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The Daily Commentary (sample)

Sample case reviewed on October 20, 2016.
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Tesoro Corporation v. AIG Specialty Insurance Company No. 15-50953

Before SMITH, HAYNES, and COSTA, Circuit Judges.

AFFIRMED. (October 17, 2016).

Posted in Environment, Insurance, Reformation of Contract, Statute of Limitations


Tesoro Corporation and Tesoro Refining & Marketing Company, LLC (“Tesoro Refining”) (collectively, the “Tesoro Parties”) appealed the summary judgment granted in favor of AIG Specialty Insurance Company, formerly known as Chartis Specialty Insurance Company (“Chartis”).

The Golden Eagle Refinery in Martinez, California, had been subject to a prolonged series of Federal and state environmental remediation orders. In 2000, Tosco Corporation (“Tosco”) sold the refinery to Ultramar Diamond Shamrock (“Ultramar”) and provided indemnity for $50 million of remediation costs to cover preexisting environmental issues. Ultramar, based in Texas, also purchased $100 million excess coverage from Chartis (the “Chartis policy”). Ultimately, Ultramar began negotiating with Tesoro Corporation and agreed to sell the refinery to Tesoro Refining. The purchase and sale agreement specified that Ultramar was to assign the Tosco indemnities, and to either secure an endorsement to the Chartis policy adding the new company as an additional insured or assign the Chartis policy directly.

This litigation concerned the transfer of the Chartis policy from Ultamar. Chartis did provide the transfer endorsement – but the endorsement named Tesoro Corporation as the new named insured. However, Tesoro Refining, its subsidiary, was the actual purchaser of the refinery. Chartis contended that it acted upon instructions that listed only Tesoro Corporation as the named insured. Soon after the refinery transaction took place, Tesoro Refining sued Tosco for fraud contending that Tosco had concealed the severity of the environmental liabilities present at the refinery. Their legal dispute stretched from 2003 until 2007. As Tosco and Tesoro Refining drew near a settlement, Tesoro sent a letter to apprise Chartis of the progress of the litigation. Chartis responded with a reservation of rights letter that acknowledged the matter as a potential claim. That letter identified “Tesoro Petroleum Corporation” (Tesoro Corporation’s prior name) as the named insured and stated that coverage would be provided only if the insured were legally obliged to pay for cleanup costs.

Tesoro Refining settled the Tosco litigation in March 2007, receiving $58.5 million from Tosco’s successor, ConocoPhillips. In October 2009, Chartis received a formal demand for coverage in a letter written on “Tesoro Corporation” letterhead and identifying “Tesoro Petroleum Corporation” as the named insured. This letter indicated that Tesoro Refining was the buyer of the refinery and the party that owed cleanup liabilities. The Tesoro letter explained the conclusion of the Tosco litigation, outlined various expenditures on environmental cleanup, and demanded that Chartis pay under the policy. Though Chartis acknowledged the demand, it indicated that it would investigate the claims. With that investigation proceeding slowly, the parties eventually filed suit. The Tesoro Parties initially sued in California, with Chartis filing a declaratory judgment action in Texas. Both cases were later consolidated into one action in Federal District Court in San Antonio. The matter of which entity was insured under the Chartis policy became an issue, with Chartis contending that it owed coverage only to Tesoro Corporation. In 2012, the Tesoro Parties sought reformation and also sued for breach of contract on a “third-party beneficiary” claim under California law (assuming arguendo that Tesoro Refining was not a named or additional insured under the policy). The District Court applied Texas law to the third-party beneficiary claim and concluded that it failed; alternatively, it concluded also that California law would not offer relief. In addition, it concluded that the reformation claim was barred by the Texas four-year statute of limitations (and, in the alternative, the California three-year statute) because, at a minimum, the Tesoro Parties should have discovered the alleged mistake during the mid-2000’s Tesoro/Tosco litigation. Thus, the action filed in 2012 was barred. After the District Court entered judgment in Chartis’s favor, and the Tesoro Parties timely appealed.

The parties agreed that Texas law does not recognize a third-party beneficiary claim that would permit Tesoro Refining to recover in this case. The Tesoro Parties argued that California law governed and that it provided relief for Tesoro Refining. Analyzing California law, the Fifth Circuit resolved that it would not sustain the claimed relief the Tesoro Parties sought. Under California law a policy of indemnity insurance will not inure to a third party’s benefit unless the contract makes such an obligation express, and any doubt should be construed against such intent. See Am. Home Ins. Co. v. Travelers Indem. Co., 175 Cal. Rptr. 826, 834 (Cal. Ct. App. 1981). Because the instant policy’s language did not evince any intent to benefit a third party (Tesoro Refining or otherwise), Tesoro Refining could not assert third-party beneficiary status. In consequence, the Fifth Circuit affirmed the District Court’s summary judgment on the breach of contract claim premised upon a third-party beneficiary argument.

The District Court granted summary judgment on the Tesoro Parties’ reformation claim on limitations. The parties agreed that Texas law governs this issue. Texas applies a four-year statute of limitations to reformation claims. Harbor Ins. Co. v. Urban Const. Co., 990 F.2d 195, 200 (5th Cir. 1993); TEX. CIV. PRAC. & REM. CODE § 16.051. The Tesoro Parties argued that limitations did not begin to run until they discovered the alleged mistake in the policy. The Court recalled that it has long been the law in Texas that receipt of a policy containing a mistake does not bar a later claim for reformation if the insured offers proof “that when he received it he put it away without examination, or that he relied upon the knowledge of the insurer and supposed he had correctly drawn it.’” Fireman’s Fund Indem. Co. v. Boyle Gen. Tire Co., 392 S.W.2d 352, 355 (Tex. 1965) (quoting Del. Ins. Co. v. Hill, 127 S.W. 283, 286–87 (Tex. Civ. App.—El Paso 1910, writ denied). The Fifth Circuit concluded that the Tesoro Parties did not raise a genuine issue of material fact issue as to the “reliance on knowledge” prong. Nor did they point to any evidence of the “put it away without examination” prong. Thus, the Court found that their argument failed on the merits. However, the Court explained that even if it were to assume arguendo that their claim is not barred on the merits for the Tesoro Parties’ failure to question the policy when they received it, the claim was nonetheless filed too late. The Tesoro Parties sued for reformation many more than four years after the 2002 “mistake” was made. Although the parties argued over the application of the discovery rule here, the Court stressed that the Tesoro Parties were unable to point to any basis for concluding that the injury in this case – the alleged mistake over which entity was covered – was “inherently undiscoverable.” As such, the discovery rule did not apply to delay the accrual of the cause of action in this situation.

On Appeal from the United States District Court for the Western District of Texas (David A. Ezra).
Attorney for Appellant – Allyson Newton Ho, Dallas, TX
Attorney for Appellee – Scott Louis Davis, Dallas, TX

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