Reversing a Texas Court of Appeals decision that allowed Anadarko’s Lloyd’s of London excess insurers to escape coverage for more than $100 million in defense costs incurred in connection with claims from the Deepwater Horizon well blowout, the Supreme Court of Texas held that the insurers’ obligations to pay defense costs under an “energy package” liability policy are not capped by a joint venture coverage limit for “liability” insured. Anadarko Petroleum Corp. et al. v. Houston Casualty Co. et al., No. 16-1013 (Tex. Jan. 25, 2019).
While the Lloyd’s of London insurers had agreed to pay Anadarko $37.5 million for damages, they declined to cover $100 million-plus in defense fees, arguing that both Anadarko’s liability and defense expenses are subject to the $37.5 million joint venture limit for “liability” insured. Anadarko asserted that only amounts paid as damages to third parties are subject to that limit. Defense costs, however, are not amounts paid as damages to a third party and, thus, are not a “liability.” Those amounts, therefore, are not subject to the joint venture limit and are instead subject to the policy’s $150 million coverage limit.
Agreeing with Anadarko and rejecting the insurers’ reading of the policy, the Texas Supreme Court found that the term “liability insured” refers to Anadarko’s liability to third parties for damages. Anadarko’s defense costs are not claims for liability or demands for damages against Anadarko. Accordingly, the “liability” insured does not include defense costs, despite that defense costs are also covered under the policy as part of “Ultimate Net Loss.” As a result, the joint venture provision, which contained a limit only with respect Anadarko’s liability, does not limit the insurers’ responsibility for Anadarko’s defense expenses.
In reaching its conclusion, the Texas Supreme Court employed established rules of insurance policy construction, leading it to differentiate the term “liability insured” from “Ultimate Net Loss.” While the latter is defined in the policy and includes both damages and defense costs, the term “liability” is not defined. In determining the parties’ intent, the Court considered how the term “liability” is commonly used in legal and insurance contexts. The Court also examined how the policy uses the term “liability” and consistently distinguishes between an insured’s “liabilities” and “expenses.” The Court concluded that “liability” in the policy refers to an obligation imposed by law to pay for damages sustained by a third party who submits a claim. The term “liability” does not include Anadarko’s “voluntarily assumed obligation to pay lawyers, investigators, or others for services provided to defend against the liability.” Accordingly, the reference to “liability insured” in the policy does not include “defense expenses.” Because defense expenses are not “liabilities,” the joint venture clause does not limit the insurers’ obligation to pay such expenses. The Texas Supreme Court remanded the case to the trial court for further proceedings consistent with its holding.
The Texas Supreme Court’s opinion in Anadarko is a significant victory for policyholders. The case is an example of how enormous dollar value can hinge on the most basic construction issue. Unfortunately, insurers’ arguments focusing on seemingly straight-forward insurance policy wording are not unusual. The Texas Supreme Court’s opinion in Anadarko, however, provides compelling support to policyholders to counter arguments by insurers that seek to limit coverage for defense costs based upon a policy’s “liability” limits.
Specifically, the opinion will have a profound impact on insurance coverage for energy companies, as the “energy package” insurance form issued to Anadarko is commonly used in the energy sector, especially by oil & gas companies. More broadly, the Texas Supreme Court’s opinion could have far-reaching implications, as the insuring language in Anadarko’s policy is nearly identical to language contained in standard liability insurance policies throughout the United States. For instance, the opinion is consistent with the common understanding that “defense costs” are outside the limits of “liability” in such policies, unless the policy expressly states otherwise.
Finally, the appellate panel’s ruling was inconsistent with Texas precedent and could have led to extensive disputes under liability policies governed by Texas law. The Texas Supreme Court’s reversal clarifies how Texas courts should apply the rules of policy construction. In this regard, the Supreme Court’s opinions serves to right the ship and bring Texas case law back in line with precedent.