NEW ORLEANS—A U.S. appeals court Friday upheld an insurer's denial of coverage for the cost of independent counsel after a Texas oil drilling services firm rejected the insurer's offer of representation in a lawsuit.

Tomball, Texas-based Downhole Navigator L.L.C. was sued by Dallas-based Sedona Oil & Gas Corp. after work Downhole performed for Sedona in 2008 caused damage to an oil well, according to court documents.

Downhole notified its commercial general liability insurer, Nautilus Insurance Co., of the suit, to which Nautilus replied, offering a qualified defense under a reservation of rights to decline indemnifying Downhole if the suit against the drilling firm fell under one of several policy exclusions.

Downhole responded that Nautilus' reservation of rights “created a material conflict with respect to the selection of counsel,” according to court documents, adding that the situation forced the company to select its own counsel and demanding that Nautilus cover all damages related to the claim including attorneys' fees, up to the policy limits.

The insurer advised Downhole that it was not entitled to separate counsel under the circumstances, and Downhole sued. The United States District Court for the Southern District of Texas agreed, in granting a portion of a summary judgment request by Nautilus, that the insurer was not required to reimburse Downhole for the cost of hiring an independent counsel.

Downhole subsequently appealed that ruling.

In it’s ruling Friday in Downhole Navigator L.L.C. vs. Nautilus Insurance Co., a panel for the 5th U.S. Circuit Court of Appeals in New Orleans upheld the lower court judge’s ruling that Downhole is not entitled to reimbursement from Nautilus for the cost of hiring independent counsel.

“Because the facts to be adjudicated in the Sedona lawsuit are not the same facts upon which coverage depends, the potential conflict in this case does not disqualify the attorney offered by Nautilus to represent Downhole,” U.S. Circuit Judge Edward C. Prado wrote in delivering the panel’s opinion.