Why it matters: In a unique conflict between a Texas statute and a New York choice-of-law provision contained in an insurance policy, a Texas bankruptcy judge concluded that Texas law applied. The law that ultimately would apply was outcome determination because under Texas law an insurer has to prove prejudice from any late notice whereas under New York law as applied only in maritime disputes it did not. After a thorough analysis, the court ruled that the Texas statute trumped the insurance policy’s New York choice-of-law provision. As part of the Deepwater Horizon oil spill ATP Oil & Gas Corp. was hit with a lawsuit from the federal government and subsequently filed for bankruptcy. Insurer Water Quality Insurance Syndicate refused to provide a defense or to indemnify ATP, arguing that the company failed to provide timely notice as required under the policy. The bankruptcy trustee countered that the Texas statute applied to Texas residents such as ATP, which required the insurer to demonstrate that it was prejudiced from any such late notice in order to avoid coverage. The court initially observed that “there is ambiguity as to whether to apply statutorily mandated Texas law or contract-mandated New York law,” which required that the ambiguity be resolved in the policyholder’s favor. The court further undertook an analysis of the choice-of-law factors enumerated in the Restatement and reached the same result.

Detailed discussion: Water Quality Insurance Syndicate insured ATP Oil & Gas Corporation against certain pollution-related losses pursuant to a policy issued on November 11, 2011. The policy required ATP to give “immediate notice” of any occurrence that gave rise to a claim under the policy and excluded coverage arising out of ATP’s “willful misconduct.”

On February 11, 2013, the United States sued ATP for discharging pollutants from an offshore platform located in the Gulf of Mexico as part of the Deepwater Horizon oil spill. The bulk of the lawsuit alleged willful misconduct by ATP. For example, the government alleged that the company constructed and operated a hidden tube to allow ATP to utilize an unpermitted chemical dispersant, which masked discharges of oil in wastewater that was discharged from the platform.

The complaint did contain a few allegations regarding negligent operations of the platform, such as a failure to properly operate the wastewater treatment system.

ATP delayed giving notice to Water Quality until September 12, 2013. The insurer refused to provide a defense based on the late notice and willful misconduct exclusion, and ATP was forced to provide its own defense.

After the company filed for bankruptcy, the trustee filed an adversary action against Water Quality seeking a declaration of rights and obligations under the policy with respect to the duty to provide reimbursement. Both parties filed motions for summary judgment.

The insurer told the court that late notice of the suit operated to eliminate any duty of coverage. ATP argued that under Texas law, an insurer must demonstrate prejudice as a result of the late notice, which Water Quality failed to do. Water Quality responded that the policy was governed by New York law, which does not require a showing of prejudice for maritime policies.

With the choice-of-law question outcome determinative in the case, U.S. Bankruptcy Court Judge Marvin Isgur first had to decide what law governed the dispute.

As no federal rule regarding notice could be identified, the court turned to the laws of the two states. In Texas, an insurer must demonstrate prejudice before it will be allowed to enforce a notice provision in its insurance policy, the court said. Alternatively, although New York statute generally requires a showing of prejudice for late notice to serve as a valid defense to coverage, the statute explicitly excludes “insurance in connection with ocean going vessels.”

Adding to the problem, the court noted “an ambiguity in the choice of law provision when applicable law is applied to the contract.” While the language of the policy itself contains a choice of New York law, “a policy of insurance, by necessity, incorporates applicable state law insurance requirements into the terms of the policy. When Water Quality issued the policy to a Texas resident, the policy effectively incorporated applicable Texas law.”

“Thus, there is ambiguity as to whether to apply statutorily mandated Texas law or contract-mandated New York law,” Judge Isgur wrote. “Because conflicts within insurance policies are resolved in favor of the insured, maritime law mandates the Court to apply Texas law because Texas law is more favorable to the insured.”

The court didn’t stop there, however, and “for the purposes of completeness,” further analyzed the question under the Restatement (Second) of Conflicts of Laws. The court considered seven factors: the needs of the interstate and international systems; the relevant policies of the forum; the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue; the protection of justified expectations; the basic policies underlying the particular field of law; certainty, predictability and uniformity of result; and ease in the determination and application of the law to be applied.

Of the factors, just one favored New York law: the ease of determination of the law to be applied. “The contract specifies New York law, and the application of the laws of another state (applied through federal maritime law) requires an analysis of factual determinations such as the residence of the insured,” the court said.

But the rest of the factors were either neutral or—in the case of the needs of the interstate and international systems and the basic policies underlying the field of law—heavily favored Texas, Judge Isgur determined.

“Texas and New York both generally recognize the merits of requiring prejudice to be shown when notice is late,” he wrote. “Although New York makes a distinction in the field of maritime insurance, that distinction pales in favor of the overall concerns expressed both in Texas insurance regulatory needs, and the broader implications of requiring a showing of prejudice.”

Therefore, whether applying the Restatement factors or considering the ambiguity in the policy, Texas law ruled, the court concluded. “Texas has a substantially greater interest in the outcome of this dispute than New York,” the judge added.

With late notice not a problem, the court turned to the policy’s exclusion for willful acts. Although “the bulk” of the complaint alleged willful acts, “[t]he policy covers negligent acts,” Judge Isgur wrote. “The lawsuit alleges some negligent acts. Accordingly, under the familiar eight-corners rule, Water Quality must defend the lawsuit.”

To read the opinion in In re: ATP Oil & Gas Corp., click here.