The California Court of Appeal has affirmed a judgment that certain Underwriters at Lloyd’s, London and certain London market insurance companies (London Market Insurers) were entitled to consider all subsidiaries as part of an insurance buyback agreement they had with one of the world's largest oil companies. On September 13, 2012, a three-judge panel of the First District Court of Appeal issued an opinion in Certain Underwriters at Lloyd's, London v. BP America, Inc., et al., Case No. A132298. At issue was more than $1 billion in liability insurance placed by the Atlantic Richfield Company (ARCO) in the London insurance market.
London Market Insurers entered into an insurance policy buyback agreement with BP America Inc. (BPA) on June 30, 2000. In exchange for approximately $83 million, London Market Insurers bought back all pre-1993 liability policies they had issued to BPA and its subsidiaries. Approximately two months before the agreement was signed, BP acquired ARCO and transferred the shareholding in ARCO to BPA. London Market Insurers were never told and did not know that BPA owned ARCO. In 2006, after London Market Insurers learned that ARCO had been a BPA subsidiary on the effective date of the agreement, they filed suit for a declaratory judgment holding that ARCO and the policies London Market Insurers had issued to ARCO were covered by the agreement. BPA and ARCO counterclaimed for declaratory relief and reformation. The reformation claim was eliminated on summary adjudication in 2009. A bench trial on the declaratory relief claims took place in 2010.
In its opinion, the Court of Appeal determined that there was no ambiguity in the language of the agreement, which defined "BP America" to include "the past and present subsidiaries... in which [BPA] currently ha[s] or in the past ha[s] had at least 50 percent ownership interest..." Not only was the agreement facially unambiguous, but extrinsic evidence of surrounding circumstances did not create an ambiguity. "[W]e will not resort to extrinsic evidence of surrounding circumstances to create an ambiguity that posits a meaning in direct contravention of clearly defined terms. We cannot interpret a contract that is blatantly inconsistent with its clear wording, and therefore reject appellants' assertion that the extrinsic evidence created a legitimate legal ambiguity in the 2000 Agreement." (Opinion at 17.) With respect to reformation, the Court of Appeal determined that the foundation for granting reformation was lacking where "[t]here was no mistake as to expression or reduction of a verbal agreement to writing. Rather, ... the parties who negotiated the 2000 Agreement harbored a mistaken assumption of extrinsic fact about the makeup of BPA." (Opinion at 19.)