AUSTIN – Anadarko emerged the winner Friday in a coverage clash with its surplus liability insurers when the Texas Supreme Court ruled that the underwriters are contractually obligated to pay Anadarko’s $112.5 million defense costs related to the Deepwater Horizon disaster.
The case was closely watched for its impact on the high-risk, excess-liability insurance market. It drew amicus briefs from underwriters and energy trade groups representing drillers who commonly purchase the coverage.
Writing for a unanimous court, Justice Jeffrey Boyd said the policy’s joint-venture provision limiting liability to Anadarko’s 25 percent ownership interest in the Macondo Well does not apply to defense expenses.
Houston Casualty Co. and other insurers had argued that the policy provision capped its liability at $37.5 million, 25 percent of the $150 million policy limit.
The appeal required the Supreme Court to examine the contract’s treatment of terms including “liability” and “expenses” using their common meanings.
“Here, although the policy does not define the term ‘liability,’ it consistently distinguishes between Anadarko’s ‘liabilities’ and ‘expenses.’ Based on the policy’s usage of the term ‘liability’ and its distinguishing references to ‘expenses,’ we conclude that, consistent with the term’s common meaning within insurance and other legal contexts, ‘liability’ refers in this policy to an obligation imposed on Anadarko by law to pay for damages sustained by a third party who submits a written claim,” said Boyd.
The court concluded that the policy’s reference to “any liability of [Anadarko] which is insured” applies only to liabilities, not to defense expenses.
The coverage dispute grew out of the multi-district litigation that consolidated claims from the 2010 well blowout. The Louisiana federal court handling the federal environmental damages claims found BP and Anadarko jointly and severally liable. In a settlement, Anadarko agree to transfer its interest and pay BP $4 billion. BP agreed to release and indemnify Anadarko but refused to cover Anadarko’s legal fees and other defense expenses.
Anadarko then turned to the “energy package” insurance policy it had purchased before the incident through the Lloyd’s London Market. The policy does not require the underwriters to defend Anadarko against liability claims but does require them to reimburse Anadarko for expenses it incurs in providing its own defense, according to the Supreme Court opinion.
The Supreme Court reversed the Ninth Court of Appeals in Beaumont, which had sided with the underwriters, and granted Anadarko’s motion for partial summary judgment. The case was remanded to the Montgomery County state district court, which had agreed with Anadarko.
Marie Yeates, a partner at Vinson & Elkins, represented Anadarko at the oral arguments in September. She said the court of appeals opinion would “disincentivize” settlements because of uncertainty over whether an insured company can recover defense costs.
J. Clifton Hall III, managing shareholder of Hall Maines Lugrin, represented the underwriters. He said Anadarko’s interpretation of the policy would create separate limits of liability and threaten the market for surplus insurance lines.
The appeal was the latest to reach the Supreme Court from the well blowout and rig explosion which cost 11 workers their lives and resulted in a massive oil spill that fouled the Gulf of Mexico. In 2015 the court settled an insurance dispute by rejecting BP’s claim to $750 million in rig owner Transocean’s insurance coverage.
The Anadarko case featured a minority-interest owner in the drilling enterprise and reflects “lingering ripples” from the costly disaster, said Boyd.
Read the opinion in Anadarko Petroleum Corp. and Anadarko E&P Co. v. Houston Casualty Co., et al.