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Defense and Settlement

Endorsement Did Not Apply to Defense Costs in Deepwater Horizon Suit

Lyndon Bittle | March 1, 2019

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Offshore oil platform in California

The 2010 Deepwater Horizon drilling rig catastrophe continues to generate lawsuits triggering insurance disputes that require resolution by the Texas Supreme Court. In its most recent opinion, the court rejected the insurers' argument that a liability policy endorsement limited coverage of defense costs to a fraction of the actual costs.

The case is Anadarko Petrol. Corp. v. Houston Cas. Co., No. 16-1013, 2019 WL 321921 (Tex. Jan. 25, 2019), and the opinion offers another lesson in the court's approach to interpreting insurance policies.

Facts of the Case

Anadarko owned a 25 percent minority interest in BP's Deepwater Horizon operation. After a federal court held BP and Anadarko jointly and severally liable for damages under the Oil Pollution Act, Anadarko reached a settlement with BP, under which Anadarko paid BP $4 billion and relinquished its 25 percent interest in exchange for BP's agreement to indemnify Anadarko for any additional liability. BP did not agree to pay Anadarko's defense costs, so Anadarko sought to recover those costs, which exceeded $100 million, under an excess liability policy purchased on the Lloyd's of London market.

The policy did not require the underwriters to defend Anadarko. It provided indemnity up to $150 million for Anadarko's "ultimate net loss," defined as:

[T]he amount [Anadarko] is obligated to pay, by judgement or settlement, as damages resulting from an "Occurrence" covered by this policy, including the service of suit, institution of arbitration proceedings and all "Defence Expenses" in respect of such "Occurrence."

The underwriters took the position that a joint venture endorsement limited the insurers' responsibility for both settlement and defense expenses to 25 percent of the limit (i.e., $37.5 million), which they paid. Anadarko acknowledged the $37.5 million limit applied to the $4 billion settlement payment but argued it did not limit its right to recover defense costs up to $112.5 million—the remaining balance of the $150 million policy limit.

As usual, the dispute turned on construing the pertinent policy provisions. The joint venture endorsement had three clauses. The first provided the basic coverage limitation:

[A]s regards any liability of [Anadarko] which is insured under this Section III and which arises in any manner whatsoever out of the operation or existence of any joint venture … in which [Anadarko] has an interest, the liability of Underwriters under this Section III shall be limited to the product of (a) the percentage interest of [Anadarko] in said Joint Venture and (b) the total limit afforded [Anadarko] under this Section III.

The second and third clauses provided exceptions to the limit imposed by the first clause.

The Rulings

The trial court granted part of the relief sought by Anadarko, finding the first clause applied but was modified by the third clause, so that Anadarko was entitled to recover some, but not all, of the costs it requested. The Beaumont Court of Appeals granted the parties' cross-petitions for permissive appeal, reversed the judgment, and granted judgment for the underwriters. The appellate court agreed that the first clause's limitation was triggered but held neither of the exceptions applied. On review, the Texas Supreme Court disagreed with both of the lower courts and held the limitation imposed by the first clause applied only to Anadarko's liability, not to defense costs.

The key to the decision was the meaning of "liability" as used in the joint venture endorsement. After consulting dictionary definitions of the term, the court confirmed it "can refer broadly to any debt or obligation," so it could include a party's obligation to pay its lawyers, investigators, and other experts. However, emphasizing that "context matters," the court considered how the term was used in other sections of the policy as well as its common uses in insurance and other legal contexts.

This detailed analysis led the court to construe "liability" to mean the insured's "legally imposed obligation to pay for a third party's damages in response to a written claim." As such, the term did not encompass defense costs (i.e., the "voluntarily assumed obligation to pay lawyers, investigators, or others for services provided to defend against the liability"). Consequently, the court held that "the liability insured and defense expenses are two separate components of the ultimate net loss," and only the former was limited by the joint-defense endorsement.  

The underwriters' backup argument was that, even if "liability" did not include defense expenses, the joint venture endorsement "scales" coverage of defense expenses to Anadarko's 25 percent ownership interest. Without explaining the practical effect of "scaling," the court summarily rejected that argument as misreading the joint venture endorsement. Finally, because the court found the policy's plain language unambiguously favored Anadarko's position, the court did not address other arguments by the insured, including the rule that ambiguity must be resolved in the insured's favor.

The Texas Supreme Court reversed the judgment of the court of appeals, rendered judgment granting Anadarko's motion for partial summary judgment, and remanded to the trial court "for further proceedings consistent with this opinion"—a determination of the amount of defense costs incurred up to the remaining policy limit.

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