The Deepwater Horizon Drilling Rig Accident Continues to Cause Ripples: Texas Supreme Court Holds That Defense Costs are Not Liabilities Under Insurance Policy

The Supreme Court of Texas recently issued a decision in which the community of insured parties and insurer parties alike will be interested. The case, Anadarko Petroleum Corporation, et al. v. Houston Casualty Company, et al., stems from the April 20, 2010 Deepwater Horizon drilling-rig accident that has been called, “the largest accidental marine oil spill in U.S. history.” The decision distinguishes between an insured’s “liability” and “expenses” under certain policy language to the consequent of $112 million.

The case involved the Anadarko Petroleum Corporation and Anadarko E&P Company, L.P. (collectively, “Anadarko”) and a group of insurance underwriters led by the Houston Casualty Company (the “Underwriters”). Anadarko was a 25% minority interest holder in the Macondo Well that blew out in the Gulf of Mexico in April 2010. Anadarko reached a settlement agreement with BP under which Anadarko agreed to provide its 25% interest and to pay $4 billion to BP in exchange for a release and indemnity against all other liabilities arising out of the accident. Anadarko’s legal fees and defense expenses were not included in the settlement agreement, and Anadarko sought these fees and expenses from the Underwriters pursuant to its “energy package” insurance policy.

The policy included a $150 million excess liability coverage limit per occurrence that was further limited by a “joint venture” clause. The Underwriters paid out $37.5 million, which was 25% of the $150 million limit and consistent with Anadarko’s 25% ownership interest in the joint venture that operated the Deepwater Horizon and the Macondo Well. The dispute before the court involved the balance of $112.5 million. The trial court initially ruled in favor of Anadarko and held that the Underwriters must pay off the balance of the coverage limit, and the appeals court reversed. The Texas Supreme Court reversed the appeals court and held that the Underwriters must pay off the balance of the coverage limit, but for reasons that differed from those of the trial court.

The Supreme Court focused on the clause of the policy that included the joint venture limit and that required the Underwriters to cover “‘any liability’ of Anadarko ‘which is insured’” under the policy and “which arises” out of the joint venture. Thus, the issue was whether Anadarko’s defense costs were an insured liability that arose out of the joint venture.

The court noted that the dictionary definition of the term “liability” is broad and included “any kind of debt, obligation, or responsibility.” The Underwriters argued that Anadarko’s defense costs were part and parcel of its liability arising out of the joint venture, and that the word “any” indicated the broadest possible meaning of the term “liability” should apply.

However, the term had a narrower meaning in the context of the policy itself. Because the policy consistently distinguished between the insured’s “liabilities” and “expenses,” the court concluded that the term “liability” was limited to obligations that Anadarko was obligated to pay for damages sustained by a third party. As a result, Anadarko’s defense costs were not a “liability” under the policy and not subject to the limitation of the joint venture clause.

This is a holding that the community of insured parties and insurer parties alike will want to heed and understand as it may have significant impact on similar disputes all over the country, especially given its connection to the infamous Deepwater Horizon accident.