Insured Must Reimburse Insurers for Defense Costs Advanced under Marine Liability Insurance Policies, District Court Decides

The U.S. District Court for the Southern District of New York has ruled that claims brought against a Panamanian state-owned company were not covered by the company’s marine liability insurance policies.

The Case

Petroterminal de Panama, S.A. (“PTP”), a Panamanian state-owned company that owns and operates oil storage and transfer facilities in Panama, including marine terminals on Panama’s Atlantic and Pacific coasts connected by a trans-isthmus pipeline, entered into a transportation and storage agreement (the “TSA”) with Taurus Petroleum Limited under which Taurus leased PTP’s facilities for storage of its crude oil and related shipping operations.

Thereafter, Taurus assigned the TSA to Castor Petroleum, a global company based in Geneva, Switzerland. At the time, Castor was not registered to do business in Panama.

After a valve ruptured at PTP’s facility located at Chiriqui Grande (the “Atlantic Facility”), leading to a minor oil spill, PTP faced a series of lawsuits in Panamanian court seeking damages for personal injury and property damage. One of the civil actions was a lawsuit filed in the Maritime Tribunal of Panama (the “Cayo de Agua Action”), which named both PTP and Castor as defendants.

To secure jurisdiction over Castor, the Cayo de Agua plaintiffs obtained an order from the Panamanian court that attached the oil that Castor had stored at PTP’s Atlantic Facility. The attachment remained in place for about six weeks, during which time Castor did not have access to that oil. The Supreme Court of Panama later found that the attachment violated due process and should not have issued.

Castor sued PTP in New York, alleging that PTP had been negligent in failing to prevent and properly respond to the oil spill, and that the oil spill had proximately caused the litigation that had given rise to the attachment. Castor further alleged that, because of the attachment, it had lost access to its oil stored at the Atlantic Facility and, therefore, that it had incurred business interruption damages for shipping-related expenses, trading losses, lost profits, lost opportunities, increased transaction costs, and decreased gross margins.

Castor sought $45 million in damages from PTP.

PTP sought indemnification and defense costs for the civil suits and the Castor action based on two marine liability insurance policies that its insurers had issued. The insurers disputed coverage and the parties reached a partial settlement that provided, among other things, that they would pay 50 percent of PTP’s defense costs, past and future, in the Castor action subject to a later coverage determination.

The court hearing the underlying Castor action granted summary judgment in favor of PTP on all claims in Castor’s complaint. The court found that Castor’s damages had not been caused by the “operation of the PTP system,” as required to trigger an indemnification obligation PTP had under the TSA. Rather, the court held, Castor’s alleged business interruption losses had been caused not by the “relatively minor oil spill” that prompted the Cayo de Agua lawsuit but by the Panamanian court’s attachment of Castor’s oil. The court also found that the attachment had been caused by Castor’s own failure to register to do business in Panama because, as an unregistered business, Castor’s assets were subject to attachment based on a bond of only $1,000. If it had registered to do business in Panama, the bond required to secure an attachment would have been prohibitively expensive and the attachment almost certainly would not have issued.

Thereafter, PTP went to court seeking to recover the remaining 50 percent of its defense costs. The insurers, for their part, contended that the policies did not provide coverage for Castor’s claims against PTP and sought to recoup the 50 percent of the costs associated with defending the Castor action that they had previously advanced to PTP.

Both sides moved for summary judgment.

The Court’s Decision

The court granted the insurers’ motion for summary judgment, finding that the insurance policies did not provide coverage for Castor’s claims against PTP.

In its decision, the court agreed with the insurers that the trial court’s summary judgment opinion in the Castor action established that Castor’s claims against PTP did not come within the scope of the two insurance policies’ insuring agreements. Specifically, that decision established that Castor’s alleged losses had not been “the result of an accident or occurrence in respect of or in connection with” PTP’s work, operations, activities, or business within the meaning of one policy, nor had they been “on account of property damage” within the meaning of the other policy. Accordingly, the court concluded that PTP was not entitled to coverage for the Castor action.

Having found that the policies did not cover the claims in the underlying action, the court considered whether the insurers were entitled to be reimbursed for that portion of defense costs they previously advanced to PTP.  The court stated that the “critical threshold question” was whether the policies created a duty to defend, or only a narrower duty to reimburse costs incurred in the defense of claims for which the insurer has a duty to indemnify.  The court observed that “the duty to defend applies to claims that are arguably covered, whereas the duty to indemnify covers claims that are actually covered.”  In reimbursement cases, the court noted that it must consider the eventual resolution of the claims to determine if they were actually, and not simply potentially, covered. The court determined that the policies at issue contained provisions relating to the payment of defense costs, but those provisions contained none of the standard duty to defend language.  Since the insurers were required only to reimburse defense costs for covered claims, the court held that the insured was required to reimburse the insurers for the defense costs they had advanced.

The case is Petroterminal de Panama, S.A. v. Houston Cas. Co., No. 14-cv-9554 (JSR) (S.D.N.Y. July 16, 2015).