Effort To Reform Policy To Add Oil Refinery Owner to Transfer Endorsement Rejected As Insufficient and Untimely.

The Fifth Circuit, applying Texas law, rejected an oil refinery’s effort to be added as an additional insured under a pollution policy, finding the oil refinery failed to state a claim for reformation and, even if it stated such a claim, the claim was barred by a four-year statute of limitations.

The Golden Eagle Refinery in Martinez, California, has been the subject of numerous federal and state remediation orders.  In 2000, Tosco Corporation (“Tosco”) sold the refinery to Ultramar Diamond Shamrock (“Ultramar”).  Ultramar purchased $100 million excess coverage from Chartis Specialty Insurance Company (“Chartis”) to cover preexisting environmental issues.  Ultramar subsequently began negotiating with Tesoro Corporation to sell the refinery to Tesoro Refining, a subsidiary of Tesoro Corporation.

As part of the sale, Ultramar was to secure an endorsement to the Chartis policy adding the new company as an additional insured or assigning the Chartis policy directly.  Chartis provided the transfer endorsement, but the endorsement named “Tesoro Corporation” as the new named insured.  Its subsidiary, “Tesoro Refining,” however, was the actual purchaser of the refinery.

Soon after the transaction took place, Tesoro Refining sued Tosco for fraud contending that Tosco concealed the severity of the environmental liabilities at the refinery.  The Tosco/Tesoro Refining dispute, which began in 2003, settled in 2007.

In 2009, Tesoro Corporation demanded that Chartis pay for the additional cleanup costs on behalf of the owner, Tesoro Refining.  Chartis contended that it only owed coverage to Tesoro Corporation.  Tesoro Refining argued that it was entitled to coverage because (1) it was a third-party beneficiary of the policy and/or (2) the policy should be reformed based on a mutual mistake.

With regard to its third-party beneficiary argument, Tesoro Refining asserted that the court should follow the intent of the parties – that the owner of the refinery was covered under the policy – rather than the actual words of the policy.  The court rejected this argument:  “[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…the instant policy’s language does not evince any intent to benefit a third party (Tesoro Refining or otherwise).”

With regard to its reformation argument, Tesoro Refining asserted that it relied upon the “specialized knowledge” of Chartis in connection with the transfer endorsement.  In rejecting this argument, the court held:  “This argument makes little sense, as Chartis was hardly in a superior position to know which entity purchased the refinery, i.e., which entity was likely to be most directly liable for any environmental problems.”  In addition, the court held that Tesoro Refining had failed to direct the court to any evidence that it had “relied on Chartis to know that Tesoro Refining actually owned the refinery and to therefore draft the policy to include Tesoro Refining as an additional insured ….”

Finally, the court held that, even if Tesoro Refining could establish that it relied on Chartis, the reformation claim nevertheless failed because it was filed too late.  The court held that the Tesoro entities did not file suit until more than four years after the “mistake” was made, and Texas has a four year statute of limitations on reformation claims.  Having failed to demonstrate that the mistake was “inherently undiscoverable,” the court held any reformation claim would have been time barred.  AIG Specialty Ins. Co. v. Tesoro Corp., No. 15-50953 (5^th Cir. Oct. 17, 2016).