Circuit Says: Parent Company’s Policy Did Not Cover Refinery’s Owner Where Policy Did Not List Owner as an Insured

The U.S. Court of Appeals for the Fifth Circuit has affirmed a decision by the U.S. District Court for the Western District of Texas that the owner of a refinery was not covered under its parent company’s insurance policy where the refinery owner was not listed as an insured and it could not demonstrate that the policy intended to provide coverage to any third-party beneficiaries.

The Case

In 2000, Tosco Corporation sold the Golden Eagle Refinery in Martinez, California, to Ultramar Diamond Shamrock and provided indemnity for $50 million of remediation costs to cover preexisting environmental issues. Ultramar also purchased $100 million of excess coverage from Chartis Specialty Insurance Company.

Ultramar subsequently sold the refinery to Tesoro Refining & Marketing Company, LLC. Tesoro Refining’s parent company, Tesoro Corporation, instructed Chartis to name Tesoro Corporation as the named insured on the excess policy that had been purchased by Ultramar and assigned as part of the refinery’s sale.

After litigation arose over environmental liabilities at the refinery, Tesoro Corporation demanded that Chartis pay under the policy. The insurer contended that it owed coverage only to Tesoro Corporation – the named insured on the policy – and not Tesoro Refining, the owner of the refinery.

Tesoro Corporation and Tesoro Refining sought reformation of the policy and also sued for breach of contract on a third-party beneficiary claim under California law.

The U.S. District Court for the Western District of Texas entered judgment in favor of Chartis, and Tesoro Corporation and Tesoro Refining appealed to the Fifth Circuit.

The Fifth Circuit’s Decision

The circuit court affirmed.

In its decision, the Fifth Circuit first noted that the parties had agreed that Texas law did not recognize a third-party beneficiary claim that would permit Tesoro Refining to recover.

The circuit court then ruled that Tesoro Refining could not assert third-party beneficiary status under California law, because there was nothing in the policy’s language indicating any intention to benefit Tesoro Refining or any other third party.

The Fifth Circuit next decided that the district court had correctly granted summary judgment on the reformation claim asserted by Tesoro Corporation and Tesoro Refining because the reformation claim had not been brought within the four year statute of limitations provided by applicable Texas law.

In any event, the circuit court concluded, Tesoro Corporation and Tesoro Refining could not have relied on the “specialized knowledge” of Chartis to be able to assert a claim for reformation, concluding that it made “little sense” for them to argue that they had relied on Chartis to determine that the correct owner of the refinery was a separate entity other than the named insured, Tesoro Corporation. Chartis “was hardly in a superior position to know which entity purchased the refinery, i.e., which entity was likely to be most directly liable for any environmental problems.”

The case is AIG Specialty Ins. Co. v. Tesoro Corp., No. 15-50953 (5th Cir. Oct. 17, 2016).