Assumption of Liability Exclusionshoke2013
No Coverage for Refinery Fire and EPA Violations Indemnification Claim
A district court in Arkansas, applying Arkansas law, granted Liberty Mutual Fire Insurance Co.’s (“Liberty Mutual”) motion for summary judgment finding that all of the claims at issue for indemnification against its insured, Murphy Oil Corporation (“Murphy”), fell squarely within its policy exclusion for liability because of “assumption of liability in a contract or agreement.”
The coverage suit stemmed from a fire at an oil refinery that Valero Energy Corporation (“Valero”) purchased from Murphy pursuant to an Asset Purchase Agreement (“APA”). After an investigation, Valero concluded the fire was caused by various acts and omissions that Murphy had committed prior to selling the refinery to Valero. Later that same year, the EPA informed Valero that it would seek to impose penalties on Valero for violations of the Clean Air Act based on the fire. Pursuant to the indemnity provision of the APA, Valero requested that Murphy indemnify Valero for the full amount of damages in connection with the fire, including the resulting EPA penalties. Valero also accused Murphy of having made material misrepresentations or omissions about EPA violations to Valero during the sale of the refinery and demanded that Murphy indemnify Valero as required under the APA for any related damages. Valero alleged that its indemnification claims exceeded $52m and threatened to file a lawsuit.
Murphy notified Liberty Mutual, its commercial general liability insurer, of Valero’s claims against it and asked Liberty Mutual to provide Murphy a defense. Liberty Mutual declined to provide a defense because no lawsuit had actually been filed and the policy did not provide coverage for Murphy’s claim.
Ultimately, Murphy and Valero were unable to resolve their dispute and Valero filed a one-count complaint against Murphy for breach of contract, claiming damages in excess of $25m. Murphy again requested a defense from Liberty Mutual, and Liberty Mutual again denied. Murphy filed suit against Liberty Mutual seeking a declaration that Liberty Mutual had a duty to defend and damages for breach of contract. The parties filed cross motions for summary judgment.
Under the policy, Liberty Mutual has a duty to defend any suit seeking damages that Murphy becomes legally obligated to pay because of “bodily injury” or “property damage.” However, coverage is excluded for “‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” The policy also includes an exception to the exclusion, “[t]his exclusion does not apply to liability for damages: (1) [t]hat the insured would have in the absence of the contract or agreement; or (2) [a]ssumed in a contract or agreement that is an ‘insured contract’, provided the ‘bodily injury’ or ‘property damage’ occurs subsequent to the execution of the contract or agreement.” Murphy did not contend that the APA was an “insured contract,” but rather argued that the exception applied because Valero’s claim was substantively a tort liability that Murphy would have had in the absence of the APA’s limitation-of-liability clause.
The district court disagreed with Murphy and found that, under Arkansas Supreme Court precedent and the language of the policy, there was no possibility of coverage for Valero’s claims against Murphy. The district court held that Valero’s claims did “not arise from property damage itself, but rather from Murphy’s alleged false representations and alleged failure to honor its promise to provide Valero property that met certain agreed-to standards of regulatory compliance and good condition.” In rejecting Murphy’s argument, the district court stated: “To whom would Murphy have been liable for property damage in the absence of the APA? To itself? Certainly not Valero, since the APA is the vehicle through which Valero obtained the refinery in the first place.” Murphy Oil Corp. v. Liberty Mutual Fire Ins. Co., No. 1:18-CV-1013 (W.D. Ark. Jan. 1, 2019).