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Texas Supreme Court Requires Insurers to Pay Anadarko Full Deepwater Horizon Defense Costs Under CGL “Joint Venture Provision”

iStock-907906404-anadarko-300x200The Supreme Court of Texas delivered good news to policyholders insured under a “Joint Venture Provision” endorsement commonly used in the oil and gas industry. In Anadarko Petroleum Corp. v. Houston Casualty Co.—a case arising from the 2010 Deepwater Horizon disaster—the court held that insurers assumed the obligation to reimburse the full amount of a joint venture partner’s defense costs, rejecting the insurers’ argument that their obligation was reduced by the “scaling” language of a Joint Venture Provision. As a result, the court held the insurers liable to Anadarko for over $100 million in defense costs, not just the $37.5 million they had already paid.

Anadarko held a 25% joint venture interest in the Deepwater Horizon offshore rig. After the blowout, Anadarko settled with BP, the majority owner, agreeing to transfer its minority interest to BP and pay $4 billion in exchange for a release of BP’s claims against Anadarko and indemnity against all other liabilities arising out of the incident. BP did not, however, agree to pay Anadarko’s substantial legal fees and other defense expenses.

Anadarko was insured under an “energy package” policy issued through the Lloyd’s market, with excess coverage of $150 million per occurrence. The policy did not require the insurers to defend Anadarko against liability claims, but it did require them to indemnify Anadarko for Ultimate Net Loss, which it defined as “the amount [Anadarko] is obligated to pay, by judgment or settlement, as damages resulting from an ‘Occurrence’ covered by this Policy, including the service of suit, institution of arbitration proceeds and all ‘[Defence] Expenses’ in respect of such ‘Occurrence.’”

But the insurers paid Anadarko only $37.5 million of its defense costs, contending that the policy’s Joint Venture Provision reduced the $150 million limit available for Ultimate Net Loss where Anadarko’s liability arose out of the operations of a joint venture in which it had an ownership interest. Here, the Joint Venture Provision provided:

[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.

Multiplying Anadarko’s 25% interest by the $150 million limit for Ultimate Net Loss under this so-called “scaling clause,” the insurers argued Anadarko was entitled to only $37.5 million in coverage for its defense costs.

Reversing a lower appeals court decision, the Texas Supreme Court rejected the insurer’s reasoning. The court held that the introductory language of the scaling clause (“As regards any liability of Anadarko which is insured under this Section III …”) expressly applied only to liabilities within the scope of the insurance, while Anadarko’s obligation to pay its costs of defending a suit were not “liabilities … imposed by law.” The court recognized that the definition of “Ultimate Net Loss” was unclear, but it concluded that a contextual reading of the policy’s plain language displayed a consistent intention to distinguish between liabilities imposed by law and defense costs. Therefore, it found that Joint Venture Provision did not operate to reduce coverage for defense costs to 25% of the overall per occurrence limits.

Anadarko is an important win for policyholders. It not only establishes broader defense cost limits under the Joint Venture Provision widely used in the oil and gas industry, but it also reaffirms the Texas courts’ commitment to holding insurers to their coverage obligations.