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by Alexander Masotto

The Fifth Circuit in BPX Production Company v. Certain Underwriters at Lloyd's London, No. 23-20034, 2025 WL 2952911 (5th Cir. Oct. 20, 2025), revived oil and gas producer BPX Production Company’s contractual coverage claims as assignee of oilfield services company BJ Services. The Court held that insurers may not leverage procedural “consent-to-suit” conditions after denying coverage and that underlying liability and indemnity can be litigated together in a coverage action when the insurer denied the duty to defend. At the same time, the Court affirmed the dismissal of extra-contractual third-party bad-faith claims, and clarified the limits of Stowers liability where the insured has obtained a bankruptcy discharge.

Background

BPX retained BJ Services to cement production casing on a West Texas well. BJ Services used the wrong cement components, causing the slurry to set prematurely and creating a 7,000-foot cement plug. The well was ultimately abandoned and redrilled. BPX invoked the Master Services Agreement’s (“MSA”) dispute-resolution process and demanded payment. BJ Services notified its insurers and requested a defense and indemnity. However, Insurers denied coverage, citing a property-damage exclusion and noncompliance with requirements tied to a supplemental endorsement. In addition, insurers generally reserved their rights but did not identify lack of consent as a basis to refuse any defense.

Notwithstanding the denial, BPX and BJ Services proceeded with settlement negotiations pursuant to the MSA. Soon after, BJ Services filed Chapter 11, and, in January 2022, the bankruptcy court approved a settlement by which BJ Services assigned to BPX “any and all” insurance claims against Insurers related to Insurers’ refusal to defend and indemnify, and BPX released its claims against BJ Services. BPX, standing in BJ Services’ shoes, then sued Insurers for breach of the duties to defend and indemnify, and for extra-contractual claims.

The Bankruptcy

BJ Services’ Chapter 11 filing intervened while BPX’s claim was pending. Rather than litigate liability within the estate (or pursue a late proof of claim), the bankruptcy court approved a stipulation and agreed order assigning BJ Services’ insurance claims against Insurers to BPX in full satisfaction of BPX’s claims against BJ Services, and expressly foreclosing BPX from pursuing recovery against BJ Services or the estate. The Fifth Circuit held that this structure did not bar BPX’s pursuit of coverage. Relying on its precedent, the Court reaffirmed that a debtor’s discharge and a creditor’s failure to file a proof of claim do not extinguish the creditor’s ability to prosecute a liability-fixing suit for the limited purpose of recovering from insurance proceeds. The Court further recognized that where an insurer wrongfully refuses to defend, underlying liability and coverage may be tried together in the coverage action, avoiding duplicative and non-adversarial proceedings that bankruptcy realities often produce. See Great Am. Ins. Co. v. Hamel, 525 S.W.3d 655, 669 (Tex. 2017).

Duty to Defend - Duty to Indemnify

Ultimately, the Court held that the CGL policy defined “suit” to include “any other alternative dispute resolution proceeding” in which damages are claimed and to which the insured submits with the insurer’s consent. The Court held that the MSA’s formal, mandatory dispute-resolution process qualified as an “alternative dispute resolution proceeding,” distinguishing “informal” pre-suit discussions addressed in prior unpublished authority. Crucially, the Court held that Insurers waived any consent-to-ADR requirement by wrongfully denying coverage without asserting lack of consent as a ground. Under Texas law, an insurer that wrongfully refuses to defend forfeits reliance on post-loss procedural conditions. Construing ambiguity in favor of the insured, the Court rejected a cramped view of “suit” that would exclude ADR not amounting to a civil proceeding.

Although indemnity typically depends on the outcome of the underlying liability action, the Court applied Texas’s Hamel doctrine to permit adjudication of both underlying liability and coverage in the same suit when the insurer refused to defend and bankruptcy dynamics make a fully adversarial underlying judgment unlikely. The bankruptcy court’s assignment and BPX’s agreement not to seek estate recovery did not preclude BPX’s indemnity claims; a discharge or failure to file a proof of claim does not allow an insurer to escape coverage where liability may be fixed solely to collect from insurance.

Extra-Contractual Claims

Lastly, the Court affirmed the dismissal of BPX’s extra-contractual duty-of-good-faith claim. Texas recognizes no common-law third-party bad-faith claim outside the Stowers duty. See Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., 236 S.W.3d 765, 776 (Tex. 2007). Any Stowers theory also fails because a Stowers claim requires actual excess liability imposed on the insured. BJ Services’ bankruptcy discharge eliminates the requisite “legal injury” to the insured, foreclosing Stowers-based recovery as a matter of law.

Significance

Insurers should recognize that contractually mandated alternative dispute resolution (ADR) processes can trigger the duty to defend under commercial general liability (CGL) policies that broadly define “suit” to include ADR proceedings. Insurers risk waiving key procedural defenses, such as consent-to-suit and settlement-without-consent clauses, if they wrongfully deny coverage without timely raising these defenses. Moreover, bankruptcy of the insured does not absolve insurers of their indemnity obligations; assignments of insurance claims through bankruptcy proceedings remain enforceable. Finally, insurers should note that extra-contractual third-party bad-faith claims are limited by Stowers liability principles, which require actual excess liability to the insured, a condition often negated by bankruptcy discharge. Overall, this ruling highlights the need for insurers to carefully evaluate coverage denials, defense obligations, and procedural conditions early to avoid forfeiture of rights and unexpected exposures.

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The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.