chevron-down Created with Sketch Beta.
    May 21, 2013 Articles

    Fifth Circuit Reverses in Favor of BP in Deepwater Horizon Litigation

    In a major victory for BP, the Fifth Circuit ruled that BP was entitled to coverage as an additional insured under the policies of Transocean, owner of the oil rig that exploded

    by Charles Platto, Joseph G. Grasso, and Michael Menapace [1]

    The same week in which the trial of the multibillion dollar claims by the U.S. government and private parties against BP and the other parties involved with the Deepwater Horizon drilling rig was getting under way in federal court in New Orleans, the Fifth Circuit Court of Appeals was putting the finishing touches on its decision in the declaratory judgment case brought by Transocean’s primary and excess insurers against BP. It involved BP’s claim for coverage as an additional insured under the policies of Transocean, owner of the rig.

    On Friday, March 1, 2013, the Fifth Circuit unanimously reversed the decision of the U.S. District Court for the Eastern District of Louisiana, which had previously granted judgment in the insurers’ favor denying coverage to BP. In a major victory for BP, the Fifth Circuit ruled that BP was entitled to coverage as an additional insured under the Transocean policies.[2]

    We have been following and reporting on this case since its inception.[3] As previously reported, Transocean maintained primary and excess liability coverage in the amount of $750 million covering the period during which the explosion of the Deepwater Horizon drilling rig took place.[4] Transocean was a contractor to BP, and BP and its affiliated entities were named as additional insureds under the policies.[5] The dispute with the insurers arose because under the drilling contract between BP and Transocean, Transocean was only obligated to indemnify BP and to name BP as an additional insured for surface pollution, and the major pollution claims resulted from subsurface pollution caused by the well blowout.[6] However, there was a question as to whether the insurance policies were similarly limited.

    In its November 15, 2011, decision, the district court, applying Texas law, held that the additional insured coverage was only as broad as the indemnity requirements in the underlying contract and therefore denied coverage to BP and issued judgment on the pleadings in favor of the insurers.[7]

    The Fifth Circuit ruled to the contrary:

    Applying Texas law, especially as clarified since the district court’s decision, we find that the umbrella insurance policy [and the primary insurance policy as well]—not the indemnity provisions of Transocean’s and BP’s contract—controls the extent to which BP is covered for its operations under the Drilling Contract. Because we find the policy imposes no relevant limitations upon the extent to which BP is covered, we REVERSE the judgment of the district court and REMAND the case for entry of an appropriate judgment in accordance with this opinion.[8]

    Reasons for Reversal

    The Fifth Circuit reached this conclusion for the following reasons.

    Initially, the court of appeals noted that the $50 million primary policy issued by Ranger Insurance, Ltd., and the $700 million excess policies had materially identical provisions, so it treated all insurers as one for purposes of its decision.[9] The drilling contract between Transocean and BP required that Transocean maintain insurance covering its operations and that BP be named as an additional insured under Transocean’s policies.[10] The parties agreed that the drilling contract was an insured contract under the policies. The issue in contention was the scope of BP’s insurance coverage.[11]

    Under article 24 of the drilling contract, Transocean was responsible for, and indemnified BP with respect to, pollution or contamination originating on or above the surface of the water, whereas BP was responsible for, and indemnified Transocean with respect to, pollution or contamination not assumed by Transocean—that is, originating from subsurface conditions (such as the well blowout).[12] The district court had found that the drilling contract only required Transocean to carry insurance and to name BP as an additional insured for above-surface pollution, and that the policies that were obtained by Transocean only provided coverage to the extent of Transocean’s contractual liabilities.[13] The court of appeals disagreed.

    The court of appeals conducted a de novo review of the district court’s decision granting judgment on the pleadings to the insurers and of the contract and the policies.[14] It applied standard principles under Texas law, holding that if there are ambiguities in, or more than one reasonable interpretation of, a policy, coverage will be interpreted in favor of the insured.[15] As applied to this case, the court was guided by the following principle:

    Under Texas law, to discern “whether a commercial umbrella insurance policy [or the primary policy], that was purchased to secure the insured’s indemnity obligation in a service contract with a third party also provides direct liability coverage for the third party,” we look to the “terms of the umbrella policy itself,” instead of looking to the indemnity agreement in the underlying service contract. We apply this analysis so long as the indemnity agreement and the insurance coverage provision are separate and independent.[16]

    Applying Texas Law

    Applying this analysis, the court of appeals looked first to the policy language and applied Texas law—as set forth in Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc.;[17] Aubris Resources LP v. St. Paul Fire & Marine Insurance Co.[18] (which the district court had distinguished); and Pasadena Refining System, Inc. v. McCraven[19] (which came down after the district court’s opinion)—in concluding that even if the indemnity obligations of Transocean were limited under the drilling contract, only the policy itself may establish limits on the extent to which an additional insured is covered.[20] The court found that, as in ATOFINA, Aubris, and Pasadena Refining, the fact that the policy referred to the underlying contract in the definition of “additional insured” was not sufficient, without more, to impose any limitations of liability in the underlying contract, on the policy obligations.[21] The court of appeals concluded that “there is no relevant limitation to BP’s coverage under the policy as an additional insured, that is, so long as the insurance provision and the indemnities clauses in the Drilling Contract are separate and independent.”[22] The court of appeals then went on to hold that “it is ‘unmistakable’ that the provision in the Drilling Contract extending direct insured status to BP is separate and independent from BP’s agreement to forego contractual indemnity in various other circumstances.”[23]

    The court of appeals’ final conclusion was as follows:

    Because we find that the umbrella policies [and the underlying policy] between the Insurers and Transocean do not impose any relevant limitation upon the extent to which BP is an additional insured, and because the additional insured provision in the Drilling Contract is separate from and additional to the indemnity provisions therein, we find BP is entitled to coverage under each of Transocean’s policies as an additional insured as a matter of law.[24]

    Thus, the bottom line is quite simple. Even if the obligations of an additional insured are limited in an underlying contract, if the insurance policy is broader than those obligations, unless the policy provides specific limitations on coverage to the additional insured—by specific reference to the limitations in the underlying contract or otherwise—at least under Texas law, the policy provides the full extent of coverage to the additional insured.

    This case represents an important development in additional insureds law; undoubtedly, in the future carriers will tailor their policies more carefully to limit coverage to additional insureds if there are limits in the underlying contracts. The decision also represents a major win for BP, to the tune of $750 million. Of course, compared with the billions BP has already spent as a result of the Gulf oil spill and the billions at issue in the current trial, $750 million may not seem like so much, but, as they say, every little bit helps.

    Keywords: litigation, excess policy, indemnification, insured contract, limitation of liability, umbrella policy, underlying contract, Transocean, BP

    Charles Platto teaches insurance law and litigation at Fordham Law School. Joseph G. Grasso is with Wiggin and Dana LLP in Philadelphia. Michael Menapace is with Wiggin and Dana LLP in Hartford, Connecticut.

     

    [1] Charles Platto is an adjunct professor of insurance law and litigation at Fordham Law School, a vice chair of the ABA TPS Insurance Coverage Litigation Committee, and a member of the editorial board of the Insurance Litigation Reporter. He was formerly chair of the Insurance Practice Group at Wiggin and Dana LLP, and previously a partner at Cahill Gordon & Reindel, and is now an independent arbitrator and mediator on domestic and international commercial and insurance matters. Mr. Platto, Mr. Grasso, and Mr. Menapace, along with Tim Diemand, are coeditors of the Handbook on Additional Insureds, published by the American Bar Association in 2012.

    Joseph G. Grasso is the current cochair of the Insurance Practice Group of Wiggin and Dana LLP and chair of the Committee on Marine Insurance and General Average of the U.S. Maritime Law Association. He is counsel to the American Institute of Marine Underwriters and wrote the Institute’s amicus brief to the United States Supreme Court in the Exxon Valdez case.

    Michael Menapace is an insurance and reinsurance litigator at Wiggin and Dana LLP in Hartford, Connecticut. He is an adjunct professor of insurance law at Quinnipiac Law School.
    [2] Ranger Ins., Ltd. v. BP P.L.C., 710 F.3d 338, No. 12-30230, 2013 U.S. App. LEXIS 4512, (5th Cir. Mar. 1, 2013).
    [3] Insurance Litigation Reporter, Vol. 32, No. 9; Vol. 32, No. 14; Vol. 33, No. 1; Vol. 33, No. 20.
    [4] Ranger Insurance, Ltd., 710 F.3d at 341.
    [5] Ranger Insurance, Ltd., 710 F.3d at 342-343.
    [6] Ranger Insurance, Ltd., 710 F.3d at 340-343.
    [7] In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, MDL No. 2179,  2011 U.S. Dist. LEXIS 131693 (E.D. La. Nov. 15, 2011).
    [8] Ranger Insurance, Ltd., 710 F.3d at 341.
    [9] Ranger Insurance, Ltd., 710 F.3d at 341.
    [10] Ranger Insurance, Ltd., 710 F.3d at 342.
    [11] Ranger Insurance, Ltd., 710 F.3d at 342-343.
    [12] Ranger Insurance, Ltd., 710 F.3d at 343 n.5.
    [13] Ranger Insurance, Ltd., 710 F.3d at 343.
    [14] Ranger Insurance, Ltd., 710 F.3d at 343-344.
    [15] Ranger Insurance, Ltd., 710 F.3d at 343-344.
    [16] Ranger Insurance, Ltd., 710 F.3d at 344 (citations omitted).
    [17] 256 S.W.3d 660 (Tex. 2008).
    [18] 566 F.3d 483 (5th Cir. 2009).
    [19] Nos. 14-10-00837-CV, 14-10-00860-CV, 2012 Tex. App. LEXIS 3823 (Tex. App. May 15, 2012).
    [20] Ranger Insurance, Ltd., 710 F.3d at 345-348.
    [21] Ranger Insurance, Ltd., 710 F.3d at 348.
    [22] Ranger Insurance, Ltd., 710 F.3d at 348 (citations omitted).
    [23] Ranger Insurance, Ltd., 710 F.3d at 349 (citations omitted).
    [24] Ranger Insurance, Ltd., 710 F.3d at 350.

    Copyright © 2013, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).