Insurer Fights $50M Payment Over Cost of Louisiana Sinkhole

By JANET McCONNAUGHEY | October 6, 2014

The collapse of a portion of a salt dome that left a 37-acre sinkhole in swampy land west of Baton Rouge, La., has bubbled up into a $50 million dispute between the mine operator and its insurance company.

Texas Brine LLC wants the Louisiana insurance commissioner to order New York-based Liberty Insurance Underwriters Inc. to pay off on the policy, which was to kick in after the company’s other insurers paid more than $75 million in claims in the collapse. Texas Brine claims the limit has been reached.

Assumption Parish sinkhole on 6/27/2013. Photo: Assumption Parish Police Jury
Assumption Parish sinkhole on 6/27/2013. Photo: Assumption Parish Police Jury

The sinkhole first developed in August 2012 and engulfed marshes and trees as it grew. Though no houses have been swallowed, Texas Brine has bought out homes near the small Bayou Corne community as a precaution.

A federal judge in Louisiana approved a $48.1 million class-action settlement in August, effectively ending the financial matter for local residents. The settlement compensates about 270 people and dismisses individual claims against Texas Brine.

Salt domes are natural underground formations that are common throughout south Louisiana and can be found in association with natural gas deposits. Texas Brine has been burning off natural gas near the sinkhole site.

The company was creating a cavern to extract brine used in the petrochemical industry when scientists say the mine came too close to the salt dome and the sinkhole developed.

Its fight with Liberty is tied to the risk the insurer says Texas Brine took as it mined near the salt dome.

Liberty has asked a federal court in Houston to rule that it owes nothing to Texas Brine because the company knew it was mining close to the edge of the dome.

The insurer alleges a 1998 Texas Brine internal memo warned against raising the height of the cavern roof and widening the diameter, saying “if we get greedy … we could cause a disaster.”

Iris Mack, who teaches risk management at Tulane University Energy Institute in New Orleans, said the insurer’s claim may be shaky.

“This is all about the law of large numbers,” she said. “Insurance companies are happy to take in premiums but nobody wants to pay,” she said.

She said the “law” isn’t limited to corporate coverage. “The insurance company was happy to take my mother’s premium before Hurricane Katrina, but they didn’t want to pay off after the storm,” she said.

Mack said there are 40-50 risks that mining and energy industry managers are taught to consider in developing a project, from land issues such as at the salt dome to weather and geopolitics. Insurance companies that cover the industry know these as well, said Mack, author of a book on mining and energy industry risk.

In its plea to Louisiana Insurance Commissioner Jim Donelon, Texas Brine claims Liberty breached confidentiality by basing its allegations on privileged material provided by Texas Brine to all of its insurers, and making that material public.

According to Texas Brine, Liberty claims the other insurers “inexplicably have paid $76 million in claims that were not owed under their five separate policies,” so the $75 million limit hasn’t been reached.

Neither Liberty nor its federal court attorneys responded to requests for comment on the filing with Louisiana insurance regulators.

A Louisiana judge recently held Liberty in contempt of his order to drop the Texas suit. Texas Brine can recover damages and attorney fees involved in the Texas suit, and Liberty “owes fiduciary duties to its insured, Texas Brine,” Texas Brine spokesman Jim Turner said.

(Associated Press writer Brian Schwaner in New Orleans contributed to this story.)

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