Liberty Insurance Must Pay Attorneys’ Fees in Gulf Oil Spill Case

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A federal appeals court has ruled against an insurer in its quest to avoid paying attorneys’ fees in litigation stemming from 2010’s Deepwater Horizon oil spill.

The U.S. Court of Appeals for the 5th Circuit in New Orleans found hollow Liberty Insurance Underwriters Inc.’s (LIU) argument that it should not pay attorneys’ fees for Cameron International Corp., maker of a faulty blowout preventer used on the Deepwater Horizon to connect the rig to the Macondo well owned by the oil giant BP.

Cameron’s blowout preventer was previously found by the U.S. Chemical Safety Board to be a factor in the 2010 Gulf of Mexico spill.

The 5th Circuit court also determined that LIU breached its contract as one of Cameron’s insurers by refusing to cover its share of settlement costs the manufacturer had reached with BP after the Macondo blowout off the coast of Louisiana, which caused an explosion that killed 11 rig workers and spilled millions of barrels of oil into the Gulf.

Additionally, in In Re: Deepwater Horizon, Cameron International Corp. v. Liberty Insurance Underwriters Inc., the appellate court has asked Texas Supreme Court to certify whether by wrongfully denying Cameron’s claim under its policy, the Boston-based insurer violated the Texas insurance code.

The 2010 Deepwater Horizon spill has generated thousands of lawsuits against BP, Transocean Ltd., owner of the Deepwater Horizon rig, Cameron and others.

In its written opinion, the 5th Circuit described the background in the Cameron/LIU litigation:

“This case turns, in part, on a complicated arrangement of indemnification between some of the parties involved in the spill. BP (a nonparty here) owned the Macondo oil well and the lease on the continental shelf. BP contracted with Transocean (also a nonparty here), which owned Deepwater Horizon, to drill the well, and to indemnify Transocean for liability associated with drilling. Cameron manufactured and sold Transocean the blowout preventer connecting the rig to the well, and Transocean indemnified Cameron for liability associated with the blowout preventer. In short, Cameron was indemnified by Transocean, which was in turn indemnified by BP.”

Cameron had purchased an insurance tower of $500 million to protect its interests in the event litigation arose out of its involvement in the Deepwater Horizon project. The tower consisted of multiple layers of insurance coverage obtained from multiple insurers.

“Liberty sold Cameron a policy covering the $50 million in losses between the first $100 million and $150 million in losses. In other words, Liberty’s $50 million policy was excess of the policies covering the first $100 million in losses, and Cameron obtained other policies that were excess of Liberty’s policy,” the 5th Circuit explained.

After the spill, BP, Transocean and Cameron sued and countersued each other. Cameron also sought indemnification from Transocean and notified LIU “of a potential loss covered by the policy,” the court said.

BP and Cameron ultimately reached a $250 million settlement, to which all of Cameron’s insurers agreed with the exception of LIU. Cameron’s quest for indemnity from Transocean remained unsettled.

The appeals court wrote that LIU claimed, among other things, that its obligation to pay Cameron had not been triggered because the Other Insurance Clause in its policy “provided that ‘[i]f other insurance applies to a ‘loss’ that is also covered by this policy, this policy will apply excess of such other insurance.'” LIU considered indemnity from Transocean to be “other insurance,” and maintained that Cameron had not “exhausted its legal remedies” with regard to securing payment from Transocean.

Cameron nevertheless settled with BP, “putting up $50 million of its own money in addition to the $200 million its other insurers contributed.” The company then filed suit against LIU “asserting claims for breach of contract and for violations of the Texas Insurance Code,” the court wrote.

The district court sided with Cameron on the $50 million breach of contract claim but ruled in favor of LIU on Cameron’s Texas Insurance Code claims and ultimately denied Cameron payment of attorney’s fees resulting from the litigation.

Both sides appealed.

“Cameron appealed the district court’s judgment against it on its claim under Chapter 541 of the Texas Insurance Code and on its claim for attorney’s fees. Liberty cross-appealed the district court’s judgment in favor of Cameron on its breach of contract claim,” the court wrote.

The appeals court, however, rejected Liberty’s arguments on the breach of contract claim, letting the $50 million judgment stand, and ruled that the insurer was also on the hook for Cameron’s attorney’s fees.

“We … agree with the district court that Liberty breached the contract, before Cameron settled with BP, by constructively denying coverage and by violating the policy’s ‘prompt payment’ requirement. Because Liberty breached the contract, it waived its rights under the subrogation clause. Thus, even if Cameron violated that clause in its settlement with BP — a question that we do not reach — Liberty breached first,” the court wrote.

In siding with Cameron on the question of attorney’s fees, the appeals court stated that Cameron “did not waive its claim for attorney’s fees, impliedly or otherwise.”

The court found to be of “important state interest” the question of whether Liberty violated the Texas Insurance Code in denying coverage to Cameron, as well as whether the district court was wrong in dismissing Cameron’s claim under Texas Insurance Code Chapter 541.

“Chapter 541 authorizes policyholders to file private actions against insurers in order to recover ‘actual damages'” caused by an insurer’s ‘unfair method of competition or an unfair or deceptive act or practice in the business of insurance,’ and permits treble damages in certain circumstances,” according to the 5^th Circuit.

Cameron had claimed as actual damages only the policy benefits that LIU denied and its attorney’s fees related to the case.

“The question here involves an important state interest — namely, the availability of a cause of action under the Texas Insurance Code where the insurer wrongfully denied the policy benefits but caused the insured no damages other than those denied benefits,” the court wrote.