352 S.W.3d 462 (Tex. 2011), 08-0890, The Houston Exploration Co. v. Wellington Underwriting Agencies, Ltd.

Docket Nº08-0890.
Citation352 S.W.3d 462, 54 Tex.Sup.Ct.J. 1683
Opinion JudgeHECHT, Justice.
Party NameThe HOUSTON EXPLORATION CO. and Offshore Specialty Fabricators, Inc., Petitioners, v. WELLINGTON UNDERWRITING AGENCIES, LTD., et al., Respondents.
AttorneyS. Shawn Stephens, James C. Winton, Farrell Ann Hochmuth, Baker & Hostetler, LLP, Houston, TX, for The Houston Exploration Company. Harry Lloyd Scarborough, Ian Ranier Beliveaux, Faubus & Scarbrough LLP, Robert Lee Galloway, South Texas College of Law, Houston, TX, for Offshore Specialty Fabricat...
Judge PanelJustice HECHT delivered the opinion of the Court, in which Justice WAINWRIGHT, Justice MEDINA, Justice GREEN, and Justice GUZMAN joined, and in Parts I and III of which Justice JOHNSON joined. Justice JOHNSON filed a concurring opinion. Chief Justice JEFFERSON filed a dissenting opinion, in which...
Case DateAugust 26, 2011
CourtSupreme Court of Texas

Page 462

352 S.W.3d 462 (Tex. 2011)

54 Tex.Sup.Ct.J. 1683

The HOUSTON EXPLORATION CO. and Offshore Specialty Fabricators, Inc., Petitioners,

v.

WELLINGTON UNDERWRITING AGENCIES, LTD., et al., Respondents.

No. 08-0890.

Supreme Court of Texas.

August 26, 2011

Argued Sept. 14, 2010.

Rehearing Denied Dec. 16, 2011.

Page 463

S. Shawn Stephens, James C. Winton, Farrell Ann Hochmuth, Baker & Hostetler,

Page 464

LLP, Houston, TX, for The Houston Exploration Company.

Harry Lloyd Scarborough, Ian Ranier Beliveaux, Faubus & Scarbrough LLP, Robert Lee Galloway, South Texas College of Law, Houston, TX, for Offshore Specialty Fabricator, Inc.

Glenn Richard Legge, Karen Ann Conticello, Legge Farrow Kimmitt McGrath & Brown, LLP, Alexander C. Papandreou, Chevron Shipping Company LLC/Chevron Global Gas, Houston, TX, for Wellingotn Underwriting Agencies, Ltd.

Jay K. Rutherford, Jackson Walker, Fort Worth, TX, for Amicus Curiae Texas Association of Business.

Philip D. Nizialek, Carver Darden, New Orleans, LA, pro se.

Francis I. Spagnoletti, Marc Evan Kutner, Spagnoletti & Co., Houston, TX, for other interested party Lary Insurance Services, Inc.

Ashley T. Parrish, Cantey & Hanger, L.L.P., Dallas, TX, for other interested party Tysers International Ins.

Justice HECHT delivered the opinion of the Court, in which Justice WAINWRIGHT, Justice MEDINA, Justice GREEN, and Justice GUZMAN joined, and in Parts I and III of which Justice JOHNSON joined.

OPINION

HECHT, Justice.

The parties dispute whether an " all risk" property damage insurance policy provides indemnity for certain expenses incurred in connection with a covered loss. Coverage was negotiated in the London market, and as is customary there, the parties reached agreement by lining through provisions in a form policy. One such provision would have required reimbursement of the disputed expenses, and the question is whether the strike-through reflects the parties' intention that those expenses would not be reimbursed. We agree with the court of appeals that the answer is yes.1 Deletions from a draft agreement do not always indicate the parties' intent, but they do when, as here, they are part of the customary negotiation process.

I

In 2002, Offshore Specialty Fabricators, Inc. agreed to construct a drilling platform in the Gulf of Mexico for The Houston Exploration Company. Their contract required Offshore to obtain builder's risk insurance naming Houston as an additional insured. Offshore contacted a local broker, Greg Lary at Lary Insurance Services, Inc., who turned to Lloyd's of London for the insurance.

" Lloyd's began as a coffee house but has developed into one of the world's leading markets for insurance. This market, however, operates in accordance with age-old customs that are, to say the least, unusual in American business law." 2 Houston cites an opinion by Judge John Rainey as " [a] good description of the Lloyd's operation" 3 at the time the policy in this case issued:

Lloyd's London (" Lloyd's" ) is a 300-year-old market in which individual and corporate underwriters, known as Names, underwrite insurance. Lloyd's itself is not an insurance company; it merely provides the physical premises and administrative staff and services to enable the actual underwriters to carry on their business. To increase efficiency

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and multiply resources, Names have joined together to form syndicates, of which there are now more than four hundred; a particular syndicate may have a few hundred or several thousand Names. Syndicates have no legal existence apart from the Names, and syndicates neither assume liability nor underwrite risks. Within each syndicate, an " active" underwriter is authorized to determine the conditions to which a risk will be subject, the percentage of risk to be assumed by the syndicate on behalf of the Names, and the percentage of risk each Name in the syndicate will assume. Thus, when the active underwriter accepts a percentage of the risk, he binds every Name in the syndicate. Each Name assumes unlimited liability for his share of the syndicate's losses, but he is liable for no other portion assumed by any other Name.

Only approved brokers are permitted to place risks with Lloyd's underwriters. Typically, a broker will prepare the " slip," a summary of the details of the risk the broker is seeking to insure (or reinsure). The broker and the active underwriter proceed to negotiate the terms and premium, indicating as much on the slip itself. The underwriter who structures the transaction with the broker is known as the " lead" underwriter; the lead underwriter's syndicate is known as the " market lead" or " leader of the market" for that particular risk. When the underwriter signs (or " scratches" ) the slip, a binding contract between his syndicate and the insured is formed. Having obtained the signature of the lead underwriter, the broker retains the slip and approaches other syndicates or insurance companies to secure coverage for the remaining risk. Once the broker has succeeded in procuring full coverage, he retains the slip and provides subscribing underwriters with copies of the terms and conditions of the coverage. If a claim under the insurance (or reinsurance) agreement is not outstanding, an underwriter may agree to waive issuance of a policy; the slip is then signed " on risk." Otherwise, the broker's policy department prepares the policy and forwards it to the Lloyd's Policy Signing Office (" LPSO" ). The LPSO checks the policy against the slip to ensure that the policy contains all the terms and conditions of the slip. If no inconsistencies are discovered, the policy issues, often long after the initial signing of the slip.4

As required by Lloyd's, Lary requested an approved London broker, Tysers International Insurance & Reinsurance Brokers, to obtain insurance for Offshore and Houston (" the Assureds" ). Tysers negotiated with respondent Wellington Underwriting Agencies Limited as lead for a group of underwriters (" the Underwriters" ).5 Tysers and Wellington worked

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from a 33-page " WELCAR 2001 Offshore Construction Project Policy" form, lining through several provisions. The form contained two parts labeled " Section I-Physical Damage" and " Section II-Liability" . Tysers and Wellington lined through all seven pages of Section II, which provided liability insurance. " Subject to the [policy's] terms, conditions and exclusions", Section I " insure[d] against all risks of physical loss of and/or physical damage to [covered] property" — that is, property involved in any project undertaken by Offshore and declared under the policy.6 Offshore's Houston project was part of the declaration, and others could be added as they were undertaken.

The policy terms provided that the Underwriters would indemnify the Assureds for " costs necessarily incurred and duly justified in repair or replacement" of lost or damaged property (¶ 1 a). The cost of hiring vessels, equipment, and labor " used in or about the repair ... of losses covered by Section I" was also recoverable, as was a reasonable charge for Offshore's " utilis[ing]" its own equipment (¶ 1 d). Other provisions required payment for loss due to governmental action to prevent pollution (¶ 6); certain defective parts (¶ 7); certain salvage charges (¶ 8); and wreckage removal (¶ 11). But five provisions calling for reimbursement of other expenses associated with covered losses were struck through:

• ¶ 10, " Additional Work", providing payment for additional work needed to reposition a structure; 7

• ¶ 12, " Tests, Leak and/or Damage Search Costs", providing payment for tests required to be repeated after a covered occurrence; 8

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• ¶ 13, " Stand-By Charges", providing payment for the cost of keeping equipment engaged in repairing a covered occurrence available through delays for bad weather; 9

• ¶ 16, " Terrorist ‘ Buy Back’ Clause", providing payment of some losses due to terrorism; 10 and

• ¶ 17, " Forwarding Charges", providing payment for costs due to interruptions in transporting property as part of a covered occurrence. 11

Following these terms were almost two pages of exclusions. As altered, 12 the form became the policy to which Tysers and the Underwriters agreed, and Tysers notified Lary that coverage had been bound.13

A few weeks later, the drilling platform Offshore was constructing for Houston became unstable, requiring immediate repairs. But work was delayed by severe storms in the Gulf, during which Offshore kept repair vessels standing by so that they could resume repairs as soon as the weather improved. The Assureds submitted a claim for $3,256,174, which included about $1 million for weather stand-by charges. The Underwriters paid $2,034,961, acknowledging that the platform damage was a covered occurrence, but refused to pay for the weather stand-by charges. Paragraph 13, which was struck through in the policy, would have required indemnity for those charges.

The Assureds sued the Underwriters on the policy, and the Underwriters counterclaimed,

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alleging that the Assureds had submitted a false claim. The trial court granted partial summary judgment for the Assureds, construing the policy to require payment of the weather stand-by charges. In its order, the trial court gave this explanation of its ruling

The Court, having disregarded the stricken policy language as parol evidence, found the Policy to be unambiguous in favor of coverage. The Policy is only ambiguous if the stricken language is read into the Policy, and then treated as an exclusion. The stricken language is parol evidence that creates an ambiguity, necessitating further parol evidence. Whereas parol evidence may be used to interpret an ambiguous contract, it cannot be used to create an ambiguity. By ignoring the stricken language and treating it as never having been in the policy...

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