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.

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