Hunton Insurance Recovery Blog

A policyholder’s settlement negotiations—even without a formal proceeding like arbitration or mediation—can give rise to its insurer’s duty to defend.

The Fifth Circuit in BPX^[1] found that because the contractor master services agreement (MSA) required the negotiations, the negotiations were not informal and were a type of alternative dispute resolution (ADR) proceeding. This case emphasizes that trade policyholders and risk management teams should give serious consideration to ADR provisions when working up construction contracts, such as ensuring that the ADR provision requires initial negotiations if the parties seek that type of alternative resolution. These provisions not only pave an avenue for dispute resolution out of court but can also serve as the impetus to trigger an insurer to defend, and indemnify, the claim.

Case Background

Oil and gas producer BPX retained a subcontractor to cement an oil well in Reeves County, Texas. The subcontractor used the wrong materials, causing the cement to harden prematurely. The contractors eventually abandoned the well as unsalvageable and drilled a replacement.

BPX demanded payment for its losses from the subcontractor under the parties’ dispute resolution provision of their MSA. That provision required the parties to first “attempt to resolve” a dispute by giving “written notice of the Dispute to the other party” and requesting a “settlement meeting” within 30 days of notice. Only after the parties participated in a settlement meeting and the dispute remained unresolved could the parties proceed with arbitration under the contract language.

The subcontractor gave notice to its insurer of BPX’s demand under its CGL and umbrella insurance policies. The insurer underwriters denied coverage. The underwriters’ declination rejected the subcontractor’s claim, citing broadly to an exclusion for certain types of property damage arising from the insured’s work and that the insured failed to comply with certain conditions under the CGL coverage form.

BPX and the subcontractor nevertheless engaged in settlement discussions. A month later, the subcontractor filed for bankruptcy. The bankruptcy court formalized the parties’ settlement and, as part of that settlement, the subcontractor assigned its insurance claims to BPX.

BPX sued the underwriters to pursue its coverage claims. The underwriters moved to dismiss, arguing that the policyholder’s settlement negotiations did not constitute an ADR proceeding, so their duty to defend a “suit” as defined was not triggered. The magistrate judge granted the motion to dismiss and BPX appealed.

The Court’s Decision

The Fifth Circuit reversed the magistrate’s dismissal in part, holding that the underwriters had a duty to defend and indemnify the subcontractor’s claims. By doing so, it rejected the underwriters’ argument that negotiations were not an ADR proceeding triggering defense of a “suit.”

First, the court found the term “suit” in the policy was ambiguous. The court looked to Texas law to conclude that where a contract of insurance is susceptible of more than one reasonable interpretation, it must be resolved in favor of the insured.^[2] The court then turned to authority in other jurisdictions to resolve the ambiguity. It found that while the Tenth Circuit held that “suit” only meant pre-suit ADR proceedings, which constitute “civil proceedings,” the Florida Supreme Court broadened “suit” to encompass any ADR proceeding irrespective of whether it was technically a “civil proceeding.” Analyzing the conclusions from these two jurisdictions, the Fifth Circuit rejected the insurers’ argument that the negotiations were not an ADR proceeding to trigger defense of a “suit” under the policy, instead concluding that “suit” was ambiguous and the conflict should be resolved in favor of the insured.

Second, the court looked to the construction contract to disregard the underwriters’ argument that BPX’s settlement negotiations with the subcontractor were “informal” and not an ADR proceeding. The parties’ MSA set forth a formal ADR process that required written notice, a request for a meeting, and participation in a settlement meeting.^[3] The MSA contractually demanded a settlement meeting to attempt to resolve the dispute before proceeding to arbitration. The Fifth Circuit clarified that because the negotiations were “conducted pursuant to a contractually required process,” they constituted ADR proceedings under the policy.

As to whether the underwriters’ prior consent was required to engage in settlement discussions, the court held that the underwriters waived the consent requirement by not asserting it in their denial letter. The insured had no incentive to seek consent after the underwriters “repudiated liability.” Further, the court found that the underwriters’ failure to assert consent in the letter meant the insured had no opportunity to cure the defect by seeking consent. 

Takeaways for Insureds

The Fifth Circuit’s decision in BPX supports how imperative precise drafting of the underlying trade contract can be to insurance coverage determinations later on. A policyholder should discuss with its risk management team how it wants to resolve disputes. For example, if settlement discussions are preferred, those should be drafted into the contract. Or, if arbitration is preferred but the policyholder does not want to be bound to the decision, the policyholder can seek language that makes the arbitration non-binding. Strong contractual provisions—like dispute resolution procedures—can serve as a basis to push back on insurance companies’ denials of what are meritorious claims for coverage made by their policyholders.

Further, the court found the term “suit” ambiguous not only by looking to law in its own jurisdiction, but also by analyzing persuasive authority from other jurisdictions to resolve the ambiguity. Looking outside the policy to conflicting interpretations in different jurisdictions speaks to how broadly some courts will reach to ascertain ambiguity in an insurance policy in favor of policyholders. Policyholders should be apprised of how jurisdictions sway on certain coverage issues. This knowledge can assist in determining which jurisdiction should govern when inserting and agreeing to a forum selection provision in a contract.

^[1] BPX Prod. Co. v. Certain Underwriters at Lloyd's London, No. 23-20034, 2025 WL 2952911 (5th Cir. Oct. 20, 2025).

^[2] See BPX, 2025 WL 2952911, at *4.

^[3] Id. at *3.