March 18, 2013 Articles

Additional-Insured Provisions: What You Don't Know Can Hurt You

Done incorrectly, they can result in massive unanticipated losses.

By Jack G. Carnegie – March 18, 2013

Additional-insured provisions are one of the most common, and yet least understood, contractual risk-allocation techniques. They are widely used in the energy industry and elsewhere and, depending on the state where the contract is entered into and the subject matter of the contract, they may be regulated by statute. Done correctly, they can help effectively allocate liabilities among the parties and their insurance carriers. Done incorrectly, they can increase the risk associated with the transaction and result in massive unanticipated losses.

One potential disaster is when one party fails to provide the other party with insurance as the contract requires. In that case, the party who was obligated to provide the insurance may be liable for breach of contract and may have to pay what the insurance carrier would have paid had the insurance been provided.

A second potential disaster occurs when a party provides the required insurance, but inadvertently provides more coverage than it was obligated to provide. In that case, the party providing the insurance may find its insurance coverage depleted and inadequate to cover its own potential liabilities.

This is what recently happened to Transocean when, on March 1, 2013, the Fifth Circuit held that BP was entitled to full coverage for the Gulf oil spill under Transocean’s $750 million insurance stack. Ranger Insurance, Ltd v. BP P.L.C., 2013 U.S. App. LEXIS 4512, No. 12-30230 (5th Cir. Mar. 1, 2013). BP’s massive liabilities arising from the Macondo well blowout could easily exhaust this coverage, leaving Transocean with little or no coverage for its own liabilities.

The two seminal Texas Supreme Court cases underlying the Fifth Circuit’s decision, Getty v. INA, 845 S.W.2d 794 (Tex. 1992), and Evanston v. ATOFINA, 256 S.W.3d 660 (Tex. 2008), both were argued by the author of this article, so perhaps we can help bring some clarity to this poorly understood area of law.

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