Insurers must face claim over plugged oil well: Appeals court

Lloyd’s of London insurers cannot deny a claim over a Texas oil well that was plugged after a contractor used the wrong cement mix for its casing, a federal appeals court ruled Monday.

In BPX Production Co. v. Certain Underwriters at Lloyd’s London, the 5th U.S. Circuit Court of Appeals overturned a lower court’s dismissal of the production company’s claim that the insurers had a duty to defend and indemnify and remanded the case for further review.

BPX hired BJ Services to cement the well’s production casing. BJ Services used the wrong cement mix, “resulting in the cement hardening prematurely and forming a 7,000-foot cement plug,” court papers say.

BPX demanded payment from BJ Services and initiated a dispute resolution process outlined in the contract between the two companies.

BJ Services notified its insurers of the claim; they denied it, citing a policy exclusion, among other reasons.

Despite the denial, BPX and BJ Services started settlement negotiations in July 2020, but a month later, BJ Services filed for Chapter 11 bankruptcy protection. In 2022, a bankruptcy judge approved a settlement that transferred the company’s insurance claims to BPX.

BPX sued the insurers, alleging they breached their duty to defend and indemnify. The insurers sought to dismiss the case on the grounds that the dispute resolution process between BPX and BJ Services did not qualify as a “suit” as defined in the policy. The lower court agreed.

The New Orleans-based appeals court ruled, however, that the policy’s definition of “suit” includes alternative dispute resolution proceedings.