COURT REJECTS REFINERY'S ARGUMENTS TO SECURE INSURED STATUS UNDER POLICY ASSIGNED TO PARENT CORPORATION

In a recent decision analyzing a complex series of property transactions, choice of law issues and policy reformation arguments, the U.S. District Court in San Antonio rejected the refinery's arguments seeking coverage under a policy assigned to a parent corporation and granted summary judgment in favor of the insurer.  In Chartis Specialty Insurance Company v. Tesoro Corporation, 2015 WL 4154136 (W.D.Tex. July 10, 2015), a refinery which began operations in 1913, was transferred between a series of owners and in recent decades was subject to remediation orders from the EPA addressing contamination issues at the refinery.  And in one of the most recent property transfers, an insurance policy potentially applicable to cover the remediation expense was transferred to Tesoro Corporation instead of Tesoro Refining and a declaratory judgment lawsuit followed.

The court first analyzed the refinery's effort to secure third-party beneficiary status under the policy assigned to its parent corporation.  Applying Texas law, the court observed that "parties are presumed to be contracting for themselves only" and that absent a clear intention in the agreement to confer direct benefit to a third party, enforcement efforts by the third party must be denied.  Following review of the policy, the court noted that the named insured was "Tesoro Corporation, which made no promise to Tesoro Refining regarding the proceeds of the insurance policy that it executed with Chartis."  The court made a similar finding applying California law and granted Chartis's motion on the third party beneficiary issue.

Next, the court examined the refinery's reformation claims and the insurers argued a statute of limitations defense in response.  The court noted that under both Texas and California law, "an insured party that accepts a policy without disagreement is presumed to know its contents....Because Tesoro Corporation did not contest the endorsement at the time of the assignment, the Tesoro parties are presumed to know the contents of the policy."  The presumption however, is rebuttable and the court then focused on when the Tesoro parties should have discovered the mistake in order to apply Texas' four-year statute of limitations or California's three-year limitations period. 

To address the limitations issue, the court examined the date on which the cause of action accrued - the date the Tesoro parties should have reasonably discovered that the policy did not cover Tesoro Refinery.  In doing so, the court considered Tesoro's litigation seeking $50 million indemnity from a previous owner related to a self insured retention for cleanup costs and found it "inconceivable" that during that 2006 litigation, Tesoro Refinery did not examine the Policy.  "Accordingly, the Court finds, as a matter of law, that the Tesoro parties should have discovered that Tesoro Refining was not covered under the Policy by at least 2006, rendering the 2011 and 2012 filings beyond the limitations period."  as a result, the court granted Chartis's motion for summary judgment.