Retaining Insurance Coverage in the Face of Late Notice and Misconduct Exclusions

A Texas federal court recently ordered an insurer to reimburse an oil and gas company for costs and expenses incurred while defending against environmental claims. The court found that a duty to defend existed even though the insured failed to immediately notify the insurer of the occurrence, giving rise to the claim as required by the insurance policy, and despite alleged willful misconduct that was excluded from coverage under the policy. The opinion presents important lessons for corporate policyholders concerning choice of law, the notice-prejudice rule and the duty to defend.

EXAMINING THE CASE

The United States sued ATP Oil and Gas Corporation for allegedly discharging pollutants from an offshore platform located in the Gulf of Mexico. Water Quality Insurance Syndicate (WQIS) insured ATP under a maritime pollution insurance policy. ATP notified WQIS of the government’s claim seven months after the suit was filed and 18 months after the ATP learned of the allegations.

WQIS denied coverage because ATP failed to give “immediate notice” of an “occurrence or incident which may give rise to a claim” as required by the policy. After conducting a choice of law analysis, the court applied Texas law to hold that an insurer must prove prejudice before it may enforce a notice provision in its insurance policy. Because WQIS failed to prove prejudice, the court ordered the insurer to reimburse costs and expenses incurred by ATP in its defense of the underlying litigation.

WQIS also declined coverage arguing that the claims were excluded under the policy’s “willful misconduct” exclusion. The underlying lawsuit primarily alleged willful misconduct— the government claimed that ATP willfully hid its use of an unpermitted chemical dispersant that masked oil in wastewater discharged from the platform. However, the government also alleged that ATP negligently operated the platform, resulting in the unlawful discharge of oil. The policy covered negligent acts.

Because the duty to defend arises if at least one of the claims in the complaint is potentially or facially within the policy’s coverage, the court held that WQIS was obligated to defend the entire underlying lawsuit, notwithstanding the “willful misconduct” exclusion.