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Fifth Circuit Holds Pollution Insurance Policy Wording to be Ambiguous

On August 29, 2011, the Fifth Circuit Court of Appeals, in a split decision, reversed the District Court's grant of summary judgment in Jefferson Block v. Aspen Insurance, holding that, under applicable New York law, the District Court erred in not applying the contra-insurer rule,(i.e., that an ambiguous clause in a pollution insurance policy must be construed in favor of the insured).

Jefferson Block was a part-owner and sole operator of seven (7) offshore oil and gas leases as well as pipelines located in the Gulf of Mexico. On November 5, 2007, a leak in one of the Plaintiff's pipelines extending from its offshore facility resulted in the spill of oil into the Gulf of Mexico. The US Coast Guard designated the Plaintiff as the responsible party and the oil was cleaned up at a cost of approximately $3 million. At the time of the spill, Jefferson Block owned a London OPA Insurance Policy for Offshore Facilities (the OPA Policy). Jefferson Block submitted a claim under the OPA Policy for indemnification of the removal costs it incurred in responding to the pipeline leak. However, the Underwriters denied coverage under the OPA Policy claiming that the pipeline was not covered by the policy. The District Court granted Defendant's motion for summary judgment, ruling that the pipeline was not included as a covered offshore facility under the OPA Policy.

The Fifth Circuit found that the OPA Policy language was ambiguous and capable of various interpretations. The ambiguity of the policy language arose because the policy's listing of insured facilities referred to a separate regulatory form which included  only the locations of offshore facilities covered and did not specifically list any pipelines. Whether the pipeline, which undisputedly started at one of the locations designated on the form, but crossed many others that were not so designated, was a covered offshore facility could not be determined through reference to the plain language of the policy alone. Additionally, none of the extrinsic evidence submitted by the Underwriters was deemed by the Fifth Circuit to adequately resolve the ambiguity. The majority stated that it was Underwriters who had created the ambiguity at issue by including the regulatory form into the OPA Policy without alteration or further specification. The Fifth Circuit held that since the policy language addressing covered offshore facilities was ambiguous it should be construed in favor of the insured, under the contra-insurer rule.  Accordingly, the Fifth Circuit adopted the 'reasonable interpretation of the policy' and held that the pipeline was a "covered offshore facility" designated on the regulatory form and thus included within the scope of coverage afforded by the OPA Policy.

In a dissenting opinion, Circuit Judge Garza stated that there is a substantial body of more recent New York authority which strongly cautions against the use of contra-insurer rule in a situation where a sophisticated party such as Jefferson Block had an opportunity to identify and remedy any ambiguities within the contract at the time of drafting. Judge Garza argues that the ambiguity in the instant case arises solely from the answers provided by Jefferson Block to the regulatory form incorporated into the OPA Policy. The dissent held that regardless of the extent to which Jefferson Block negotiated the OPA Policy terms as a whole, it had the power to affect the ambiguity at issue. As such, the contra-insurer rule should not apply and using the ordinary tools of contractual interpretation, Judge Garza would have applied the interpretation of the policy advanced by the Underwriters and the District Court.

Read a copy of the Fifth Circuit Court of Appeals decision

For more information concerning this decision and its application to any specific set of facts and circumstances, please do not hesitate to call on us at info@chaloslaw.com

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