The case of Jefferson Block 24 Oil and Gas, Inc. v. Aspen Insurance UK Limited highlights an important battle over money set aside for oil spill recovery, an obviously sensitive and important topic in the Gulf Coast. At the federal district court for the Eastern District of Louisiana, the defendants won a motion for summary judgment and the court dismissed the case. The plaintiffs appealed the determination and the United States Court of Appeals for the Fifth Circuit reversed the decision and remanded the case for further hearing.
The plaintiff, Jefferson Block, owned and operated offshore gas leases, pipelines and a platform in the Gulf of Mexico. In November 2007, a drop in pressure in one of the pipelines was discovered that showed that oil was spilling into the Gulf. Jefferson Block cleaned up the oil under the direction of several government agencies and incurred a cleanup cost of approximately $3 million.
At that time, Jefferson Block owned an insurance policy which provided some coverage in the case of a leak, but was limited to the items set out in a “Declaration.” This declaration listed the oil interests that Jefferson Block had in the area but did not specifically reference the 16-inch pipeline that was the cause of the spill.
Underwriters, one of the defendants, denied coverage and plaintiff sued in a Louisiana federal court. The policy provided that the governing law was New York law, and under New York law, the policyholder bears the burden of showing that the insurance contract covers the loss. Courts interpret insurance policies like any other contract, and there is a series of steps courts will take to determine what the terms of the contract are.
First, courts look to the express language of the policy, with reference to the subject matter and purpose of the policy. If the terms are unambiguous, the court will determine the parties’ intent from the words in the document, and summary judgment is therefore appropriate as a matter of law.
However, if a policy is ambiguous, the burden of proof shifts to the party asking for summary judgment to show that its proposed interpretation of the policy is the correct one. At this point, the court can accept extrinsic evidence of the parties’ intent. If the extrinsic evidence does not unambiguously favor the party that filed for the summary judgment, the court looks to the law for guidance. Typically, ambiguities in insurance policies are construed in favor of the policyholder.
In this case, the court found that because of the purpose of the policy, which was to comply with the Oil Pollution Act of 1990, this weighed in favor of finding for the plaintiff. Additionally, the policy referred to facilities “located” within certain areas, and the appellate court agreed with the district court that the word “located” was ambiguous. It also stated that the extrinsic evidence was not so one-sided as to require finding for the defendant.
The district court refused to construe the ambiguities in favor of the plaintiff, and the appellate court held that this was a legal error. For that reason, the court reversed the decision of the district court and sent the case back for further proceedings.