Background and Business Context

BPX Production Company (formerly Petrohawk Energy Corporation) operated the State Willie Vee 56-T3-6 W107H well in Reeves County, Texas, and hired BJ Services, an oilfield services company, to cement the production casing. BJ Services used incorrect components in the cement mix, causing the cement to harden prematurely and form a 7,000-foot cement plug in the well. After unsuccessful salvage attempts, BPX had to abandon the well and drill a replacement.

BPX demanded payment from BJ Services and invoked the dispute resolution procedure in their Master Services Agreement (MSA). The MSA required that if a dispute arose, a party must give written notice and request a settlement meeting, the parties must participate in the settlement meeting within thirty days, and if the dispute remained unresolved, the parties could proceed to arbitration in accordance with the MSA's forum selection and arbitration clauses.

The Insurance Coverage Dispute

After receiving BPX's demand, BJ Services timely provided notice to Certain Underwriters at Lloyd's London under CGL Policy No. ENGLO1800982 and Umbrella Policy No. ENGLO1800981, demanding defense and indemnification. Underwriters denied coverage, citing two reasons: first, a provision excluding certain types of property damages arising out of BJ Services' operations, and second, BJ Services' failure to comply with certain requirements for obtaining protection under a supplemental endorsement to the CGL Policy.

BJ Services subsequently filed for Chapter 11 bankruptcy. The bankruptcy court approved a settlement under which BJ Services assigned to BPX all rights and causes of action against Underwriters for their alleged failure to defend and indemnify. BPX then sued Underwriters for breach of the duty to defend, breach of the duty to indemnify, and bad faith. The magistrate judge granted Underwriters' motion to dismiss, and BPX appealed.

The Duty to Defend Analysis

The central issue was whether Underwriters' duty to defend was triggered under the policy's definition of "suit." The policies defined "suit" to mean "a civil proceeding in which damages ... are alleged" and included "[a]ny other alternative dispute resolution proceeding in which such damages ... are claimed and to which the insured submits with our consent." Underwriters argued that the settlement discussions were not "alternative dispute resolution proceedings" and that BJ Services never obtained their consent to submit to such proceedings.

The Fifth Circuit disagreed, holding that the MSA's formal dispute resolution process constituted an "alternative dispute resolution proceeding" under the policy. The court noted that the MSA provided a structured procedure requiring written notice of the dispute, a request for a settlement meeting, and mandatory participation in that meeting within thirty days. The court found this process fell within the ordinary meaning of alternative dispute resolution as a procedure for settling disputes by means other than litigation.

The court applied the eight-corners rule, examining only the insurance policy and BPX's demand letter to BJ Services. Under Texas law, the court construed the policy language in favor of coverage because the term "alternative dispute resolution proceeding" was susceptible to more than one reasonable interpretation. The court emphasized that the duty to defend is broader than the duty to indemnify and is triggered when the complaint alleges facts that potentially or arguably fall within the policy's coverage.

Regarding the consent requirement, the court held that Underwriters waived any argument that BJ Services failed to obtain consent by not raising it in their denial letter. The denial letter cited only the policy exclusions and the supplemental endorsement requirements as reasons for denying coverage, without mentioning the consent requirement. Under Texas law, an insurer waives defenses not timely asserted in its denial letter.

Disposition of Other Claims

The Fifth Circuit affirmed dismissal of BPX's duty-to-indemnify claim, holding that BJ Services' bankruptcy precluded this claim as a matter of law. The court also affirmed dismissal of the bad-faith claim, holding that Texas law does not recognize common-law bad-faith claims in the third-party liability insurance context. The case was reversed in part and remanded for further proceedings on the duty-to-defend claim.