Taylor Energy Co. LLC v. Underwriters At Lloyds (United States District Court, Eastern District of Louisiana, October 29, 2010)
This environmental coverage case arises out of the collapse of an oil production platform owned by policyholder Taylor Energy and certain costs incurred by Taylor Energy as the result of oil seepage from 28 wells which were serviced by that platform but damaged during Hurricane Ivan. Taylor Energy had insured the structure and wells through defendants, Certain Underwriters at Lloyd's London ("Underwriters").
Underwriters moved for summary judgment concerning its rights and obligations under the Policy. Specifically, Underwriters asked the Court to issue a declaration that Section IIC of the Policy held by plaintiff Taylor Energy "does not cover costs to drill relief wells" which Taylor Energy has been required by the United States to stop seepage from the wells. Thus, Underwriters maintained that Taylor Energy's breach of contract claim is without merit. Likewise, Underwriters sought dismissal of Taylor Energy's statutory bad faith claims.
The insuring agreement contained coverage under four sections: Section I – Physical Damage/Removal of Wreck; Section II – Energy Exploration and Development Insurance; Section III – Oil Pollution Act Coverage; and Section IV – Loss of Production Income. The section in dispute was IIC, which involved coverage for Seepage and Pollution, Cleanup and Contamination. Specifically, the question presented to the Court was whether the insuring language in Section IIC unambiguously provided coverage to Taylor Energy with respect to the drilling of relief/intervention wells to comply with the government’s specific order to take immediate remedial action to prevent further soil contamination and/or hydrocarbon seepage.
In August 9th, 2005, Taylor Energy informed Underwriters that there would be leakage if the wells were not properly plugged and abandoned. Furthermore, Taylor Energy made clear in that letter that it believed that all of the coverages under Sections IIA, IIC and III were available to defray the cost thereof. Underwriters paid about $166 million under the various coverages on the policy and thus the only coverage that had not been exhausted was that provided by the Section IIC coverage – Seepage and Pollution. Consequently, the issue presented was whether the action taken by Taylor Energy to address the seepage from the wells was covered by Section IIC of the policy.
Underwriters considered the costs incurred for drilling relief wells outside the intended coverage under Section IIC because Underwriters did not consider the drilling of the intervention wells to be remedial measures for bodily injury or loss of, damage to or loss of use of property caused directly by seepage pollution or contamination arising from wells insured or costs for the removal, nullification or clean up of seepage or pollution emanating from the insured wells. Underwriters viewed the clear intent of the Policy was that the relief wells are control of well operations covered under Section IIA which explicitly states: "Relief Wells are automatically held covered under this section subject to notice to Underwriters as soon as possible and rates to be established by Underwriters.”
Further in July 2009 Underwriters officially declined the claim for coverage under Section IIC noting that “the Policy Language clearly contemplates that until hydrocarbons escape from the insured wells, they are not yet seeping, polluting or contaminating substances and therefore, no coverage is afforded under Section IIC for costs incurred to stop such a flow of such substances. Rather, the intent of the Policy is that efforts to stop the flow from any well (including relief wells) are control of well operations covered under Section IIA. The limit of coverage under Section IIA has now been exhausted.”
In evaluating the coverage issues, the court noted that in the first instance, the Section IIC is styled, "SEEPAGE AND POLLUTION, CLEANUP AND CONTAMINATION" indicating that the title of the provision is for BOTH seepage and pollution. The act of seepage must have some bearing on coverage. Indeed, the costs that Taylor Energy has incurred are as a result of seepage from these wells. Moreover, the court concluded that Underwriters’ interpretation that Section IIC is only applicable for cleanup of the after-effects of the seepage, rather than covering actions to prevent seepage or pollution was strained and unsupported by the plain language of the policy. Specifically, the court held that the primary remedial measure or corrective action for seepage is to stop that seepage. Thus, the "cost of remedial measures" "caused by seepage" would include the cost of drilling the relief/intervention wells required to stop the seepage as underscored by the governmental orders. There was simply no question that Taylor Energy was required by law to pay for the cost of remedial measures (that is the drilling of these wells based on the decision sanctioned by the United States government under the law) to counteract the seepage. If the wells were not seeping, there would be no need for remedial measures. Once Taylor Energy incurred such costs, Underwriters was legally obligated to indemnify.
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Paul Steck and Tom Segalla