Who Is Insured Under A Policy

Llano County insurance lawyers need to keep up with how the Courts interpret insurance policies.  The 5th Circuit issued an opinion worth reading in 2016.  It is styled, AIG Specialty Insurance Co. v. Tesoro Corp.

In this case the 5th Circuit had to decide whether a subsidiary not designated as an additional insured under an excess policy, was covered, because the insurer ought to have known the insured intended the subsidiary to be covered.

The facts of this case begins with a refinery, subject to a series of federal and state pollution remediation orders, changing hands twice.  First, Tosco Corp. sold the refinery to Unltramar.  Tosco indemnified Ultramar $50 million, and Ultramar acquired $100 million in excess insurance coverage from AIG.  Then Ultramar sold the refinery to Tesoro, and transferred the policy as well.

The transfer endorsement for the AIG policy named only Tesoro, and named no additional insured.  But it was Tesoro Refining, a subsidiary of Tesoro, that actually acquired ownership of the refinery.  AIG claimed that it was directed to name only the parent on the transfer endorsement.

Teroso Refining sued Tosco, claiming Tosco had concealed the scope of the environmental remediation requirements still associated with the refinery.  Tesoro’s acquisition of the Chartis policy became an issue in this litigation, as Tosco argued that it showed that Tesoro had not relied on any disclosures Tosco had made regarding the remediation orders.  As the matter approached settlement, Tesoro Refining notified AIG, which responded with a reservation of rights letter that did two things: (1) it recognized the possibility that the remediation orders could constitute a claim, and (2) it named Tesoro, not Tesoro Refining , as the insured.

Ultimately, Tesoro Refining settled with Tosco’s successor.  Tesoro then demanded coverage for remaining liabilities from AIG, naming itself as insured, on behalf of Tesoro Refining.  AIG began a coverage investigation, which proceeded too slowly for Tesoro, who sued California.  AIG brough a declaratory judgment action in Texas.

AIG claimed that it was not obligated to pay because its only insured was Tesoro Corp.  Tesoro sought third party beneficiary coverage.  The district court ruled in favor of AIG and this appeal ensued.

On appeal, the 5th Circuit considered the merits of Tesoro’s reformation request under Texas law.  The Court explained that an insured is entitled to reformation of a policy if the insured shows that the policy contains a mistake that arises from the insured’s specialized knowledge as an insurer to determine that Tesoro intended to have the subsidiary that owned the refinery covered as well.

The Court was not sure why it would assume that AIG, as opposed to Tesoro, was in a better position to know who owned the refinery, or why it would make sense for Tesoro to rely on AIG knowing this.  The Court therefore held that Tesoro was not entitled to reformation.

The Court also found that Tesoro should have known that Tesoro Refining was not named; as a result, Tesoro’s reformation claim was time barred.

This opinion means that insureds must be diligent in monitoring and defining the scope of coverage, and should not rely on Courts to enforce coverage for additional insureds based on what the insured “really meant” at the time a claim is made.  This is especially true in cases where insurance is being assigned from an original insured to a new one — in the haste to get a deal done, important details like who actually needs the insurance cannot be overlooked.