Hurricane Rita destroyed an oil and gas well about 75 miles off Louisiana in 2005, but when Prime Natural Resources sought to recover damages from its insurance company, it was rebuffed.
Prime, a Houston venture capital firm that owned a 50 percent stake in the well, sued several underwriters through the Lloyds of London syndicate to help repay the $17 million it cost to rebuild the well and adjacent platform.
On Friday, a Harris County jury awarded Prime $41.6 million, a decision that could benefit other drillers that carry similar insurance policies on their wells. The case, which wound its way through the courts for the past decade, is a dispute that isn’t all that different from the problems homeowners face when they discover that foundation or other types of damage aren’t covered under their homeowners policy.
Prime sued in state district court in Houston when the underwriters refused to cover portions of the drilling operation destroyed during the hurricane that washed away the platform, took the well out of production and left the wellhead and other equipment at the bottom of the Gulf of Mexico, according to court papers.
John Zavitsanos, the Houston trial lawyer representing Prime Natural Resources, said that exploration and production companies typically buy different levels of insurance for different parts of their operations, depending on the risks they face. It’s typical, he said, for energy companies to buy relatively small amounts of coverage on their platforms, but carry much higher policy limits on their wells. Prime Natural Resources carried about $1 million for its platform – a structure big enough to land a helicopter – and $25 million on its well.
But when it came time to file a claim, Prime was told that the “Christmas tree” – the device that controls the flow of liquids in and out of a well – was really part of the platform, rather than the well, Zavitsanos said. The insurer also claimed the outer casing of the well wasn’t part of the well, he said.
Zavitsanos said the dispute is a common one in the drilling world, forcing some companies to settle for less than they’re entitled just to get the matter resolved. But the verdict Friday, he said, “puts insurance companies on alert that you better pay what you are obligated to pay.”
J. Clifton Hall III, the Houston lawyer representing the underwriters, said his clients are considering the jury verdict and what will eventually be entered as the judgment by state District Judge Michael Gomez. From there, he said, the underwriters will give close scrutiny to their appellate options.
After a six-week trial, the jury found that the underwriters who work through Lloyd’s of London syndicate engaged in several unfair or deceptive acts, including refusing to pay Prime’s claims without conducting a reasonable investigation, and failed to make a fair settlement once it became clear the underwriters were liable, according to the jury verdict form. The jury awarded $1.8 million in actual damages and $10.9 million for bad faith.
The jury also awarded a total of $27.3 million in punitive damages to compensate Prime for the conduct of the underwriters, including failing to determine coverage within a reasonable period of time and failing to make a good- faith settlement under one portion of the policy in order to influence Prime to settle another portion, according to the jury verdict.
The jury also awarded $1.6 million in attorney’s fees to Prime.
W&T Offshore of Houston owns the other half of the offshore well and acts as the well operator.
This story originally appeared in the Houston Chronicle, an Energy Voice content partner. For more click here.