United States: Prompt Payment Required Under Policy Cannot Be Delayed Due To Potential For Contractual Indemnity

Last Updated: January 4 2016
Article by Jennifer E. Michel

Case:   Cameron International Corp. v. Liberty Insurance Underwriters, Inc.
U.S. Court of Appeals for the Fifth Circuit
No. 14-3132; November 19, 2015

Cameron International Corporation, the manufacturer of the blow out preventer, was one of the Deepwater Horizon defendants in thousands of suits arising from the 2010 Macondo Oil Spill in the Gulf of Mexico. Cameron had a tower of insurance of $500 million, included within which was a policy issued by Liberty Insurance Underwriters, covering Cameron's exposure between $100 million and $150 million.

There were contracts between the various parties, through which Cameron claimed contractual indemnity from Transocean and Transocean claimed indemnity for that alleged obligation from BP. Those obligations were denied and not resolved.

During the course of the litigation, Cameron and BP negotiated a settlement through which BP would indemnify Cameron for its exposure in exchange for $250 million, provided Cameron agreed to waive its indemnification rights against Transocean and Cameron's insurers agreed to waive their subrogation rights (as successful pursuit of indemnity against Transocean could ultimately rest in BP's lap through Transocean's indemnity claims against BP, requiring BP to return the very $250 million received in settlement). Cameron agreed, as did all Cameron's impacted insurers, aside from Liberty. In spite of Liberty's refusal, Cameron entered into the settlement with BP anyway, directly funding the $50 million attributable to Liberty's layer.

Litigation ensued between Cameron and Liberty, through which Cameron sought to recover the $50 million, attorneys' fees for breach of contract and for violations of the Texas Insurance Code. Judge Carl Barbier in the Eastern District of Louisiana granted Cameron the $50 million against Liberty, denied its attorneys' fees claim on the basis of waiver and denied its claim under the Texas Insurance Code, noting he was constrained to do so by prior Fifth Circuit jurisprudence, with which he disagreed. Appeal to the Fifth Circuit followed.

The Fifth Circuit panel, Judge Edith Brown Clement writing for the Court, rejected Liberty's defenses to payment of their $50 million policy limits, finding Liberty had breached the insurance policy in failing to promptly pay. The Court noted there was no dispute over whether the amounts at issue were insured under the Liberty policy.

To avoid payment, Liberty relied upon the Other Insurance clause of its policy, arguing their coverage would only be excess of Other Insurance, which was defined as "any type of self-insurance, indemnification or other mechanism by which an Insured arranges for funding of legal liabilities." Liberty argued the contractual indemnity allegedly owed by Transocean qualified as Other Insurance, making their policy excess over that recovery.

The Court noted Other Insurance clauses are generally intended to avoid an insured over insuring property or inflicting self-injury, but that such clauses were not intended to put the insured in a worse position when they have contracted for other means of handling losses than the insured would have been in had it not taken those extra, and not required, measures. Given this, the Court held Liberty had to comply with its policy's "prompt payment" requirement and satisfy its insured's obligations, seeking subrogation after making payment. Any other reading would put the Insured in a worse position having obtained the indemnity agreement than they would have been in had they not. When there was no requirement they have one, this could not be allowed.

The Court also noted the policy wording did not support Liberty's position as the excess obligation arose under these circumstances, "if other insurance applies to a 'loss' that is also covered by this policy, this policy will apply excess of such other insurance." The Court focused on the present tense of the term "applies." As the contractual indemnity obligations had not been determined valid, they did not at that time apply and the Court would not read "potentially" into the terms of the policy. The Court also rejected any position that would require Cameron to litigate to conclusion a contractual indemnity claim before Liberty's policy would be implicated, noting that such a 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." The Court further noted the distinction between the handling of underlying insurance and Other Insurance, commenting that with respect to underlying insurance, the policy provided it would never "drop down" such that the Liberty limits would always be excess of the underlying limits. In contrast, no such wording was included in the Other Insurance provision, so the Liberty policy was not entitled to force exhaustion of efforts to pursue indemnity before it would respond.

Liberty argued Cameron had breached the policy first by entering into the settlement with BP and thereby impairing Cameron's subrogation rights and forgiving Liberty's obligation to pay under the policy. However, the Court found Liberty had constructively denied coverage and violated the policy's "prompt payment" requirement before Cameron entered into the settlement, such that it was Liberty who breached the contract first and thereby waived its subrogation rights. As a result, the Court did not consider whether Cameron's settlement violated the subrogation clause. The Court affirmed the District Court's determination that Liberty owed the $50 million to Cameron.

The Court also reversed Judge Barbier's finding that Cameron had impliedly waived its claim for attorney's fees for breach of contract. The attorneys' fees for pursuing coverage were not squarely addressed in earlier proceedings, and the Court found they had been properly alleged, such that the claim had not been waived. The Court reminded that waiver can only be found if Cameron had misled Liberty to its prejudice "into the honest belief that such waiver was intended or consented to." No such conduct was found. Further, it was noted a claim for recovery of attorneys' fees before success on the merits would have been premature.

Finally, Cameron had asserted violation of the Texas Insurance Code, but aside from recovery of the $50 million in policy limits and its attorneys' fees and expenses, Cameron did not identify any damages sustained as a result. Judge Barbier noted conflicting Texas state cases on whether independent damage is required to allow such recovery and that he was constrained to deny the claim due to the Fifth Circuit prior decision holding independent damage was required, Great American Insurance Co. v. AFS/IBEX Financial Services, Inc., 612 F.3d 800 (5th Cir. 2010). Finding the requirement for certification of an issue to the Texas Supreme Court met, that important state interests were at stake and the state courts had not provided clear guidance on how to proceed, the Court certified the following question:

Whether, to maintain a cause of action under Chapter 541 of the Texas Insurance Code against an insurer that wrongfully withheld policy benefits, an insured must allege and prove an injury independent from the denied policy benefits?

Be on the lookout in future issues for a decision by the Texas Supreme Court on the certified questions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jennifer E. Michel
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