of appeals erroneously applied the policy’s joint venture provision to reduce policy limits by holding that defense costs are part of the insured “liability” in the coverage provision.
“Defense costs don’t constitute damages at all,” said Yeates, a partner at Vinson & Elkins. She said the Beaumont court’s opinion will “disincentivize” settlements because of uncertainty over whether an insured company can recover defense costs.
J. Clifton Hall III, representing the underwriters, said Anadarko’s interpretation of the policy would create separate limits of liability, a scaled limit of $37.5 million for third-party liability and a non-scaled limit of $150 million for defense expenses.
“Those kind of limits can threaten an insurer. The market of insurers that provide this kind of coverage is not that great,” said Hall, managing shareholder of Hall Maines Lugrin.
Questions from the justices centered on the policy’s limitations on liability arising out of the joint venture and two exceptions to that provision.
In a previous appeal stemming from the rig explosion, the Supreme Court in 2015 answered a question from the 5th U.S. Court of Appeals and rejected BP’s claim to $750 million in rig owner Transocean’s insurance coverage.
Watch the arguments in Anadarko v. Houston Casualty, here.