Houston Exploration Co. v. Wellington Underwriting Agencies, Ltd.
Houston Exploration Co. v. Wellington Underwriting Agencies, Ltd.
Opinion of the Court
delivered the opinion of the Court, in which
The parties dispute whether an “all risk” property damage insurance policy provides indemnity for certain expenses incurred in connection with a covered loss. Coverage was negotiated in the London market, and as is customary there, the parties reached agreement by lining through provisions in a form policy. One such provision would have required reimbursement of the disputed expenses, and the question is whether the strike-through reflects the parties’ intention that those expenses would not be reimbursed. We agree with the court of appeals that the answer is yes.
I
In 2002, Offshore Specialty Fabricators, Inc. agreed to construct a drilling platform in the Gulf of Mexico for The Houston Exploration Company. Their contract required Offshore to obtain builder’s risk insurance naming Houston as an additional insured. Offshore contacted a local broker, Greg Lary at Lary Insurance Services, Inc., who turned to Lloyd’s of London for the insurance.
“Lloyd’s began as a coffee house but has developed into one of the world’s leading markets for insurance. This market, however, operates in accordance with age-old customs that are, to say the least, unusual in American business law.”
Lloyd’s London (“Lloyd’s”) is a 300-year-old market in which individual and corporate underwriters, known as Names, underwrite insurance. Lloyd’s itself is not an insurance company; it merely provides the physical premises and administrative staff and services to enable the actual underwriters to carry on their business. To increase efficiency*465 and multiply resources, Names have joined together to form syndicates, of which there are now more than four hundred; a particular syndicate may have a few hundred or several thousand Names. Syndicates have no legal existence apart from the Names, and syndicates neither assume liability nor underwrite risks. Within each syndicate, an “active” underwriter is authorized to determine the conditions to which a risk will be subject, the percentage of risk to be assumed by the syndicate on behalf of the Names, and the percentage of risk each Name in the syndicate will assume. Thus, when the active underwriter accepts a percentage of the risk, he binds every Name in the syndicate. Each Name assumes unlimited liability for his share of the syndicate’s losses, but he is liable for no other portion assumed by any other Name.
Only approved brokers are permitted to place risks with Lloyd’s underwriters. Typically, a broker will prepare the “slip,” a summary of the details of the risk the broker is seeking to insure (or reinsure). The broker and the active underwriter proceed to negotiate the terms and premium, indicating as much on the slip itself. The underwriter who structures the transaction with the broker is known as the “lead” underwriter; the lead underwriter’s syndicate is known as the “market lead” or “leader of the market” for that particular risk. When the underwriter signs (or “scratches”) the slip, a binding contract between his syndicate and the insured is formed. Having obtained the signature of the lead underwriter, the broker retains the slip and approaches other syndicates or insurance companies to secure coverage for the remaining risk. Once the broker has succeeded in procuring full coverage, he retains the slip and provides subscribing underwriters with copies of the terms and conditions of the coverage. If a claim under the insurance (or reinsurance) agreement is not outstanding, an underwriter may agree to waive issuance of a policy; the slip is then signed “on risk.” Otherwise, the broker’s policy department prepares the policy and forwards it to the Lloyd’s Policy Signing Office (“LPSO”). The LPSO checks the policy against the slip to ensure that the policy contains all the terms and conditions of the slip. If no inconsistencies are discovered, the policy issues, often long after the initial signing of the slip.4
As required by Lloyd’s, Lary requested an approved London broker, Tysers International Insurance & Reinsurance Brokers, to obtain insurance for Offshore and Houston (“the Assureds”). Tysers negotiated with respondent Wellington Underwriting Agencies Limited as lead for a group of underwriters (“the Underwriters”).
The policy terms provided that the Underwriters would indemnify the Assureds for “costs necessarily incurred and duly justified in repair or replacement” of lost or damaged property (¶ 1 a). The cost of hiring vessels, equipment, and labor “used in or about the repair ... of losses covered by Section I” was also recoverable, as was a reasonable charge for Offshore’s “util-ising]” its own equipment (¶ 1 d). Other provisions required payment for loss due to governmental action to prevent pollution (¶ 6); certain defective parts (¶ 7); certain salvage charges (¶8); and wreckage removal (¶ 11). But five provisions calling for reimbursement of other expenses associated with covered losses were struck through:
• ¶ 10, “Additional Work”, providing payment for additional work needed to reposition a structure;7
• ¶ 12, “Tests, Leak and/or Damage Search Costs”, providing payment for tests required to be repeated after a covered occurrence;8
*467 • ¶ 13, “Stand-By Charges”, providing payment for the cost of keeping equipment engaged in repairing a covered occurrence available through delays for bad weather;9
• ¶ 16, “Terrorist ‘Buy Back’ Clause”, providing payment of some losses due to terrorism;10 and
• ¶ 17, “Forwarding Charges”, providing payment for costs due to interruptions in transporting property as part of a covered occurrence.11
Following these terms were almost two pages of exclusions. As altered,
A few weeks later, the drilling platform Offshore was constructing for Houston became unstable, requiring immediate repairs. But work was delayed by severe storms in the Gulf, during which Offshore kept repair vessels standing by so that they could resume repairs as soon as the weather improved. The Assureds submitted a claim for $3,256,174, which included about $1 million for weather stand-by charges. The Underwriters paid $2,034,961, acknowledging that the platform damage was a covered occurrence, but refused to pay for the weather standby charges. Paragraph 13, which was struck through in the policy, would have required indemnity for those charges.
The Assureds sued the Underwriters on the policy, and the Underwriters counter
The Court, having disregarded the stricken policy language as parol evidence, found the Policy to be unambiguous in favor of coverage. The Policy is only ambiguous if the stricken language is read into the Policy, and then treated as an exclusion. The stricken language is parol evidence that creates an ambiguity, necessitating further parol evidence. Whereas parol evidence may be used to interpret an ambiguous contract, it cannot be used to create an ambiguity. By ignoring the stricken language and treating it as never having been in the policy (as is the case when only looking at the four corners of the Policy), the contract is unambiguous.
(Emphasis in original.) Later, the trial court signed an agreed order for an interlocutory appeal on two questions:
(1) Whether the Welcar 2001 Offshore Construction Project policy of insurance at issue herein provided coverage for the weather standby charges incurred by Houston Exploration which are the subject of suit herein;
(2) If coverage exists for weather standby [charges], whether Underwriters’ counterclaims for fraud and breach of contract are without merit.
The trial court found these were “controlling questions of law as to which there is substantial ground for difference of opinion”, and that “an immediate interlocutory appeal ... will materially advance the ultimate termination of this litigation”.
The court of appeals answered the first question no, thereby mooting the second question.
We initially denied the Assureds’ petitions for review
II
A written contract must be construed to give effect to the parties’ intent expressed in the text as understood in light of the facts and circumstances surrounding the contract’s execution, subject to the parol evidence rule.
As we have said, “[negotiations of the parties may have some relevance in ascertaining the dominant purpose and intent of the parties embodied in the contract inter
The Assureds argue that by deleting requirements that specific kinds of costs be reimbursed, the parties did not intend that the costs not be reimbursed. Rather, they contend, the deletions are completely irrelevant, and the policy must be construed as if the struck-through provisions had not been included in the form in the first place. This not only ignores but distorts the negotiation process. The parties did not try to write a policy from scratch. They took an existing form, deleted some payment requirements and kept others. The purpose of the process was to decide both what costs would be paid by the policy and what costs would not be paid. To see the deletions as irrelevant blinks reality.
We have twice held that deletions in a printed form agreement are indicative of the parties’ intent. In Gibson v. Turner, lessors leased all the minerals in 922 acres, even though they owned only an undivided 9/40ths.
In Houston Pipe Line Co. v. Dwyer, landowners claimed that a natural gas pipeline easement had terminated when the defendant removed the existing pipeline and replaced it with a larger one to meet increased demand.
Gibson and Dtuyer establish that deletions in a printed form agreement must be considered in construing the other provisions.
The Assureds argue that deletions in a printed form should be treated no differently than deletions in a draft, all evidence of which is omitted from the final agreement. But the law has long recognized that changes in a printed form must be accorded special weight in construing the instrument. The Uniform Commercial Code, for example, provides that handwritten and typewritten terms prevail over contradictory printed terms.
We conclude that the effect of the deletion of paragraph 13 was to remove weather stand-by charges from the costs for which the policy provided indemnity.
Ill
The Assureds contend that indemnification for weather stand-by charges is required by policy provisions other than paragraph 13, and that if the deletion of that paragraph is construed as an exclusion, then its effect must be “strictly construed against the insurer and in favor of the insured.”
The Assureds argue that payment of weather stand-by charges is required by the policy’s general provision that “insures against all risks of physical loss of and/or physical damage to [covered] property”. But that provision is expressly “[s]ubject to the terms” that follow in the policy, one of which would have been paragraph 13. Treating its deletion as an exclusion makes it an express exception to the general “all risks” insurance provision.
The Assureds argue that weather stand-by charges are “costs necessarily incurred and duly justified in repair or replacement” of lost or damaged property, which must be paid under paragraph la. But weather stand-by charges are not nec
The Assureds argue that weather stand-by charges are part of the costs of equipment and labor “used” or “utilise[d]” in repairing covered property under paragraph Id, but the opposite is true: the charges are for equipment and labor that are standing by, awaiting use when the weather clears. If paragraph Id covered weather stand-by charges, paragraph 13 would be surplusage in a policy in which it was not struck through, as in this policy.
Finally, the Assureds argue that because the policy provided a deductible for weather standby charges, the charges must have been payable under the policy. But the deductible provision was another part of the printed form. Having struck paragraph 13, the parties might well have struck the deductible provision, but failing to do so simply left it inoperative.
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For these reasons, we conclude that the judgment of the court of appeals should be
Affirmed.
Justice JOHNSON filed a concurring opinion.
. 267 S.W.3d 277 (Tex.App.-Houston [14th Dist.] 2008).
. E.R. Squibb & Sons, Inc. v. Accident & Cas. Ins. Co., 160 F.3d 925, 929 (2d Cir. 1998) (citing Godfrey Hodgson, Lloyd's of London 49-75 (1984)).
.Brief on the Merits of Petitioner The Houston Exploration Company at 43.
. Houston Cas. Co. v. Certain Underwriters at Lloyd's London, 51 F.Supp.2d 789, 791-792 (S.D.Tex. 1999), aff'd, 252 F.3d 1357 (5th Cir. 2001) (footnote omitted); cf. What We Do, Lloyd’s.com, http://www.lloyds.com/Lloyds/ Investor-Relations/Lloyds-overview/What-we-do (last visited Aug.23, 2011).
. The other underwriters, also respondents, were: Syndicate 2020; Anton Private Capital Limited; CBS Private Capital Limited; Ar-genta Private Capital Limited; Syndicate 3030; Amlin Underwriting Ltd.; Syndicate 2001; Navigators Underwriting Agency Ltd.; Syndicate 1221; Marlborough Underwriting Agency Ltd.; Syndicate 1861; Managing Agency Partners Ltd.; Syndicate 2791; Hardy (Underwriting Agencies) Ltd.; Syndicate 382; Beazley Furlonge Ltd.; Syndicate 623; Houston Casualty Company; Navigators Insurance Company; AXA Corporate Solutions Reassurance-Paris; AXA Corporate Solutions IUA; AXA Corporate Solutions Insurance Company; AXA Corporate Solutions Reinsurance; AXA Corporate Solutions Lloyd's Insurance
.A section captioned "Covered Property” provided as follows:
"This insurance covers works executed anywhere in the world in the performance of all contracts relating to the Project including (provided they are included in the contract values declared to Underwriters and insured herein) materials, components, parts, machinery, fixtures, equipment and any other property destined to become a part of the completed project, or used up or consumed in the completion of the project. This insurance shall also cover (provided they are declared to and agreed by Underwriters) all temporary works, plant, equipment, machinery, materials, outfits and all property associated therewith, whether such items are intended to form a permanent part of the works or not, including site preparatory work and subsequent operational risks.
"It is understood and agreed that any insured equipment and/or property that is not for incorporation into the contract works shall be covered whilst it is being utilised in the Project and whilst in transit from the Project site(s) until the earlier of the date of arrival at its final destination or the 30th day after its removal from the Project site(s).”
. "In the event that the structure or insured property is set down or wrongly positioned, which is the direct result of a peril insured against, Underwriters shall indemnify the Assureds for the cost of additional work that is required in respect of positioning or repositioning, sinking, submerging and stabilizing the property insured herein insofar as such cost does not fall within the cover afforded by the sue and labour clause. However Underwriters' liability under this clause shall not exceed the percentage amount that would be recoverable under the sue and labour clause and then only to the extent that the Policy Limit is not exhausted by a claim under the sue and labour clause.”
. "If it becomes necessary to repeat any test(s) and/or trial(s) or to carry out subsequent test(s) and/or trial(s) as a result of a physical loss or physical damage to the insured property arising from an Occurrence covered under Section I, Underwriters will bear the cost of any such repeated and/or subsequent test(s) and/or trial(s) subject to a sub-limit of (AMOUNT) (100%) any one Occurrence, but never to exceed original expen
. “Subject to a sub-limit of US$ (AMOUNT) any one Occurrence aggregated at US$ (AMOUNT) over the Policy Period, Underwriters shall indemnify the Assureds for the cost of stand-by time on vessels and/or craft and/or equipment actively engaged in the course of repair following an Occurrence covered under Section I, where the Assureds are prevented from working in, around or about the damaged property by bad weather, including named hurricanes.”
. "Subject to the terms and conditions to which reference is made below, Underwriters shall indemnify the Assureds under this clause for physical loss and/or physical damage that would be recoverable under Section 1 of the Policy but for the existence of the following clause in Section I, Exclusion 2:
" 'Notwithstanding anything to the contrary contained in this section, there shall be no liability whatsoever for any loss caused by, or resulting from, or incurred as a result of: " ‘a. (i) the detonation of an explosive and/or (ii) any weapon of war[;] and is caused by any person acting maliciously or from a political motive.
" ‘b. Any act for political or terrorist purposes of any persons, and whether or not agents of a sovereign power, and whether the physical loss, damage or expense resulting therefrom is accidental or intentional'.”
. “In respect of transits) insured hereunder, if as a result of an Occurrence covered by the terms of Section I, the insured transit is terminated at a port or place other than that to which the property insured is covered under this insurance, Underwriters will reimburse the Assured for any extra charges properly and reasonably incurred in unloading, storing and forwarding the property insured to the destination to which it is insured hereunder.
"Underwriters will bear the cost of any such extra charges subject to a sub-limit of US$ (AMOUNT) (100%) any one Occurrence.”
. Tysers and the Underwriters also lined through a paragraph of the general provisions entitled "Escalation Clause”, which called for insured values to be adjusted above or below declared values to reflect final completed values, and other provisions deemed unnecessary because they related to the construction period.
. The Assureds insist that they knew nothing of the actual terms of the policy to which Tysers and the Underwriters had agreed until after this litigation commenced. Those factual disputes and others before the trial court do not prevent our resolution of the legal questions presented.
. See Tex.Civ. Prac. & Rem.Code § 51.014(d) ("A district court, county court at law, or county court may issue a written order for interlocutory appeal in a civil action not otherwise appealable under this section if: (1) the parties agree that the order involves a controlling question of law as to which there is a substantial ground for difference of opinion; (2) an immediate appeal from the order may materially advance the ultimate termination of the litigation; and (3) the parties agree to the order.”). Section 51.014(d) has been amended, effective September 1, 2011. Act of May 30, 2011, 82nd Leg., R.S., ch. 203, § 3.01, 2011 Tex. Gen. Laws -, (amendments to Tex. Civ. Prac. & Rem Code § 51.014(d)); id. § 6.01 (effective only in civil actions filed on or after effective date); id. § 6.02 (effective date).
. 267 S.W.3d 277, 288-289 (Tex.App.-Houston [14th Dist.] 2008).
. Id. at 284 (quoting the policy).
. Id. at 285 (quoting the policy).
. Id.
. Id. at 285-286 (quoting the policy).
. Id. at 288.
. Id. at 287 (citing Gibson v. Turner, 156 Tex. 289, 294 S.W.2d 781 (1956), and Westchester Fire Ins. Co. v. Stewart & Stevenson Servs., Inc., 31 S.W.3d 654 (Tex.App.-Houston [1st Dist.] 2000, pet. denied)).
. Id. at 288.
. 53 Tex.Sup.Ct.J. 15 (Oct. 23, 2009).
. 53 Tex.Sup.Ct.J. 562 (Apr. 9, 2010).
. Sun Oil Co. (Delaware) v. Madeley, 626 S.W.2d 726, 731 (Tex. 1981) (" ‘It is the general rule of the law of contracts that where an unambiguous writing has been entered into between the parties, the courts will give effect to the intention of the parties as expressed or as is apparent in the writing. In the usual case, the instrument alone will be deemed to express the intention of the parties for it is objective, not subjective, intent that controls .... Where a question relating to the construction of a contract is presented, as here, we are to take the wording of the instrument, considering the same in the light of the surrounding circumstances, and apply the pertinent rules of construction thereto and thus settle the meaning of the contract.’ ... If, in the light of surrounding circumstances, file language of the contract appears to be capable of only a single meaning, the court can then confine itself to the writing. Consideration of the facts and circumstances surrounding the execution of a contract, however, is simply an aid in the construction of the contract’s language. There are limits. For example, when interpreting an integrated writing, the parol evidence rule circumscribes the use of extrinsic evidence.” (quoting City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515, 518-519 (Tex. 1968)) (emphasis removed)).
. Hubacek v. Ennis State Bank, 159 Tex. 166, 317 S.W.2d 30, 32 (1958) ("When parties have concluded a valid integrated agreement with respect to a particular subject matter, the rule precludes the enforcement of inconsistent prior or contemporaneous agreements.”); see generally Restatement (Second) of Contracts (1981) § 213("(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them. (2) A binding completely integrated agreement discharges prior agreements to the extent that they are within its scope.”).
. 11 Richard A. Lord, Williston on Contracts § 32.7 (4th ed. 1999).
. Tanner Dev. Co. v. Ferguson, 561 S.W.2d 777, 781 (Tex. 1977); see generally Restatement (Second) of Contracts § 214 ("negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish ... (c) the meaning of the writing, whether or not integrated”).
. 156 Tex. 289, 294 S.W.2d 781, 782 (1956).
. Id. at 782-783.
. Id. at 783.
. Id. at 782.
. See McMahon v. Christmann, 157 Tex. 403, 303 S.W.2d 341, 343 (1957).
. Gibson, 294 S.W.2d at 782.
. Id. at 785.
. Id.
. Id.
. Id.
. Id.
. 374 S.W.2d 662, 663 (Tex. 1964).
. Id. (emphasis removed).
. Id.
. Id.
. Id. at 664.
. Id.
. Id.
. See generally 11 Richard A. Lord, Williston on Contracts § 32.13 (4th ed. 1999) (“The rule that added or modified provisions control over printed provisions plainly applies to instances of interlineations or to the striking of a printed portion and the addition of another term. Indeed, deletions made without concomitant additions or substitutions may be considered in order to ascertain the parties' intent, for the deletion alone, even without replacement, clearly manifests an unwillingness to be bound according to the deleted terms, although it may not express to what terms a party would be willing to be bound.” (footnote omitted)).
. Tex. Bus. & Com.Code § 3.114 ("If an instrument contains contradictory terms, typewritten terms prevail over printed terms, handwritten terms prevail over both, and words prevail over numbers.”).
. 11 Richard A. Lord, Williston on Contracts § 32.13 ("Even though the parties will often begin with a preprinted or standard form contract, they will sometimes make additions to or changes in their printed contract, adopting it to their particular transaction. Typically, such changes or additions will be handwritten but they may also be typed or stamped. In accord with the general rule that all parts of a contract are to be given effect, the courts must seek to reconcile inconsistencies between the changed or added terms and the printed matter. Where, however, the printed contract provisions irreconcilably conflict with the provisions added by the parties, the added provisions will control." (footnote omitted)).
. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991).
Dissenting Opinion
joined by Justice WILLETT and Justice LEHRMANN, dissenting.
The Court holds that language manifestly stricken from a contract, and thereby made inoperative by the parties, nonetheless determines the contract’s meaning. The Court believes that industry custom controls and that our precedent demands this outcome. But there is no evidence of such a custom, and old precedent, to the extent that it employs inoperative language to interpret a contract, is overwhelmed by modern views of parol evidence. I respectfully dissent.
I. Deleted Language
Based on what it believes to be the custom of the Lloyd’s market,
The content of a deleted provision, like the negotiations preceding the contract’s execution, is extrinsic and cannot be considered in interpreting the contract. In Sun Oil Co. v. Madeley, 626 S.W.2d 726, 731 (Tex. 1981), we made clear that while a court may consider the circumstances surrounding a contract’s execution, it could do so only as an aid to the interpretation of the contract’s language. Neither surrounding circumstances nor extrinsic evidence may be consulted if they introduce ambiguity, as consideration of paragraph 13 does here. Sun Oil Co., 626 S.W.2d at 732 (“[P]arol evidence is not admissible to render a contract ambiguous .... ” (quoting Lewis v. E. Tex. Fin. Co., 136 Tex. 149, 146 S.W.2d 977, 980 (1941))). Extrinsic evidence, moreover, may be considered only when the contract’s meaning cannot be determined from the text. See Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. CBI Indus., Inc., 907 S.W.2d 517, 521 (Tex. 1995) (holding that extrinsic evidence may not be introduced where the contract is unambiguous); Sun Oil Co., 626 S.W.2d at 732 (same). The circumstances that a court may consider are limited to the facts constituting the context of the contract’s execution, not extrinsic evidence of the negotiations among the parties. Professor Williston explains that the rule permitting consideration of surrounding circumstances should not be read to eviscerate the parol evidence rule by allowing extrinsic evidence; rather, surrounding circumstance “refers to the commercial or other setting in which the contract was negotiated and other objectively determinable factors that give a context to the transaction between the parties” — factors such as the parties’ experience, sophistication, and age.
The evidence that Wellington wishes to admit does not provide context for the negotiation and execution of the contract in a way that elaborates on the meaning of the contract’s language; rather, Wellington seeks to use language the parties rejected to tell us directly what the contract means. Cf. Fiess, 202 S.W.3d at 745 (noting that we construe contracts according to what they say, “not what ... insurers thought [they] said”). Paragraph 13 is not evidence of a surrounding circumstance; it is parol evidence, and the Court gives no reason, beyond two old cases that conflict with the spirit of our recent precedent, for why it should be considered here.
When contracting parties strike through proposed language, the stricken language is inoperative. Though the deleted text is legible, we must not summon dead words for live contracts. See 11 Lord, Williston on Contracts § 32:13 (noting that deletions “manifest!] an unwillingness to be bound according to the deleted terms”). Deleted language is extrinsic to the contract, valid only where the law otherwise permits its consideration. Most other courts considering this issue have reached this conclusion. See, e.g., Gateway Frontier Props., Inc. v. Seiner, Glaser, Komen, Berger & Galganski, P.C., 974 S.W.2d 566, 570 (Mo.Ct.App. 1998) (noting that the majority of “jurisdictions considering the issue have held that stricken language is extrinsic and may not be resorted to in construing an integrated, unambiguous contract”). In one of the earliest opinions to address the effect of deleted language on contract interpretation, the Supreme Court of South Carolina wrote:
[W]e think the notes must be read as if the words erased had never been inserted, and when so read the contract falls within the general rule as to mortgages. Those words were not at all necessary to create a liability on the part of the defendant ..., and if he had desired to exempt himself from such liability he should have inserted in the contracts words of exemption, as contracts must be construed by the words which they contain, and not with reference to words omitted or erased.
Straub v. Screven, 19 S.C. 445, 449-50 (1883).
Meaning derived from stricken language can never be more than a mere inference — a reading of intent into an action without clear meaning — and thus the Court substitutes guesswork for operative language. The Court believes the words were deleted because the parties rejected their substance. I disagree, as explained below. But even if the Court were right in this case, the intent behind deletions will not always — or even usually — be so clear. Parties delete language because of “an unwillingness to be bound according to the deleted terms.” 11 Lord, Williston on Contracts § 32.13. Why they were unwilling to be bound by those terms — or even whether the parties wished not to be bound by them for the same reason
II. The Contract’s Language
The contract must be interpreted without reference to the deleted paragraph 13, and coverage for standby charges is otherwise established by the contract’s language.
When the deletion is honored as a banishment, there is only one reference to standby charges; a clause stating a deductible for standby charges. Surplusage being strongly disfavored in the interpretation of contracts, this alone is strong evidence of coverage. If standby charges were not covered, what would be the rationale for including the deductible? It is “our duty ... to give effect to all contract
Coverage becomes more clear when the deductible provision is considered alongside the contract’s other provisions. Paragraph l.a. of the Basis of Recovery section promises indemnification for “installation and all other costs necessarily incurred and duly justified in repair or replacement.” Paragraph l.d. of the Basis of Recovery section provides that in the event of a loss caused by a covered occurrence, with respect to
repairs ... carried out by vessels ... which the Assured have on charter, ... the cost or the proportion thereof shall be based on the pre-agreed hire or contract rates for such employment when used in or about the repair ... and shall be so recoverable as a claim hereon. In the event that the Assured utilizes its own vessels ... for any repair, ... a reasonable charge in respect of such work shall be recoverable as a claim hereon.
These clauses provide coverage for weather standby charges. Paragraph l.a. does not, by its terms, restrict coverage to actual repair costs. Rather, the provision covers all costs that are “necessarily incurred and duly justified” in the course of repairs, even if those costs are not for actual repairs. Here, Houston and Offshore incurred the weather standby costs in the course of the repairs. Though the immediate cause of the charges was the weather, it is apparent that they were in fact incurred as a result of the covered occurrence — the vessels put on standby were hired to perform covered repairs, but the weather intervened. These vessels, while on standby, continued to be hired for the purposes of repair. Absent clearer exclusionary language in the contract, the standby charges are necessarily incurred and duly justified.
Paragraph l.d. supports this conclusion. It has two relevant clauses. The first deals with hired vessels “used in or about the repair.” Wellington narrowly defines the term “about” and argues that this provision restricts indemnification to costs associated with the use of the vessels while
The second clause of paragraph l.d. indemnifies the Assureds for hire costs related to boats owned by the Assured and “utilise[d] ... for” repairs. Because most of the standby charges at issue are related to vessels owned by Offshore, this provision is especially relevant. As with the previous clause, the contract’s language here does not limit indemnification to the vessel’s expenses while actually engaged in repairs. Crucially, the preposition changes from the previous sentence. There, the parties wrote “used in” — implying actual repairs costs — while here it is “utilized for.” Like “about,” the use of “for” broadens the coverage, indicating that indemnification should include costs incurred with regard to those vessels while they are generally engaged in repair-related activities, even if they are not actively making repairs. Here, Offshore’s vessels were being “utilise[d] ... for” repairs to the platform when the storms forced them to quit. While the storms passed, Offshore and Houston kept those vessels on standby, ensuring their continued availability when repairs could recommence. As such, even as they waited out the storms, the vessels continued to be used for the repairs. Indeed, waiting on standby was their use, meant to ensure that repairs continued with haste.
Thus, standby charges are covered under the contract.
III. Conclusion
The Lloyd’s process is odd and opaque. Even after extensive discovery, it remains unclear how the insurance contract came into being or to what extent its language was accepted by the parties. Taking into account language that was removed from a contract, and trying to read the record of the negotiations, only confuses things. Here, there is a deletion and a failure to delete; there are changed stories; there are conflicting explanations. This is not clear evidence of noncoverage because it is clear evidence of nothing. Considering this extraneous information inhibits rather than enhances clarity, and it makes our interpretive task more difficult. The Court should not have gone down this road in Gibson or Dwyer, and the Court should not compound its mistake today.
We interpret language, not its absence. The expressive content of an act of deletion will frequently be indeterminate; here, it could have been intended to remove coverage, remove redundancy, or remove a sublimit. Deleted language is therefore best regarded as extrinsic evidence, inadmissible for the purposes of varying or contradicting the language of an unambiguous contract. Accordingly, I respectfully dissent.
. See 352 S.W.3d at 464 ("Coverage was negotiated in the London market, and as is customary there, the parties reached agreement by lining through provisions in a form policy.”). The Court cites no authorities confirming the existence of such a custom. Elsewhere, the Court states a broader rule: that "deletions in a printed form agreement must be considered in construing the other provisions." Id. at 471 (emphasis added).
. We have tended to permit evidence only of such contextual facts under the rubric of "surrounding circumstances.” See, e.g., Progressive Cnty. Mut. Ins. Co. v. Kelley, 284 S.W.3d 805, 807-08 (Tex. 2009) (considering
. See also, e.g., Hughes v. Samedan Oil Corp., 166 F.2d 871, 873-74 (10th Cir. 1948) (noting that a court may only look to a deleted provi
. Similarly, the Court's rule would give significance to seemingly insignificant factors, such as the thickness of the line striking a provision; Would deleted language be considered where struck with a thin, pen line but not where struck emphatically with marker that rendered the provision illegible? If the same rule would apply to both situations, how would parties prove what the now-illegible text said?
. And in this case, it is clear that there was no agreement at all.
. Although the Court is nonchalant about calling actual provisions surplusage, the Court is deeply concerned about hypothetical surplusage. The Court writes that the contract cannot be read to cover standby charges — because of the (non?)existence of paragraph 13: "If paragraph Id covered weather standby charges, paragraph 13 would be surplusage in a policy in which it was not struck through.” 352 S.W.3d at 473. This amounts to the conceptually difficult argument that something cannot be covered because if language not actually in the contract were in the contract, that language not in the contract would be surplusage. But paragraph 13 is not in the contract, and so the Court rejects the only reading that gives meaning to each of the contract’s clauses based on its hypothetical interpretation of a contract that is not before this Court and, indeed, may not exist. And, moreover, this is all based on a belief, implicit in the Court's reasoning, that the form contract from which the Underwriters were working could not have contained surplusage as it was written — but perhaps it did, and perhaps that’s why the "surplusage” was removed?
Or perhaps paragraph 13's deletion removed a sublimit, as the brokers argued to the Underwriters. To this the Court again says no, writing that "the way to delete the [sublimit] was to strike the introductory phrase” rather than the whole paragraph. 352 S.W.3d at 472 (emphasis added). The way: in the Court's opinion, there could be no other way to remove a sublimit.
Concurring Opinion
concurring.
I join parts I and III of the Court’s opinion and its judgment. I write to explain my view of why the stricken language of paragraph 13 can and should be considered for context.
First, the stricken language of paragraph 13 need not be considered in determining the policy’s coverage. As explained in part III of the Court’s opinion and by the court of appeals, 267 S.W.3d 277, 283-87, the policy is unambiguous regardless of the presence of the stricken language. The policy provides coverage for repairs and vessels engaged in “or about” repairs; it does not provide coverage for vessels on standby for an extended period of time and not actively preparing for, supporting, or engaged in repairs.
Next, this was not a one-size-fits-all insurance agreement. The insurance contract was negotiated based on Offshore’s particular risks. The striking of paragraph 13 and other language from the form policy is an objective reflection of the setting surrounding the creation of the policy; it assists in giving context to how the policy terms were reached through negotiations. See 352 S.W.3d 462 at 474 (Jefferson, C.J., dissenting) (citing 11 Richard A. Lord, Williston on Contracts § 32.7 (4th ed. 1999)). The strikings show that the parties negotiating the contract were experienced with the type of coverage being negotiated and that “standby charges” was a term of art reflecting a particular, recognized category of risk. Moreover, the presence of the clause providing a deductible for standby charges does not indicate that the policy covers standby charges as the dissent posits. To the contrary, it indicates the opposite: standby charges were a separate, recognized category of expense. The insuring portions of the policy did not provide cov
Reference
- Full Case Name
- The HOUSTON EXPLORATION CO. and Offshore Specialty Fabricators, Inc., Petitioners, v. WELLINGTON UNDERWRITING AGENCIES, LTD., Et Al., Respondents
- Cited By
- 130 cases
- Status
- Published