Fifth Circuit Finds Two “Occurrences” In Rejecting Rig Owner’s Insurance Claim

On Tuesday, the Fifth Circuit affirmed a judgment for the insurers of a drilling rig that rejected a claim from the rig owner for approximately $17 million in losses.  Following a storm in February 2010, a jack-up drilling rig encountered severe weather and the rough seas caused the rig’s legs to become misaligned, which added to the rig’s difficulties caused by twenty years of wear and tear from its hydraulic-jacking system.  The rig owner sent the rig to dry dock for repairs (though did not realize that the legs were misaligned) and then after the rig serviced a couple of other contracts, the rig again was subject to severe weather in July 2010 that caused the rig to be abandoned and float in rough seas for nearly thirty hours.  Following additional repairs made in dry dock, the rig owner submitted a claim to its insurers for approximately $17 million, which the insurers rejected.

The rig owner sued the insurers, but the district court, after a three-day bench trial, determined that the insurers properly rejected the claim because they found that there were two occurrences, and each occurrence required meeting a $10 million deductible under the policy.  The court reasoned that there were two occurrences because the sequence of losses (the damage and subsequent repairs) between February and July was proximately caused by the February storm and the sequence of losses after July was caused by the July storm.  The Fifth Circuit agreed after examining how to interpret the term “arising from” in determining the number of occurrences under the policy.

The court applied Texas law, which governed the policy, and made an Erie guess based on prior Texas Supreme Court precedent caselaw as to how Texas courts would resolve the issue.  The court explained that interpreting the term “arising from” broadly to require only a causal link could expand coverage in one case while contracting it in others, and that in prior cases, the Texas Supreme Court had ignored a but-for cause and focused on the direct, immediate, and proximate cause of the losses to determine the number of occurrences.  The Fifth Circuit concluded that under Texas law, “when an occurrence is technically defined to include a series of losses arising from the same event, it includes only those losses proximately caused by that event.”  Accordingly, the July storm was an intervening and proximate cause of the losses.

The Fifth Circuit also affirmed the district court’s conclusion in rejecting the rig owner’s claim under the Contract Provision of the policy, which provided: “coverage hereunder shall include the loss of charter hire resulting from the termination and/or cancellation of [the rig owner’s] drilling contract(s) caused by the insured drilling units being unable to operate following a claim recoverable under [the general coverage provision] if the deductible were nil.”  Here, under Texas law, the concurrent-cause doctrine applied given that covered and non-covered perils combined to create a loss so that only the portion of the damage caused solely by the covered perils could be recovered.  The Fifth Circuit held that the district judge’s conclusion that there had been no evidence demonstrating that the losses were attributable to the misaligned legs (from the storm) as opposed to the normal wear-and-tear on the hydraulic-jacking system, the latter of which was not a covered peril.  The court also explained that the rig owner failed to meet its burden here given that it presented no evidence to apportion damaged between the covered and excluded perils.

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