Last Monday, the Fifth Circuit affirmed summary judgment in favor of an insurer, rejecting efforts to reform a policy by applying the discovery rule to overcome the insurer’s statute of limitations defense.  In AIG Specialty Insurance Company v. Tesoro Corporation, 2016 WL 6078247 (5th Cir. October 17, 2016), a refinery with a long history of environmental remediation efforts was sold in 2000, and the buyer secured a $100 million in pollution liability excess coverage.  The buyer then sold the refinery and agreed to secure an endorsement to transfer the policy.  The insurer did so, but the endorsement named Tesoro Corporation as the new named insured.  The actual buyer, however, was Tesoro Refining. 

The environmental issues at the refinery were much worse than represented and litigation between the buyer and seller followed from 2003-2007.  As it neared settlement in 2007, the insurer was put on notice of a potential claim.  The insurer responded with a reservation of rights, identifying Tesoro Corporation as the named insured and indicating that coverage would be afforded “only if the insured were legally obligated to pay for cleanup costs.” The lawsuit between the buyer and seller settled in 2007, and in October 2009, the insurer received a formal demand for coverage of cleanup costs.  The demand letter showed Tesoro Refining as the buyer.  The investigation proceeded slowly and the parties eventually filed suit in 2012 with the insurer seeking a declaratory judgment that it owed no coverage to Tesoro Refining for cleanup costs and, with Tesoro Refining seeking to reform the policy.  The trial court found that Tesoro Refining was not entitled to coverage as a third-party beneficiary and that their reformation claim was barred by Texas four-year statute of limitations because they should have discovered the alleged mistake in the mid-2000’s. Summary judgment was granted in favor of the insurer and this appeal followed.

On appeal, the court agreed with Tesoro that mere receipt of a policy without protest, or without reading it, does not bar later claims for reformation.  But due to the limitations defense and passage of time, the parties argued over application of the discovery rule which applies “only where ‘the nature of the injury [is] inherently undiscoverable and… the injury itself [is] objectively verifiable.” The court determined that Tesoro Refining presented no support for the position that the alleged mistake over which entity was covered was “inherently undiscoverable”.  To the contrary, “the mistake is evident from the face of the document” and as a result, Tesoro’s reformation claim was time barred.  Summary judgment in favor of the insurer was upheld.

[Editor’s note:  Chris Martin of our firm testified as an expert witness on the claims handling issues in this case for the carrier.  We want to congratulate Scott Davis, David Timmins and the rest of their team from Gardere Wynne Sewell in Dallas on this significant victory.]    

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