I used to know a guy who worked for a major, nationally known public adjustment company. In years where there were no major hurricanes or tornado incidents, he would literally walk around looking like he had the weight of the world on his shoulders. He never overtly wished death or destruction on anyone (as far as I can remember), but hey, a guy has to eat, right? I thought of him when I read a recent coverage decision from the Fifth Circuit arising from the Deepwater Horizon disaster in 2010. The explosion and resulting oil spill into the Gulf generated tons of work for lawyers, and maybe some of them were thinking: “We don’t want tragedies to happen, but somebody has to do the legal work when they do, and it might as well be me.” Ghoulish, perhaps, but it’s the life we’ve chosen.
This particular coverage litigation involved Cameron International Corporation, which had manufactured the “blowout preventer” used on Deepwater Horizon. Cameron had an extensive insurance program, which included Liberty International Underwriters. Liberty had sold Cameron a $50 million liability policy, excess of $100 million, as part of a $500 million tower of coverage.
In addition to the insurance program, a web of indemnification agreements existed. Basically, BP contracted with a company called Transocean to drill the well, and Cameron manufactured and sold the blowout preventer connecting the rig to the well. Under the various contracts, BP agreed to indemnify Transocean, which in turn agreed to indemnify Cameron.
After the terrible accident, thousands of lawsuits were filed against BP, Transocean, Cameron, and others. The indemnity agreements might as well have been on the Deepwater Horizon when the blast happened, because BP refused to indemnify Transocean, and Transocean refused to indemnify Cameron.
After a major legal bloodletting, BP and Cameron started to discuss settlement, and they developed a framework as follows: BP would indemnify Cameron in exchange for $250 million, but only if Cameron’s carriers agreed to waive subrogation rights, and only if Cameron agreed to drop its indemnification claim against Transocean. (If the settlement agreement went through, BP didn’t want Transocean to step into Cameron’s shoes and try to reclaim the $250 million that BP just got paid.)
As magicians and comedians will tell you, there’s always one guy in the room who tries to mess up your show. Cameron’s carriers all agreed to the arrangement…except for Liberty, which also refused to contribute its $50 million in limits. Not wanting to lose the deal, Cameron went ahead and settled anyway, contributing out of its own pocket the $50 million that would have been paid by Liberty, and then going after Liberty in Court.
Liberty defended against the claim by arguing, among other things, that its “other insurance” clause meant that its payment obligations had never been triggered. The clause provided that “if other insurance applies to a ‘loss’ that is also covered by this policy, this policy will apply excess of such other insurance.” The policy defined “other insurance” to include “any type of self-insurance, indemnification or other mechanism by which an Insured arranges for funding of legal liabilities.” (Emphasis added.)
Bottom line: Liberty argued that, because of the “other insurance” clause, all indemnification agreements had to be exhausted before Liberty had to pay anything. Given the amount of money involved, Liberty’s position isn’t surprising. I have a case right now in which a carrier is arguing that indemnification agreements have to be included in an allocation-of-coverage analysis for multiple long-tail asbestos claims. (Hey, who needs precedent?)
Cameron countered by contending that the “other insurance” clause only governed situations where such other insurance actually and presently applies. After all, relevant case law holds that the purpose of an “other insurance” clause is to “avoid an insured’s temptation or fraud of over-insuring…property or inflicting self-injury” – certainly not the situation here.
Liberty lost. The Court ruled that “Cameron’s interpretation is reasonable and Liberty’s is not.” According to the Court: “Liberty’s policy is excess only if other insurance ‘applies,’ present tense. Liberty’s interpretation requires the court to read the word ‘potentially’ into the contract. Moreover, the clause provides that Liberty’s policy being excess of other insurance is conditional on other insurance applying. Liberty reads this to mean that the policy is excess of other insurance until Cameron affirmatively shows that no other insurance exists. That reading would transform the Other Insurance Clause from a protection against double-insuring into a clause that makes Liberty’s policy a policy of last resort.”
Liberty also unsuccessfully argued that, under Cameron’s interpretation of the “other insurance” clause, Cameron had no incentive to enforce its indemnification agreements (presumably resulting in unfair prejudice to Liberty). The Court made quick work of that contention, writing: “That…ignores Liberty’s subrogation rights. If Cameron refuses to seek indemnification, Liberty can pay the policy and then itself sue Transocean for indemnification.”
So what can we learn from this mess? I think there are three main lessons. First, Cameron was smart to get the deal done instead of allowing it to blow up because of Liberty’s recalcitrance. If you have the funds to cap your liability, never let the insurance tail wag the dog. Second, when things start to get real, the truth is that you may not be able to count on insurance or indemnity agreements. Commercial insurance policies are often an impenetrable thicket of conditions and exclusions, and if a carrier thinks it has an escape route, it’s generally going to go that way if the claim is big enough. So effective risk management means managing risks before they blossom into liabilities. Third, it’s critically important to have your insurance professional review your supposed safety net – including indemnification agreements, insurance policies, and “other insurance” clauses – before a problem happens. You can’t predict everything, but you may be able to identify gaps that need to be plugged.
You can read the full Deepwater Horizon decision by clicking here.