United States: Insurers' Oil Rig Coverage Trial Win Upheld By Federal Fifth Circuit

Case: Seahawk Liquidating Trust v. Certain Underwriters at Lloyds London, et. al., No. 15-
U.S. Fifth Circuit Court of Appeals
810 F.3d 986 (5th Cir. 2016)

The Fifth Circuit, in an Erie Guess, upheld a Louisiana District Court's application of a proximate cause analysis, rather than a "but for" cause-in-fact analysis, to determine the number of occurrences under a property policy, and hence the proper number of deductibles to be applied. Additionally, the Fifth Circuit upheld the lower court's determination that, due to the lack of evidence separating covered and non-covered losses which is required under Texas concurrent cause doctrine , the insured could not recover under its Loss of Contract provision.

Seahawk Drilling, Inc. owned a jack-up drilling rig – the J/U SEAHAWK 3000 - which had been in service since 1974. In February 2010, while being moved to a new location, the rig encountered severe weather and had to be jacked up out of the water to avoid harsh seas. Apparently, the exposure to rough seas caused the jack-up's legs to become misaligned. Repairs were made to the hydraulic jacking system over the next several months; however, Seahawk was unaware that the legs had become misaligned.

The Court noted that the rig had consistent wear and tear problems and required repairs to its hydraulic jacking system over its 20-year life. The misalignment of the legs caused issues with jacking it up into position and, consequently, one of Seahawk's customers asked for a replacement rig which Seahawk provided at a cost of just over $1 million. Temporary repairs were first required to the jacking system in order to move the jack-up from the customer location to drydock, where additional repairs were made. Apparently, while the rig was in drydock, Seahawk learned the legs were misaligned, but made no repairs to the legs because of the cost.

The rig departed drydock and successfully performed at least one other drilling contract, although the jack-up system apparently did not work as designed. In July 2010, the rig went to another drilling contract location and again met rough seas. Although the rig was not supposed to have been jacked into or out of the water during such weather, the crew did so anyway. The hydraulic jacking system disengaged and the rig went adrift in the rough seas and sustained further damage. The rig returned to drydock for further repairs again focused on the hydraulic jacking system instead of the misaligned legs; Seahawk never repaired the legs. Instead, Seahawk submitted a claim to its insurers to cover the $17 million cost of repairs, which was ultimately rejected by the insurers who asserted there were two separate occurrences, neither of which exceeded the separate $10 million deductibles. Consequently, there was no coverage available under the policies.

Seahawk also sought to recover under a Loss of Contract provision which allowed recovery for a contract lost when a drilling unit became unable to operate following a claim which would be recoverable under the policy "if the deductible were nil."

The Fifth Circuit Court of Appeals sided with Underwriters, upholding the District Court's application of a proximate cause analysis for the number of occurrences, and stating that the "proximate cause analysis was the correct legal standard for determining the number of occurrences." To arrive at this conclusion, the court reviewed several Texas occurrence cases and determined, even though Texas applies a broad analysis to the phrase "arising out of" when determining coverage, it had not done so when determining the number of occurrences. Particularly, the Fifth Circuit noted that reading the phrase broadly would not always favor the insured, or coverage. Rather, it is sometimes to the insureds' benefit to have multiple occurrences, and sometimes not – thus a broad reading could expanding coverage in one case, while contracting coverage in another.

Further, the Fifth Circuit found that the proximate cause analysis was implicitly consistent with Texas precedent. Thus, the Court concluded, "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" Ultimately, the Court concluded there was sufficient evidence for the trial judge to determine that the July storm, rather than the February storm, was the proximate cause of the losses after July – "The July storm was thus an intervening and proximate cause of the losses."

Seahawk also lost its bid to recover under the Loss of Contract provision on evidentiary grounds. Under Texas' concurrent cause doctrine, it is the insured's, rather than the insurers, burden to separate covered and non-covered losses. Here, the Court stated that the insured did not put any evidence on to separate out the damages caused by the misalignment of jack off legs versus the wear and tear to the hydraulic system. The Court noted Seahawk had advanced several unpersuasive theories that the concurrent-cause doctrine should not apply. The Court first dismissed out-of-hand the notion that the doctrine did not apply because the contractual provision did not explicitly say it did – this the Court said was a "non-starter." Next, the Court rejected Seahawk's argument that a loss of a contract was different than physical damage such that the doctrine did not apply. The Court noted the loss of contract coverage was tied to recoverable physical damages, such that it would remain consistent to require the insured to prove up the covered physical damages which led to the loss of the contract. Finally, Seahawk argued that it need only show any loss that would be conceivably payable physical damage had there been no deductible, but the Fifth Circuit disagreed, observing that a Texas insured can recover nothing unless it provides evidence allowing the Court to apportion damages between covered and excluded perils. Thus, as with its jack up, Seahawk was set adrift.

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