A recent Texas Supreme Court decision provides some clarity on the limits of coverage under energy package policies. The ruling is beneficial to policyholders in its broad finding that coverage for defense costs
Read on for background on the case.
Costs of defense under Energy Package Policy
The Texas Supreme Court recently ruled that underwriters of Anadarko were obligated to cover its defense costs of more than $100 million incurred in relation to the Deepwater Horizon disaster in 2010.
Anadarko was a minority partner in the Macondo well where the 2010 blowout occurred. Anadarko and its underwriters had resolved most of their disagreements with regard to coverage, and this case focused solely on coverage for the legal fees and related expenses Anadarko incurred defending against liability and enforcement claims.
Anadarko argued that its energy package insurance policy covered all defense expenses up to the policy’s $150 million excess coverage limit. Anadarko’s underwriters contended that the policy capped the excess coverage — including coverage for defense costs — at 25 percent of that limit, $37.5 million, which Anadarko’s underwriters had already paid.
The trial court agreed with Anadarko. The court of appeals agreed with underwriters. The Texas Supreme Court concluded that the policy did not cap the coverage for defense costs at 25 percent of $150 million, reversed the court of appeals, and remanded the case to the trial court for a determination of the total amount of defense costs.
The Court of Appeals concluded coverage was capped
Central to the determination of the court of appeals was the finding that defense costs constituted a “liability” insured under Anadarko’s energy package policy. That finding triggered the application of a “joint venture” policy provision that capped the underwriters’ overall limits for Anadarko’s liabilities arising out of any joint venture operations at $37.5 million.
Texas Supreme Court finds coverage
The Texas Supreme Court disagreed, finding that the term “liability” referred to “an obligation imposed on Anadarko by law to pay for damages sustained by a third party who submits a written claim” and did not encompass Anadarko’s own defense costs. The Texas Supreme Court noted that while the energy package policy did not define “liability,” it consistently distinguished between Anadarko’s liabilities and expenses.
The Texas Supreme Court noted: “Although Anadarko’s liabilities and defense expenses are both included in its ‘ultimate net loss,’ and thus both are ‘insured’…the policy distinguishes between the two and the joint venture provision applies only to liabilities, not to defense expenses.”
The Texas Supreme Court hypothetically noted that if Anadarko’s liabilities arising out of a joint venture were $50 million and its defense expenses were $50 million, for a total net loss of $100 million, the joint venture provision would limit the underwriters’ total liability to $87.5 million: $37.5 million for liabilities and $50 million for defense expenses, even though the total limit was $150 million.
Therefore, the Texas Supreme Court concluded that this provision did not cap the defense costs and, therefore, Anadarko had coverage for defense costs up to $150 million. The Texas Supreme Court remanded the case to the trial court for a determination of the amount of those costs.