Deepwater Horizon

Policy Language

Transocean obtained $750 million of insurance coverage in various layers, which extended status as an additional insured to “[a]ny person or entity to whom the 'Insured' is obliged by oral or written 'Insured Contract' ' to provide insurance such as afforded by [the] Policy.” An “Insured Contract” was defined in the policies as “any written or oral contract entered into by the 'Insured' ' and pertaining to business under which the 'Insured' assumes the tort liability of another party to pay for 'Bodily Injury' [or] 'Property Damage' ' to a 'Third party' ' .” The policies also specified that “where required by written contract, bid or work order, additional insureds are automatically included hereunder ' .”

BP's Pursuit of Additional Insured Coverage

Having paid tens of billions of dollars in expenses and claims related to the pollution from its Macondo Well, BP could not seek contractual indemnity from Transocean, as BP had agreed to indemnify Transocean for claims arising from pollution originating below the surface. Instead, BP made a claim directly against Transocean's liability insurers in the capacity as an additional insured on Transocean's policies.

BP argued that the indemnity and additional insured provisions contained separate and independent obligations and that any limitations on insurance coverage had to be included within the four corners of the insurance policies. Thus, once the insurers agreed to name BP as an additional insured, any restrictions on the extent of coverage owed to BP as an additional insured had to come only from the policies and not from the drilling contract.

Consequently, BP contended that it was covered under Transocean's policies for subsurface pollution for the following reasons:

• The drilling contract was an “Insured Contract”;
• The contract obligated Transocean to name BP as an additional insured;
• BP was therefore an “Insured” as defined by the policies; and
• Once BP was named as an additional insured, there was no language in the policies limiting the additional insured status only to that required by the drilling contract.

BP premised its argument on the decision of the Texas Supreme Court in Evanston Ins. Co. v. Atofina Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), which recognized that the named insured could secure more coverage for the additional insured than was contractually required if it failed to include language in the policy linking the coverage to what was agreed in the contract requiring additional insured coverage.

Fifth Circuit Ruling

Following that reasoning, the U.S. Court of Appeals for the Fifth Circuit initially agreed with BP that “where an additional insured provision is separate from and additional to an indemnity provision, the scope of the insurance requirement is not limited by the indemnity claims.” In re Deepwater Horizon, 710 F.3d 338, 350 (5th Cir.), op. withdrawn and questions certified, 728 F.3d 491 (5th Cir. 2013), questions answered, In re Deepwater Horizon, No. 13-0670, 2015 WL 674744 (Tex. Feb. 13, 2015). Concluding that the additional insured provision in the drilling contract was separate from and additional to the indemnity provisions and that the policies did not impose any limitation on the extent to which BP was made an additional insured, the Fifth Circuit held that BP was insured on Transocean's policies for the subsurface pollution claims, even though BP had agreed to indemnify Transocean for this risk.

The decision of the panel sent shockwaves through the insurance industry as insurers faced possible liability for risks that their insureds had not agreed to undertake. In some instances, the additional exposures could exhaust the limits of coverage, leaving the named insured without insurance for risks that the named insured had agreed to be responsible.

Given the potential impact on insurance law and the insurance industry, the insurers and Transocean asked the Fifth Circuit to withdraw its decision and certify the case to the Texas Supreme Court to decide whether Texas case law compelled a finding that the policy language alone determined the extent of BP's additional insured coverage or whether some reference could be made to the drilling contract to determine the extent of additional insured coverage.

Texas Court's Analysis of Deepwater Horizon

When the Fifth Circuit agreed to withdraw its opinion, the Texas Supreme Court was presented with the opportunity in In re Deepwater Horizon, No. 13-0670, 2015 WL 674744 (Tex. Feb. 13, 2015). Although the Texas Supreme Court agreed with BP that the extent of BP's coverage began with the four corners of the policies, the court further held that insurance policies can incorporate limitations on coverage from extrinsic documents. For instance, “following form” excess policies are an example of restricting coverage to that afforded by another policy. However, the court cautioned that unless it is “obligated to do so by the terms of the policy,” it will “not consider coverage limitations in underlying transactional documents.” Id. at *5. Therefore, the scope of indemnity and insurance clauses may not be congruent, and an insured may purchase more or less coverage for an additional insured than the underlying service contract requires.

The work of the court in Deepwater Horizon was simple ' to determine whether the policies and drilling contract were congruent or incongruent. Did the policies incorporate the limitation on the coverage extended to the additional insured in the drilling contract?

Reviewing the language of the policies, the Texas Supreme Court noted that BP was not expressly named as an insured. Instead, the policies conferred coverage on BP by reference to the drilling contract: Insured status was conferred on anyone “to whom the 'Insured' is obliged by oral or written 'Insured Contract' ' to provide insurance such as afforded by [the] Policy” or “where required by written contract.” As the insurers only agreed to provide coverage where Transocean was “obliged” or “required” to do so by contract, the court reasoned that it was required to consult the drilling contract to determine whether the conditions existed for BP to be named as an additional insured.

Turning to the language of the drilling contract (Transocean must name BP on its policies for liabilities assumed by Transocean under the drilling contract), the court considered the plain language to inexorably link BP's status as an additional insured to the contractual indemnity obligations assumed by Transocean.

As BP, not Transocean, agreed to be responsible for subsurface pollution, there was no contractual obligation for Transocean to provide insurance for subsurface pollution, and Transocean's insurers did not agree to name BP as an additional insured for the risk. Transocean's insurance was therefore available for the obligations undertaken by Transocean in the drilling contract and was not exhausted to pay for the liabilities BP agreed to assume.

Deepwater Horizon's Impact on the Insurance Industry

The Texas Supreme Court has clarified how to determine the extent to which additional insureds are afforded coverage by policies that add them when required by a contract with the named insured. If additional insured status is provided by the insurer “where required” or as “obliged” by a separate contract, the policy directs the court to that contract to determine both the existence and scope of coverage.

Both insurers and insureds must vigilantly match the language of insurance policies and service contracts with the intent of their negotiations. The underlying contract may contain extensive allocations of risk on a reciprocal basis, but it may contain an unlimited requirement that the insured name the other party as an additional insured on its liability policies that is not confined to the indemnity obligations. The courts have held that a separate provision agreeing to name a party as an additional insured without any limitation affords the additional insured coverage for all risks on the named insured's policy, regardless of the allocation of risk in the indemnity provisions. Thus, if BP was an insured on Transocean's policies without any restrictions and if BP agreed to indemnify Transocean, then BP would be covered by Transocean's insurance and would not owe indemnity to Transocean until the insurance coverage was exhausted.

Consequently, it is important that the language of the underlying contract reflect the intent of the parties with appropriate restrictions on the extent of additional insured coverage. Once that is accomplished, the Texas Supreme Court allows the insurance coverage to carry out that intent as long as the policy affords coverage “where required” or as “obliged” by the parties' contract.

Robert M. Browning is a shareholder and director in the Houston office of Brown Sims, P.C. His practice focuses exclusively on litigating complex claims and coverage issues for his insurance clients.