In American Home Assurance Company v. Oceaneering International, Inc., 4:12-cv-02540 (S.D. Tex., March 17, 2014), the Southern District of Texas, applying Texas law, adopted a Magistrate Judge’s memorandum decision holding that a general liability insurer had no duty to indemnify its policyholder for $2 million it paid as a result of faulty repair work on an offshore oil rig.
The insurance coverage dispute in American Home Assurance arose from prior litigation in which Chevron successfully sued the policyholder and others, including Aker Maritime, for the costs of replacing faulty bolts on one of Chevron’s offshore oil rigs. Id. at *1. In turn, Aker Maritime successfully sued for full contractual indemnity and attorneys’ fees against the policyholder totaling over $2 million, which the policyholder paid after the insurer denied coverage under the policyholder’s commercial liability policy. The insurer subsequently sought a declaratory judgment that the policy did not cover the policyholder’s payment to Aker Maritime, and the policyholder countersued for, among other things, breach of contract and bad faith. Id.at *2.
The court granted summary judgment in favor of the insurer. The court held that, even if the policyholder’s repair work had caused “property damage” to Chevron’s oil rig within the meaning of its commercial liability policy, a policy exclusion precluding coverage for “preventive or curative acts” taken to prevent future accidents or property damage applied. Id. at *13. The court noted that Chevron had removed all of the bolts that the policyholder had installed on the oil rig during its repair work, and then reinstalled proper bolts after determining that some of the bolts had failed and all were inadequate for their intended use. Id. at *14. The court found that, “[b]y its terms, the Policy excludes coverage for any cost or expense due to the repair, replacement, removal, or disposal of work, if such work is withdrawn from use due to a known or suspected defect, deficiency, or dangerous condition in it. That seems a very apt description of the facts of this case.” Id.
The court’s decision in American Home Assurance confirms that a commercial liability insurer is generally not responsible for indemnifying a policyholder for the cost of measures taken to prevent future property damage. As the court noted in American Home Assurance, “it was never intended that [a commercial liability] insurer would be saddled with the cost of preventing other failures, any more than it was intended that the insurer would pay the cost of preventing the first failure if the product had been discovered to be in a dangerous condition before the occurrence.” Id. at *15.