March 04, 2015 Practice Points

    Deepwater Horizon: Scope of Additional Insured Coverage Depends on Contract with Named Insured

    The Texas Supreme Court recently ruled on the scope of additional insured coverage under an insurance policy may be driven by the additional insured’s separate contract with a named insured

    by Sherilyn Pastor

    The Texas Supreme Court recently issued a ruling relating to how the scope of additional insured coverage under an insurance policy may be driven by the additional insured’s separate contract with a named insured. See In Re Deepwater Horizon, No. 13-0670 (Tex. Feb. 13, 2015).  The Texas court’s ruling was issued in connection with a federal suit involving insurance for losses arising from the April 2010 Deepwater Horizon explosion and oil spill.  Developer BP American Production Company and its affiliated companies (collectively BP) sought $750 million in coverage for their losses as additional insureds under the liability policies purchased by rig owner Transocean Offshore Deepwater Drilling, Inc. and its affiliates (collectively Transocean).  In response to questions certified to it by a federal court, a majority of the Texas Supreme Court held that BP’s coverage was linked to and limited by its drilling contract with Transocean because Transocean’s insurance policies incorporated the drilling contract and therefore required examination of it.

    BP had argued to the federal court that the Texas Supreme Court's 2008 decision inEvanston Insurance Co. v. ATOFINA Petrochemicals Inc., 256 S.W.3d 660 (Tex. 2008), required it to look solely at the four corners of the Transocean policies, not BP’s contract with Transocean, when determining the existence and extent of BP’s additional insured coverage.  Transocean’s insurers disagreed, arguing that BP’s additional insured coverage was limited to Transocean's liabilities because the insured parties’ contractual undertakings so required. They urged the court that under the drilling contract, BP had assumed liability for claims arising from subsurface pollution and therefore BP’s additional insured status extended only to its above-surface pollution liability losses.

    A federal trial court agreed with the insurers, ruling that Transocean’s policies incorporated the drilling contract’s limitations with respect to BP's additional insured status.  BP appealed and the U.S. Court of Appeals for the Fifth Circuit initially reversed the trial court’s order, holding that the insurance policies did not, by their own terms, limit coverage for additional insureds.  On rehearing, however, the Fifth Circuit vacated its order, observing that it was unclear whether Texas law compelled it to rely exclusively on the Transocean policies or to read the policies and the drilling contract together when determining BP's coverage.  The Fifth Circuit therefore certified the following questions to the Texas Supreme Court:

    1. Whether Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), compels a finding that BP is covered for the damages at issue, because the language of the umbrella policies alone determines the extent of BP’s coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the Drilling Contract are “separate and independent”?

    2. Whether the doctrine of contra proferentem applies to the interpretation of the insurance coverage provision of the Drilling Contract under the ATOFINA case, 256 S.W.3d at 668, given the facts of this case?

    See In re Deepwater Horizon, 728 F.3d 491, 500 (5th Cir. 2013).

    The Texas Supreme Court ultimately held that BP’s status as an additional insured was inextricably intertwined with drilling contract limitations on the extent of coverage to be afforded under Transocean’s insurance policies.  As Transocean was obligated under the drilling contract to insure and indemnify BP only for above-surface pollution, BP’s additional insured coverage was so limited.

    In analyzing the issues, the court did not abandon the “separate and independent” test articulated in prior Texas authorities, including Evanston.  The court, instead, explained that it was required to “determine the scope of coverage from the language employed in the insurance policy, and if the policy direct[ed it] elsewhere, [it] will refer to an incorporate document to the extent required by the policy.” The court also noted that unless obligated to do so by the terms of an insurance policy, it would not consider coverage limitations in underlying transactional documents.

    The Texas Supreme Court observed that Transocean’s policies insured those whom Transocean “is obliged” by an “Insured Contract” to provide insurance. This language it held pointed to the “additional insured” provision in the underlying drilling contract, which limited BP’s coverage to liabilities assumed by Transocean under the terms of the contract (i.e., above-surface pollution risk).  The court therefore ruled that BP’s additional insured status was linked, at least in some respect, to the extent of Transocean’s indemnity obligations.  That being the case, the court looked to the drilling contract and, on finding it unambiguous, limited BP’s insured status, and held BP was not entitled to coverage under the insurance policies for subsurface pollution liabilities.

    Given its ruling on the first certified question, the court did not reach the second issue certified by the Court of Appeals.

     

    Keywords:  insurance; coverage; litigation; Texas; Fifth Circuit; Deepwater Horizon; named insured; additional insured; insured contract; contractual indemnity; pollution; pollution liability

    Sherilyn Pastor is with McCarter & English, Newark, NJ

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