February 01, 2019 Practice Points

Context Defeats Dictionary Definition in Texas Insurance Row

A recent case shows the importance of careful drafting of all contracts—not just insurance policies.

By Jack Edwards

The Supreme Court of Texas recently held that the context of the term “liability” in an insurance policy defeated the term’s dictionary definition in a coverage dispute related to the Deepwater Horizon oil spill in 2010. Anadarko Petroleum Corporation and Anadarko E&P Company, L.P. owned 25 percent of a joint venture with several BP entities. A federal court in 2012 ruled that BP and Anadarko were jointly and severally liable under the Oil Pollution Act of 1990. BP and Anadarko then reached a settlement agreement under which Anadarko paid BP $4 billion.

Anadarko had excess-liability coverage of up to $150 million under an “energy package” policy. A “joint venture” provision reduced coverage based on Anadarko’s percentage ownership in a joint venture. The underwriters paid Anadarko $37.5 million (25 percent of the $150 million limit) based on its 25 percent ownership in the joint venture.

But the underwriters refused to pay Anadarko’s defense expenses, which exceeded $100 million. While the policy contained no duty to defend, it did require the underwriters to reimburse Anadarko for its defense expenses. The parties agreed that the joint-venture provision limited the underwriter’s liability for Anadarko’s “liability . . . insured,” but disagreed on whether “liability” included defense expenses. The policy did not define “liability.” The underwriters argued that the dictionary definition of “liability” included any kind of debt, obligation, or responsibility, including defense expenses. Anadarko countered that, as used in the policy, the term “liability” was limited to legal liability and excluded defense expenses.

Anadarko sued the underwriters in Texas state court, seeking to recover their defense expenses of up to $112.5 million for ($150 million minus the $37.5 million already paid). The trial court ruled in part for Anadarko, but the appeals court reversed. The Texas Supreme Court agreed to review.

The court concluded that the underwriters were liable for Anadarko’s defense expenses. After looking at the dictionary definition of “liability,” the court turned to the policy language because “context matters”: “[W]e 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.” Because other provisions in the policy consistently distinguished between “liabilities” and “expenses,” the court concluded that the term “liability” as used in the joint-venture provision excluded defense expenses. The court also concluded that the underwriters were liable for all of Anadarko’s defense expenses and remanded for a determination of those amounts.

This case shows the importance of careful drafting of all contracts—not just insurance policies. The joint-venture provision could have defined “liability” to include defense expenses or otherwise stated that the provision applied to both liabilities and defense expenses. While this case clarifies this area of the law, it remains to be seen whether insurance companies will amend future “energy package” policies to exclude or limit coverage for joint-venture defense expenses.

The case is Anadarko Petroleum Corp. v. Houston Cas. Co., No. 16-1013 (Tex. Jan. 25, 2019).

Jack Edwards is senior counsel with Ajamie LLP in Houston, Texas.

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