Second Circuit Affirms $54 Million Jury Award in Favor of Insured After Insurers Deny Claim for Venezuela Oil Cargo Loss

In Citgo Petroleum Corp. v. Ascot Underwriting Ltd., the Second Circuit Court of Appeals affirmed a $54 million jury award in favor of Citgo after agreeing with the lower court’s finding that Venezuela’s political conditions preceding the oil cargo seizure constituted an “insurrection,” which is covered under Citgo’s insurance policy.

In January 2021, Citgo brought an action against its marine cargo reinsurance companies for breach of contract, based on allegations that the reinsurers improperly denied coverage for loss of oil cargo seized by Venezuelan authorities. In 2016, Citgo arranged for the shipment of a million barrels of crude oil from Petróleos de Venezuela, S.A. (PDVSA) to be made between April 1, 2016, and April 30, 2021, with title transferring to Citgo once the cargo was loaded onto the delivery vessel. In 2019, after barrels were loaded onto a chartering vessel in Venezuela for transport to Aruba, Venezuelan authorities halted and eventually seized the cargo under the threat of force due to PDVSA being subject to newly implemented U.S. sanctions and Citgo’s corresponding inability to pay PDVSA for the cargo.

At the time, Citgo had a marine cargo reinsurance policy covering up to $100 million in losses from the time the cargo becomes Citgo’s risk. The policy, in relevant part, contained an institute cargo clause providing coverage for loss or damage to the subject-matter insured caused by “war civil war revolution rebellion insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power.”

In July 2019, Citgo provided a notice of circumstances to the reinsurers and provided additional updates, to which the reinsurers replied that the loss of the cargo would not be covered under the policy. In October 2019, Citgo first raised the institute cargo clause to argue that the conditions for “detainments arising from insurrection or civil strife” were met because two governments laid competing claims to authority in Venezuela, and in February 2020, once the cargo had been seized, Citgo filed its claim. Nonetheless, the reinsurers maintained that loss of cargo was unrelated to insurrection, civil strife, or any other war risk sufficient to trigger coverage and denied coverage in March 2020 because the conditions in Venezuela did not constitute an “insurrection” within the meaning of the institute cargo clause. In response, Citgo initiated its coverage action.

On cross-motions for summary judgment, the Southern District of New York granted Citgo’s motion for partial summary judgment, determining that an “insurrection” had occurred in Venezuela within the meaning of the policy’s institute cargo clause. After a five-day trial, judgment was entered upon jury verdict for Citgo on three of four issues presented, finding only that the reinsurers were not liable for late return penalties or demurrage charges under the policy. On appeal, the reinsurers challenged the lower court’s summary judgment decision and orders on judicial notice.

Initially noting that the term “insurrection” in the policy’s institute cargo clause was undefined and ambiguous given that the various dictionary definitions provided a reasonable basis for a difference in opinion as to what “insurrection” means in this context and did not resolve whether the Maduro regime fit that definition, the Second Circuit turned to the definition of “insurrection” set forth in a prior appellate decision 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.” Therein, the court identified three elements for insurrection: (1) violence; (2) an uprising to overthrow and seize powers; and (3) a constituted government.

In reviewing the lower court’s decision, the court noted that the parties disagreed only as to the legal consequences of otherwise undisputed key facts, such as that Nicolás Maduro won the 2018 election; Juan Guaidó was declared to be interim president by the National Assembly; episodes of violence attributable to supporters of Maduro took place; Maduro’s goal was to remain in power in Venezuela after his term had ended, notwithstanding the actions of the duly constituted government; President Trump and U.S. Secretary of State Michael Pompeo recognized Guaidó as the interim president of Venezuela; and Maduro retained de facto control over the Venezuelan government and military.

The main legal consequence disputed by the reinsurers was whether the “uprising” element was met because Guaidó never took de facto control of Venezuela, meaning Maduro could not have led an uprising to overthrow Guaidó or seize his powers. Under New York law, unless either party presents extrinsic evidence about their intent entering into a policy agreement to establish the intended meaning of a disputed term, the doctrine of contra proferentem requires courts to resolve ambiguities against the insurer and in favor of coverage. Because neither party provided any extrinsic evidence bearing on their intended meaning of the term “insurrection” from either party, the court determined the lower court had not erred in reading the definition of the prior appellate decision “in a way that supports coverage.” Thus, the court found that de facto control by Guaidó was not a requirement since Maduro remained in power only by depriving the National Assembly and Guaidó of their powers and construed the policy broadly to find that the Maduro regime constituted an “uprising ... acting for the specific purpose of overthrowing the constituted government and seizing its powers.”

Ultimately, in applying the rule of contra proferentem, the Second Circuit resolved the ambiguity against the reinsurers and in favor of Citgo. Based on the uncontroverted facts, the Second Circuit found that the district court did not err in determining that the actions of Maduro’s regime were “violent” and constituted an “uprising” act to overthrow a “constituted government,” and thus, as a matter of law, the Maduro regime constitutes an insurrection within the meaning of the policy.

The Second Circuit also found that the lower court properly took judicial notice of the fact that Guaidó — the president of Venezuela’s National Assembly — assumed the role of interim president of Venezuela and that a majority of Venezuela’s National Assembly reconvened in the capital and voted to reelect Guaidó as interim president of Venezuela. The court further upheld the lower court’s jury instruction that the policy’s “arising from” language required only a but-for causal relationship between the insurrection and the loss. Accordingly, the court affirmed the district court’s rulings and judgment in all respects.