Verdict for Energy Company Against Insurer Overturned

Mid-Continent Casualty Co. v. Eland Energy Inc. (N.D. Tex. June 16, 2011)

Mid-Continent Casualty Co. issued two insurance policies to several energy companies: a primary policy with a $1 million occurrence limit and $2 million aggregate, and an umbrella policy with a $5 million aggregate.  After Hurricane Katrina, crude oil leaked from the energy companies’ storage tanks at an oil and gas facility in Louisiana.  More oil that was put in a containment boom during cleanup leaked when Hurricane Rita hit.  Following the leaks, lawsuits were filed against the companies by the owners of neighboring properties and commercial fisherman.

The insurer initially agreed to defend the companies, but as the cleanup progressed, the insurer issued them a check for $1 million and $5 million and cut off payment for litigation costs, saying the limits of the policies were exhausted by the cleanup costs.  The insurer also denied defendants’ claim for cleanup costs resulting from Hurricane Rita, contending there was no new release of crude oil.

In a subsequent declaratory judgment action, defendants claimed that their insurer improperly cut them checks for $6 million, even though the cleanup costs had only reached $5.7 million, so the insurer could invoke a contractual right to stop paying their litigation costs.  The insurer alleged, however, that it was legally obligated to pay the combined policy limits when the defendants’ full liability for the cleanup costs became clear.

In October 2009, the court ruled that the insurer did not have to indemnify defendants for a  $2 million settlement in one of the underlying cases because the insurer had the right to waive certain elements of the insurance contract.  On February 22, 2010, the court rejected the defendants arguments, and reaffirmed its decision

The court, however, had allowed a claim to proceed alleging that plaintiff harmed one of the companies by directly settling early with a third-party claimant that sustained property damage.  Plaintiff offered the claimant nearly $55,000 to settle the claims but the energy company asked plaintiff to withdraw the offer.  After the offer was withdrawn, the claimant commenced a class action against the energy company that settled for $2 million.  A jury found that plaintiff put the energy company in a worse position by offering the settlement.

The company maintained that, but for Mid-Continent’s misconduct, it would have had the opportunity to discuss the offer with the claimant, persuaded him not to join the class, not to become the class representative, and not to discuss his offer with his neighbors or other class members. The company suggested that, had it been given that opportunity, it would have been able to settle class action suit for less than $2 million. The court held that the company did not adduce any evidence, however, from which a reasonable jury could have found that, given the opportunity and the information it needed, and without any interference from Mid-Continent, the company would have been successful in its attempts to discuss the offer with claimant or to persuade the claimant not to join the class, not to become the class representative, or not to discuss his offer with others. In other words, although the company argued that it would have tried to accomplish these goals, it offered no evidence from which a reasonable jury could have found it more likely than not that it would have succeeded.  Moreover, the company’s motivation to settle the class action was not solely based on Mid-Continent’s investigation of the damage to the claimant’s property and the offer to that claimant.  One reason the company settled the class action was out of concern about jury sympathy for hurricane victims.

Accordingly, on June 16, 2011, the court overturned the jury’s verdict against Mid-Continent. 

For a copy of the decision click here

Toni Frain and Joseph Oliva

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