Houston-based Insurance Recovery & Advisory counsel Tamara Bruno commented on two cases highlighted in Law360’s report on insurance decisions and cases to watch in 2019.
The first involved a Texas Supreme Court decision in January that common energy policy language doesn’t bar Anadarko Petroleum Corp.’s claim for $100 million in defense costs in Deepwater Horizon litigation.
Anadarko persuaded the Texas justices to reverse a ruling by a state appeals court panel that absolved a group of underwriters at Lloyd's of London of any duty to cover Anadarko's massive defense bill.
The lower appellate panel found that defense costs constitute a "liability" insured under Anadarko's policy. That determination triggered the application of a "joint venture" or “scaling” provision that capped the underwriters' limits for Anadarko's liabilities arising out of any JV operations at $37.5 million. The panel held that, since the underwriters had previously paid the capped sum to Anadarko, they had no further obligation to pay its defense costs.
The Texas high court disagreed, concluding the term “liability" refers "to an obligation imposed on Anadarko by law to pay for damages sustained by a third party who submits a written claim" and doesn't encompass the company's own defense costs. As such, the court revived Anadarko's bid for defense coverage.
Bruno said the decision is significant because many oil and gas companies in Texas hold insurance policies containing near-identical JV provisions. She said the Lloyd’s underwriters’ arguments in the case “always seemed like a stretch” and that a ruling adopting their position would have undercut policyholders’ reasonable expectations of coverage for their defense costs.
“From a policyholder perspective, regarding the opinion’s specific application to the JV provision, it feels like a return to normal,” Bruno said. “However, policyholders will want to be careful and look at their scaling provisions to ensure they aren’t different enough from Anadarko’s for carriers to make this sort of argument again.”
In a second case, the U.S. Fifth Circuit Court of Appeals will have a chance to interpret the scope of a recent Texas Supreme Court decision when it decides whether Chubb Ltd. must cover a $105.7 million default judgment entered against its policyholder in a dispute over problems with an oil well project.
In June 2018, U.S. District Judge David Ezra refused to hold the insurer accountable for the massive judgment that the lessee of the drilling site, CBX Resources LLC, obtained against the insurance company's policyholder, Espada Operating LLC, in the underlying action.
The district judge found that because Espada didn't appear at trial or defend against CBX's claims, the resulting judgment wasn't the product of a "fully adversarial proceeding" under the standards established by the Texas Supreme Court in its 2017 ruling in Great American Insurance v. Hamel. As a result, the judgment is unenforceable and CBX can't force Chubb to pay it.
On appeal, CBX is challenging both Judge Ezra's refusal to enforce the judgment and his earlier decision that Chubb had no duty to defend Espada in the underlying case. CBX argued that, under Hamel, the fact that CBX and Espada didn't enter into any pretrial agreements designed to shift Espada's risk to its insurer created a "strong presumption" that the $105.7 million judgment resulted from a fully adversarial trial.
Bruno said the case presents an interesting test for the Hamel standards.
"Hamel was trying to find a balance between the interests of claimants and insurers," she said. "On the one hand, it said the Texas courts don't support collusion, but on the other hand, it said policyholders should have an avenue for recovery."
According to Bruno, Judge Ezra's decision is problematic because it essentially eliminates any recourse for financially strapped or defunct policyholders whose insurers refuse to defend them.
"Frankly, if the insurer failed to defend, they are responsible for the situation, and they shouldn't be able to benefit from that decision," Bruno said. "This decision gives insurers no incentive to defend under a reservation of rights in questionable cases. If they think there is no coverage, why would they provide a defense, if they could just wait until the secondary coverage litigation for a favorable decision?"