On January 25, 2019, the Texas Supreme Court issued a unanimous ruling reversing the lower court’s holding regarding an insurers’ obligation to pay a significant amount of legal defense costs that resulted from its liability in the Deepwater Horizon oil spill.  See Anadarko Petroleum Corp. v. Houston Casualty Co., No. 16-1013 (Tex. Jan. 25, 2019).  The Court ruled that a joint-venture liability cap in an insurance policy did not limit coverage for Anadarko’s defense expenses related to the Deepwater Horizon oil spill where the provision only capped “liability”—an undefined term.

Anadarko, through a joint-venture arrangement with BP, held a 25% ownership interest in the offshore well that was the source of the spill. The policy at issue provided for $150 million in excess liability coverage for Anadarko’s “Ultimate Net Loss.”  The policy also contained a “Joint Venture Provision” that capped Anadarko’s “liability” arising from joint-venture operations at 25% of the total $150-million coverage limit—that is, $37.5 million.

Anadarko was paid $37.5 million to cover some of Anadarko’s third-party liabilities arising from the spill, but more than $100 million in defense costs was denied as subject to joint-venture liability cap.  Anadarko challenged the coverage determination, arguing that the policy’s “Joint Venture Provision” only capped excess coverage for its liabilities to third parties, not for its defense costs.

In reaching its decision, the Court ultimately determined that the joint-venture liability cap was “plainly” inapplicable to Anadarko’s defense costs, largely because “the liability insured and defense expenses are two separate components of the Ultimate Net Loss.”  The Court remanded the case back to the trial court with instructions to resolve any disputes concerning the amount of defense costs that Anadarko has claimed.

This case is significant for policyholders whose insurance policies contain similar limitations on liability coverage.  These policyholders should carefully examine their insurance policy language to ensure they are making informed decisions about potential coverage when entering into new joint ventures, such as offshore drilling projects that may expose them to significant liabilities and defense costs.