HNRK Coverage Corner

Last month, in CITGO Petroleum Corp. v. Ascot Underwriting Ltd., Case No. 24-0227-cv, the Second Circuit affirmed a victory for CITGO Petroleum Corporation (“CITGO”) when it held that oil seized in Venezuela was covered by a marine cargo reinsurance policy (the “Policy”) that provided coverage for losses caused by an “insurrection.”  On appeal, the Reinsurers argued Venezuela’s instability did not qualify as an insurrection, and they also urged a proximate-cause standard (rather than but-for) for the loss.

Background

In October 2012, Hugo Chávez won reelection for a six-year term as president of Venezuela, but he died in early 2013 and his vice president, Nicolás Maduro, was elected to serve the remainder of the term.  When the opposition party came to power in Venezuela’s National Assembly, Maduro and his supporters began targeting those politicians. 

In 2018, Maduro called for a presidential election and claimed that he won, but the National Assembly rejected the election as illegitimate and declared Juan Guaidó to be the interim president until fair elections could be held.  Maduro refused to cede control of the government. 

Meanwhile, on January 25, 2019, the U.S. recognized Guaidó as the legitimate president of Venezuela.  The U.S. also extended existing sanctions to cover several new entities, including the state-owned Petroleos de Venezuela, S.A. (“PDVSA”).

In 2016, CITGO purchased oil from PDVSA, to be delivered between 2018 and 2021.  The purchase agreement transferred assignment and risk for the oil from PDVSA to CITGO once loaded onto the delivery vessel.  To insure the oil, CITGO purchased the Policy, which contained an “Institute War Clauses (Cargo)” condition that provided in relevant part that the Policy covered loss or damage “arising from . . . war civil war revolution rebellion insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power[.]”

On January 27, 2019, a vessel chartered by CITGO to carry nearly 1 million barrels of oil from Venezuela to Aruba—the Gerd—requested clearance to depart Venezuela the next day, but was never given clearance because the U.S. sanctions, instituted two days earlier, did not allow CITGO to pay PDVSA.  A standoff ensued between CITGO and PDVSA, which both claimed ownership of the oil that had been loaded on board the vessel.  In February 2020, representatives of the Venezuela military and of PDVSA, accompanied by a Venezuelan military vessel, ordered the captain of the Gerd to return the oil to PDVSA.  The captain issued a formal letter of protest but then complied with the command.

CITGO’s Insurance Claim and the Ensuing Coverage Action

Citing the insurrection language of the Policy, CITGO submitted a claim for insurance.  The Reinsurers denied coverage, and CITGO sued for breach of contract.  Following discovery, the parties cross-moved for summary judgment.  The district court granted CITGO’s motion in part, finding as a matter of law that the losses were covered because they arose from an “insurrection,” and directed a trial on causation and damages.  A jury awarded CITGO damages $54,235,187.24 plus interest, and the Reinsurers appealed both the district court’s summary judgment decision and its jury instruction on causation at trial. 

The Circuit Holds that CITGO’s Losses Were Covered

The appellate Court affirmed the district court’s summary judgment decision that CITGO’s losses were covered by the Policy’s insurrection clause.  Because the Policy did not define “insurrection,” the Court looked to how it had interpreted the term in a prior decision.  In Pan American World Airways, Inc. v. Aetna Casualty & Surety Co. (“Pan Am.”), the Second Circuit defined “insurrection” as “(1) a violent uprising by a group or movement (2) acting for the specific purpose of overthrowing the constituted government and seizing its powers.” 

The Court then applied this definition to the facts in the summary judgment record and determined that the evidence was undisputed that the situation in Venezuela was an insurrection as defined by Pan Am.:  Maduro and his allies used violence with the aim of remaining in power “notwithstanding the actions of the duly constituted government.”  (And, the Court explained, whether Guaidó’s government was “duly constituted” was conclusively resolved by the U.S. government’s official recognition that Guaidó was Venezuela’s interim president.)

The Court went on to explain that even if there were doubts as to Maduro’s violence or his intent, the rule of contra proferentem would tip the case in CITGO’s favor because an ambiguity in what “insurrection” means must be resolved against the Reinsurers.

The Circuit Affirms the District Court’s But-For Causation Instruction

The Reinsurers also appealed the district court’s jury instructions, arguing that the Policy’s “arising from” language necessitated a jury instruction on proximate cause.  The Court held that the Reinsurers waived this argument when, at trial, they withdrew their objection to the jury instructions after the district court asked for a signed letter, subject to sanctions for frivolity, due the next day explaining the basis for the proximate cause instruction. 

In any event, the Court continued, the Reinsurers’ argument would fail even if they had not waived their objection because “arising out of” requires a but-for causation analysis under New York law (which governs the Policy).