Here is a scenario: a company seeks liability insurance coverage for a specific risk. An insurer sells the company a policy and modifies it by adding an endorsement that seemingly adds the requested coverage. When the company is sued for the precise risk for which it purchased insurance, the insurer pays the claim without any dispute, right?

Unfortunately, policyholders are finding out that even though they purchased coverage by endorsement for a specific risk, once a claim is actually submitted, the insurer may deny coverage. For instance, one insurance company recently asserted, and the court rejected, an argument that there was no indemnity coverage for RICO claims notwithstanding the fact that the policyholder had purchased a RICO coverage endorsement for an additional premium.  Regence Grp. v. TIG Specialty Ins. Co., 903 F. Supp. 2d 1152, 1166 (D. Or. 2012) (finding that “the parties intended to include defense and indemnity coverage for RICO claims under the [p]olicy”); see also Barking Dog, Ltd. v. Citizens Ins. Co. of Am.,164 N.H. 80, 85-86, 53 A.3d 554,559 (2012).

This month, the Court of Appeals of Texas addressed a similar argument when an insurer asserted that it had no duty to defend its policyholder in several lawsuits resulting from a well blowout even though the insurer had sold the company a policy with a “Blowout and Cratering Coverage Endorsement” (the Blowout Endorsement). Century Surety Co. v. DeLoach D/B/A DeLoach Vacuum Service & DeLoach Oil & Gas Waste Well, No. 13-12-00072-CV, 2013 Tex. App. LEXIS 9484 (Tex. Ct. App. Aug. 1, 2013). The Blowout Endorsement provided coverage for “Blowout & Cratering Hazard,” including “property damage” to any of the following:

a. Any “property damage” . . . due to a “blowout” [i.e.] the earth arising out of or consequence of the uncontrolled flow of gas or fluids from a well, wellhead or borehole; b. Any “property damage” . . . due to “cratering,” [i.e.] the earth arising out of or a consequence of subsidence, depression, erosion, or expulsion of the earth’s surface around or adjacent to a well, wellhead or borehole cause by the erosive or eruptive action of gas or fluids flowing to the surface.

Id. at *14. Nevertheless, the insurer argued that this endorsement was a limitation, rather than an expansion of coverage, because, among other reasons, the policy was not limited to a particular hazard. The court rejected this argument noting that the Blowout Endorsement expressly stated that the provisions in the endorsement were “added with respect to ‘property damage.’” Id. at *12 (emphasis original). The insurer also contended that two exclusions in the policy – a Total Pollution Exclusion and a Mold Exclusion – barred coverage for the claim. The court likewise rejected those arguments, reasoning that under the insurer’s interpretation, the Blowout Endorsement would be rendered meaningless. The court noted, for example, that it was not credible “that an occurrence covered under the Blowout Endorsement could [] arise in the absence of pollution, which the Pollution Exclusion excludes from coverage.” Id. at *14-15. The court concluded that the insurer had a duty to defend the policyholder in the underlying lawsuits. These cases demonstrate that even when a policyholder buys specific coverage that is added by endorsement, once a claim comes in, the insurer may (unreasonably) seek to rely on exclusions or terms in other parts of the policy to deny coverage. Policyholders, of course, should have strong arguments to defeat such a contention. For example, policyholders may argue that the endorsement supersedes other terms in the policy or, at a minimum, that the conflict between the endorsement and the policy form creates an ambiguity that should be construed in favor of coverage. Policyholders can put themselves in the best position by assuring that the policy and any contemporaneous documents clearly express the parties’ intent.