Defense costs upheld despite exclusion

LAKE CHARLES, La.—ConocoPhillips Co. is entitled to defense costs as an additional insured under its contractors' liability policies for claims arising from a 1994 pipeline leak at a Westlake, La., facility, a state judge has ruled.

Pollution exclusions in the contractors' policies do not preclude defense coverage for Houston-based ConocoPhillips, according to a ruling earlier this month by Judge Wilfred Carter of the 14th Judicial District Court for Calcasieu Parish in Lake Charles, La.

Judge Carter also rejected insurers' arguments that he should consider evidence other than the policy and contract language to decide whether the underlying claims are covered, and therefore whether defense costs are also covered.

The litigation arose from a discharge of between 150,000 and 170,000 gallons of ethylene dichloride from a pipeline at ConocoPhillips' Docks Facility in Westlake. The March 1994 discovery of the leak was followed by thousands of bodily injury claims against the energy company and others for exposure to EDC, which is classified by the U.S. Environmental Protection Agency as a probable carcinogen.

ConocoPhillips sued in 1998 for coverage of its liabilities as an additional insured under policies of various contractors the company had hired to help clean up the spill.

Coverage litigation was stayed until 2002, however, while the underlying bodily injury claims were resolved, according to John Ellison, a lawyer with New York-based Anderson, Kill & Olick, which represents ConocoPhillips. So far, ConocoPhillips and other defendants have paid more than $150 million to settle several thousand of these claims, and a "second wave" of about 500 more claims for secondary exposure to EDC are pending, Mr. Ellison said.

Apart from the contractors' coverage, which ConocoPhillips expects to respond first to the EDC claims, the energy company has its own liability coverage excess of an "eight-figure" self-insured retention, Mr. Ellison said.

When the coverage case resumed, ConocoPhillips filed a motion for partial summary judgment on the defense cost issue after several of the contractors' insurers maintained that pollution exclusions in the policies barred coverage of the claims and absolved the insurers of any defense obligation.

Insurers involved in the dispute include the Continental Casualty Co. unit of CNA Financial Corp.; American Dynasty Surplus Lines Insurance Co., now known as Great American Fidelity Insurance Co.; American Indemnity Co., which was acquired earlier this year by Catlin Group Ltd.; and American International Group Inc.'s Lexington Insurance Co., National Union Fire Insurance Co. of Pittsburgh, Pa., and Commerce & Industry Insurance Co. of Canada.

In its summary judgment motion, ConocoPhillips argued that it is entitled to defense coverage unless the underlying claims are unambiguously excluded by the contractors' policies. It also maintained that the court should look only at the language of the policies themselves and ConocoPhillips' contracts with cleanup companies to determine whether coverage is excluded.

Insurers, meanwhile, argued that there were issues of fact about whether the underlying claims were covered and asked the court to consider evidence outside the policy and contract language.

Judge Carter sided with ConocoPhillips in his ruling, though, granting the company's partial summary judgment motion. He found that the contractors' policies do not unambiguously exclude coverage of the bodily injury claims, opening the door to defense coverage. He also found that Louisiana law constrains him from considering evidence beyond the policy and contract language in deciding the defense cost issue.

The ruling was a victory for policyholders in part because it affirmed ConocoPhillips' defense coverage rights as an additional insured rather than as a named insured under its own policy, according to Anderson, Kill. While the distinction should not matter, the added complexity sometimes leads courts to deny defense coverage in similar cases, the law firm said.

Insurers are expected to ask Judge Carter's permission to appeal the defense cost ruling. The judge has said he wants the coverage case to proceed to trial next year.

EDC Contractor Insurance Litigation, Docket No. 98-1984, 14th Judicial District Court, Parish of Calcasieu, La.