Fifth Circuit Reverses Dismissal of Duty-to-Defend Claim, Holds Contractual Settlement Negotiations Constitute 'Alternative Dispute Resolution Proceeding' Under CGL Policy
The Fifth Circuit reversed dismissal of BPX Production Company's duty-to-defend claim against Lloyd's underwriters arising from a 7,000-foot cement plug that destroyed a Reeves County well, holding that contractually mandated settlement negotiations under a Master Services Agreement constitute an 'alternative dispute resolution proceeding' triggering coverage. The court resolved policy ambiguity in favor of the insured under Texas law, rejecting the insurer's argument that only formal ADR proceedings with consent invoke the duty to defend.
Background and Factual Context
BPX Production Company 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 abandoned the well and drilled 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 arises, 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 remains unresolved, the parties may proceed to arbitration in accordance with the MSA's forum selection and arbitration clauses.
BJ Services tendered the claim to its insurers, Certain Underwriters at Lloyd's London, demanding defense and indemnity under CGL Policy No. ENGLO1800982 and Umbrella Policy No. ENGLO1800981. Underwriters denied coverage, citing property damage exclusions arising out of BJ Services' operations and BJ Services' alleged failure to comply with supplemental endorsement requirements. BJ Services subsequently filed for bankruptcy, and BPX became the assignee of BJ Services' insurance claims.
The Duty-to-Defend Dispute
As assignee, BPX sued Underwriters alleging breach of the duty to defend and indemnify, and bad faith. Underwriters moved to dismiss under Rule 12(b)(6), arguing that BPX failed to allege facts indicating Underwriters' duty to defend was triggered, that BJ Services' bankruptcy precludes the duty-to-indemnify claim, and that Texas law does not recognize common-law bad-faith claims in this third-party context. The magistrate judge granted Underwriters' motion to dismiss, and BPX appealed.
The Fifth Circuit's Ruling
The Fifth Circuit reversed in part and affirmed in part. The court addressed whether the contractually mandated settlement negotiations constituted an 'alternative dispute resolution proceeding' under the policy that would trigger Underwriters' duty to defend. The CGL Policy defined 'suit' as 'a civil proceeding' but broadened it to include any other alternative dispute resolution proceeding in which damages are claimed and to which the insured submits with the insurer's consent.
The court held that the MSA's dispute resolution process—requiring written notice, meeting requests, and participation in settlement meetings—constituted an alternative dispute resolution proceeding under the policy. The Fifth Circuit applied Texas law and resolved the policy ambiguity in favor of the insured, rejecting Underwriters' argument that their duty to defend was never triggered.