Insurance Alert: Supreme Court of Texas Refuses to Limit Indemnification for Defense Costs

On Friday, the Supreme Court of Texas narrowly interpreted the term “liability” in the context of an excess insurance contract and ruled in favor of the policyholder in a dispute over coverage for defense costs. Anadarko Petroleum Corp. and Anadarko E&P Co., L.P. v. Houston Casualty Co., et al., ___ S.W.2d ____, Case No. 16-1013, (Tex. January 25, 2019). As a 25% owner in the Deepwater Horizon oil rig drilling venture, Anadarko was saddled with massive liabilities following a disastrous explosion in the Gulf of Mexico.   In addition, Anadarko incurred huge expenses defending itself against the government and third parties who were damaged by the explosion. With liability already established and no dispute over whether the policy covered those liabilities, the sole issue before the Court was whether an endorsement in the policy that limited coverage for liabilities arising out of the operation of a joint venture also limited coverage for defense costs.

The excess policy at issue provides coverage for liabilities and defense costs up to $150 million per occurrence. A “Joint Venture Provision” endorsement further limits Anadarko’s right to indemnification. The first clause of the endorsement states that

[A]s regards any liability of [Anadarko] which is insured . . . 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 . . . 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.

Anadarko, ___ S.W.2d at ____ (emphasis added). The parties agreed that the Joint Venture Provision limited coverage for Anadarko’s liabilities arising from the Deepwater Horizon explosion to $37.5 million dollars.¹ They disagreed, however, as to whether Anadarko was owed additional indemnification for its defense costs, which are not explicitly referenced in the endorsement.  

Anadarko argued that the Joint Venture Provision limits coverage only for the liabilities it owes to third parties and that the insurer must indemnify it for all of its defense costs up to the full limits of the policy. The insurer argued that coverage for Anadarko’s defense costs is effectively limited by the Joint Venture Provision and that total indemnification for the Deepwater Horizon liabilities and defense costs is capped at $37.5 million. As support, the insurer pointed to the definition of “Ultimate Net Loss” in Section III of the policy.  Section III of the policy obligates the insurer to indemnify Anadarko for its “Ultimate Net Loss” and defines “Ultimate Net Loss” as “the amount [the insured] is obligated to pay , by judgment or settlement, as damages resulting from an ‘Occurrence’ covered by this Policy, including  . . . all ‘Defense Expenses’ in respect of such ‘Occurrence.’”  Anadarko, ___ S.W.2d at ____.

Resolution of this dispute hinged on the meaning of “liability” in the first sentence of the Joint Venture Provision. As “liability” was not defined in the policy, the Court applied Texas rules of contract interpretation, first considering its common, ordinary meaning.   After determining that dictionaries define “liability” broadly to include any debt or obligation, the Court then considered the context in which “liability” appears throughout the policy. “As we have repeatedly explained, we must give an insurance policy’s undefined words their common, ordinary meaning unless the policy itself demonstrates that the parties intended a ‘different’ or more ‘technical’ meaning.” Anadarko, ___ S.W.2d at ___, citing In re Deepwater Horizon,   470 S.W. 3d 452, 464 (Tex. 2015).  

The Court found that the term “liability” is used throughout the policy to refer to the legally imposed obligation to pay for a third party’s damages and that the policy consistently refers to defense costs separately and distinctly, including in the policy’s definition of “Ultimate Net Loss.”  The Court thus interpreted the term “liability” in the context of the policy to include only the damages sustained by third parties that the insured is required to pay. Anadarko, ___ S.W.2d at ___. As a result, the Joint Venture Provision limits coverage only for Anadarko’s obligation to pay damages to third parties and not for the expenses it incurred in defense of the third party claims.  The insurer must therefore indemnify Anadarko for its defense costs up to the $150 million policy limit.