Texas Appellate Court Reverses $25 Million Judgment in Exxon and Lexington Insurance Dispute

In a landmark ruling that carries significant implications for insurance carriers and corporate policyholders, a Texas appellate court has overturned a $25 million summary judgment in favor of Exxon Mobil Corporation and ExxonMobil Oil Corporation. This judgment had been previously granted in their long-standing legal conflict with Lexington Insurance Company. Despite Exxon being acknowledged as an additional insured under Lexington’s umbrella liability policy, the court determined that a pivotal exclusion clause nullified coverage for claims related to statutory employees.

The conflict originated from a tragic incident in April 2013, when an explosion occurred at Exxon’s Beaumont, Texas, refinery during a maintenance operation. Exxon had enlisted Brock Services, Ltd. for scaffolding services. According to their service agreement, Brock was designated as an independent contractor responsible for securing specific insurance policies. These included workers’ compensation, employer’s liability, and commercial general liability (CGL) policies, all of which named Exxon as an additional insured. Additionally, the contract allowed Exxon to acquire these coverages on Brock’s behalf, which they did through an Owner Controlled Insurance Program (OCIP). Under this arrangement, Exxon purchased workers’ compensation and employer’s liability policies covering Brock and its workers, subsequently deducting the insurance costs from payments to Brock. Tragically, three Brock employees were injured in the explosion and, after receiving workers’ compensation benefits under the OCIP, they pursued personal injury claims against Exxon. Exxon ultimately settled these claims for around $35 million and sought reimbursement of $25 million from Lexington under the umbrella policy issued to Brock.

Exxon entered arbitration, as mandated by a prior appellate decision, to resolve interpretive issues concerning the policy. The arbitral panel acknowledged Exxon as an additional insured but did not address the applicability of any exclusion, leaving the issue for judicial determination. In the trial phase, the decision favored Exxon, granting them the $25 million policy limit, in addition to prejudgment and post-judgment interest and attorney’s fees. However, Lexington contested this on appeal, leveraging the 'Employer’s Liability' exclusion within the policy. This exclusion was pivotal, as it negated coverage for injuries to employees of the insured during the course of employment. The Ninth Court of Appeals in Beaumont sided with Lexington, citing that Exxon, having secured workers’ compensation for Brock’s employees under the OCIP, qualified as their statutory employer under Texas labor laws. Consequently, the workers' claims were governed by the said exclusion, devoid of coverage under the umbrella policy.

Furthermore, Lexington invoked a second policy exclusion, concerning obligations under Workers’ Compensation and Similar Laws. This argument was refuted by the appellate court, which clarified that Exxon was not seeking coverage for workers’ compensation obligations but rather indemnity for third-party injury claims. Nonetheless, since the Employer’s Liability Exclusion was triggered, the court concluded Lexington held no responsibility to either defend or indemnify Exxon. The appellate court reversed the trial court’s decision, denying Exxon any share of the policy limits, interest, or legal fees. The broader implication of this decision is a clear affirmation of the principle that qualifying as an additional insured does not guarantee coverage when a valid exclusion is applicable. For insurers and corporate risk managers, this ruling emphasizes the necessity of a thorough examination of OCIP arrangements and the interaction of statutory employer status with policy exclusions. It serves as a critical reminder that umbrella policies, although extensive, must adhere to explicit exclusions outlined within statutory constraints. This ruling delineates the boundaries of umbrella coverage in relation to Texas’s workers’ compensation system, particularly when coverage is procured through an OCIP.