Reed Smith Client Alert

Authors: John D. Shugrue John N. Ellison Kevin B. Dreher

Type: Client Alerts

As part of the ongoing insurance coverage dispute following the sinking of the Transocean offshore drilling unit Deepwater Horizon, the United States Court of Appeals for the Fifth Circuit has issued, and the Texas Supreme Court has accepted, two certified questions that have the potential to tremendously impact every business in Texas.

On August 29, 2013, the Fifth Circuit, by unanimous decision, withdrew its March 1, 2013 opinion that had awarded "additional insured" coverage to BP under Transocean’s excess insurance policies. In re Deepwater Horizon, Case No. 12-30230, Slip Op. (5th Cir. Aug. 29, 2013). In its place, the Fifth Circuit certified two questions to the Texas Supreme Court:

  1. Whether BP is covered as an additional insured, based solely on the language of the insurance policies; and
  2. Whether the contra proferentum doctrine of requiring insurance policies to be interpreted against insurers and in favor of insureds applies to sophisticated parties

Id. at 14.

The court accepted the certified questions for review September 6, 2013, and set briefing deadlines which have been extended into November and December.

The coverage issue currently before the court arises out of the interpretation of the breadth of coverage afforded under indemnity and additional insured requirements in a contract. Under the drilling contract between BP and Transocean, Transocean assumed responsibility for spills on or above the surface of the water, while BP assumed responsibility for subsurface spills. See, In re Deepwater Horizon, 710 F.3d 338, 343 n. 5 (5th Cir. Mar. 2013), withdrawn by 2013 U.S. App. LEXIS 18087. However, separate and apart from the indemnity obligations, the contract also required Transocean to name BP as an additional insured under its insurance policies. Id. at 342.

In its now withdrawn March 1, 2013 decision, the Fifth Circuit held, under Texas law, when there are separate and distinct requirements for indemnity and for additional insured status, only the language of the insurance policy itself, and not the underlying contractual indemnity language, should be considered for purposes of determining a party’s insurance rights as an "additional insured." In reaching its opinion, the Fifth Circuit cited Evanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d 660, 665 (Tex. 2008), in which the Texas Supreme Court held that an oil refinery owner was an additional insured under a contractor’s insurance policy, refusing to look beyond the terms of the policy itself in determining coverage. Finding the BP contract provisions "materially identical" to those in the Atofina case, the Fifth Circuit looked solely to the language of the insurance policy and ruled that the policy provided full additional insured coverage to BP. A petition for rehearing en banc was filed and the Fifth Circuit ultimately withdrew its earlier opinion and certified its questions to the Texas Supreme Court for clarification of Texas law. In its withdrawal and certification, the Fifth Circuit acknowledged the language in the Atofina contract was arguably broader than the BP contract language, and asked the Texas Supreme Court to clarify Texas law regarding the interplay between the contractual indemnity language and the insurance policy coverage.

The Fifth Circuit also certified a second question regarding contra proferentum. Contra proferentum requires the terms of an insurance policy be construed against the insurance company and liberally in favor of policyholders. Texas currently follows the majority rule of applying contra proferentum for all insurance policies, even those involving policyholders who may actively negotiate some terms of the insurance policy. Some jurisdictions do allow exceptions to contra proferentum for policyholders who negotiate the insurance policy terms. The Fifth Circuit has asked Texas to clarify whether contra proferentum should apply in the case of large corporate entities like BP and Transocean.

The impact of the Texas Supreme Court’s decision regarding the two certified questions could deeply impact all Texas businesses. Contracts that require indemnification and provide for additional insured coverage between parties are common across all types of business, and the Texas Supreme Court’s ruling on the certified questions will determine whether the language of the insurance policy alone, or the insurance policy read in conjunction with the contractual indemnity obligation, control the scope of additional insured coverage. Perhaps even more broadly reaching will be the outcome of the court’s decision regarding the contra proferentum issue. If Texas joins the minority of jurisdictions that recognize an exception to the contra proferentum rule, the well-established Texas rules of policy interpretation favoring policyholders will be impacted for many Texas-based policyholders.

Reed Smith has more than 80 attorneys who focus on representing policyholders in all manner of insurance issues, including policy review, consultation, and litigation of coverage disputes through arbitration and actions in state and federal courts, including Texas, and internationally. Reed Smith can advise Texas policyholders on the possible impacts of this proceeding and take steps to protect their interests.

 

Client Alert 2013-277