Law and Insurance

What's in a Name? Insured Loses Coverage By Failing to Inform Insurer of Name Change

VRV Development, L.P. v. Mid-Continent Cas. Co., No. 09-cv-1382 (N.D. Tex. Feb. 3, 2010) see Decision

The insured in this case lost coverage because it changed its name in 2005 from VRV Development, Inc. to VRV Development, L.P. and failed to change the named-insured designation on its liability policy.  Risk managers, take heed! On the named-insured designation, expect no tolerance with the identification of the business.  A corporation is not a limited partnership. A miss is as good as a mile. 

VRV Development, Inc. and its president, Kenny Marchant, are in the land development business, and contracted to build retaining walls on property to be developed into residential subdivisions.  The work began in late 2004 and ended in January 2006.  The company purchased general liability insurance in 2004, and renewed the policy in 2005.  On January 1, 2005, the corporation converted to a limited partnership, with Mr. Marchant as the sole limited partner.

Alas, by January 2007, the walls had begun to crack and tumble.  Lawsuit followed.  VRV Development L.P. submitted timely notice, but Mid-Continent looked at the policies and denied coverage.  The policies didn't cover VRV Development L.P. or Marchant as a limited partner.  The coverage lawsuit followed.

The insured made a valiant effort.  It produced solid evidence that the two companies were, in fact, the same entity.  It supported its argument for coverage with a provision of the Texas Business Organizations Act that an entity converting from one business form to another continues "without interruption" in its new form and retains "all rights, title and interests to real estate and other property owned by the converting entity" without any impairment of rights.

Yet the judge was unmoved.  First, Texas is the strictest of 8-corners jurisdictions.  Show me no extrinsic evidence to determine Mid-Continent's duty to defend.  Second, an insurer gets to choose who it insures. 

"Allowing [VRV] to substitute  a new party to an insurance contract, without Mid-Continent's knowledge or approval, and without giving Mid-Continent the opportunity to evaluate the entity or person it is purportedly insuring, materially rewrites that insurance contract in a way that would seem to contravene existing authority."

The kicker in favor of Mid-Continent is a policy provision that "no person or organization is an insured with respect to the conduct of any current or past partnership, joint venture or limited liability company that is not shown as a Named Insured in the Declarations."

Tragic.  One argument that VRV might make today that it did not have when it filed its summary judgment brief is that the Texas Supreme Court arguably blessed the submission of extrinsic evidence that shows the possibility of a duty to indemnify.  See D.R. Horton-Texas, Ltd. v. Markel Int'l Ins. Co., No. 06-1018 (Tex. Dec. 11, 2009) (See Markel Decision).  See my discussion of Markel here.  Evidence that the conversion to a limited partnership resulted in no substantial change in the business might allow VRV to prevail at the end of the underlying action, requiring Mid-Continent to indemnify even if there was no duty to defend.

But the best advice is to avoid this problem in the first place.  Keep your broker and insurer informed of your business reorganizations.

Judge Finds Policy Ambiguous But Rules Against Coverage. How Can That Be?

Jefferson Block 24 Oil & Gas, LLC v. Aspen Ins. UK Ltd, No. 08-cv-4792-JCZ-SS (E.D. La. Jan. 29, 2010) see Jefferson Block Decision

Every time I see a politically contentious senate confirmation hearing over the appointment of a judge to the federal bench, I am reminded of how seldom political philosophy or partisanship has anything to do with resolving actual cases and controversies, and, how hard good judges work to reach the legally correct result.  Facing the judge in this case are a host of perplexities, including out-of-state law (the policy selected New York law), a set of federal laws and regulations requiring insurance coverage for certain offshore pollution risks, and common law rules of interpretation over ambiguities, extrinsic evidence, and the policyholder's reasonable expectations.   On a very close call, the judge ended up ruling in favor of the insurers, but only after a careful and astute review of the facts.

The policyholder, Jefferson Block ("JB"), specialized in acquiring and reworking abandoned offshore oil and gas leases.  A federal law known as the Oil Pollution Act ("OPA") requires "responsible parties" to purchase clean-up insurance for any lease or "facility" (which includes pipelines) with a worst-case spill risk of more than 1,000 barrels.  JB acquired a $10 million OPA policy covering two leases and "facilities" in the Gulf of Mexico.  One of the pipelines leading from a covered lease leaked costing $3 million for the cleanup.

The insurers refused to reimburse JB arguing that the pipeline itself was not within the lease and was not otherwise scheduled in the policy.  Here is where it gets complicated.

The schedule refers to certain forms prescribed by an agency of the Interior Department that JB fills out and submits to the agency and the insurer.  One part of one of the forms allows JB to choose either a "General" or "Schedule" Option.  The General Option would cover all areas and facilities for which the insured could be held liable for cleanup under the Act.  Alas, JB chose the Schedule Option and failed to list the leaky pipeline.  But that doesn't end the inquiry because nothing in the form or the Act requires listing out-of-lease pipelines.  Being a federal regulation under a federal law, the matter appears hopelessly garbled.  The court, therefore, decided that the policy application and schedule were ambiguous.

At this point JB probably celebrated because usually ambiguities are resolved in favor of the insured.  That, however, is not exactly how the principle works.  When the contract is susceptible to two or more reasonable interpretations, the court must try to determine the parties' intent.  If extrinsic evidence (evidence outside the contract itself) establishes the parties' intent, then the court may consider that evidence even if it favors a decision in favor of the insurer.

It seems that JB hired a consulting firm to assist in the regulatory side of the insurance coverage.  Communications between JB and the consuting firm indicated that JB understood that the off-lease portions of the pipelines needed to be listed separately on the schedule.  The correspondence also tended to show that JB understood that the OPA didn't require coverage for the off-lease pipelines and that JB's intent was to obtain only as much coverage as required.

But here's the kicker in the court's view.  An email from a consultant helping prepare the agency form advised that he had shortened the application to show only two lines for the express reason that each additional line (required to list each pipeline) would generate more premium.  From all of the evidence, therefore, the court concluded that JB intentionally applied for more restricted coverage that did not cover the pipeline in question.  Since JB was the drafter of the application form that was ambiguous, the judge, in effect, reversed the usual rule that ambiguous provisions favor coverage.

The decision is worth a read to appreciate the court's careful, unbiased evaluation.  I have not mentioned some of the rabbit trails the insurer tried to run, dodges that the court examined and rejected.  In the end, this case presents a close call.  Some of the extrinsic evidence tilts against the insurer.  But the court deserves a round of applause for its effort, which upholds the best traditions of the American judiciary.