Reed Smith Client Alerts

Authors: John D. Shugrue Kevin B. Dreher

As part of the ongoing insurance coverage dispute following the sinking of the Transocean offshore drilling unit Deepwater Horizon, the Supreme Court of Texas has issued its response to the certified questions propounded by the Fifth Circuit.

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 umbrella insurance policies. In re Deepwater Horizon, Case No. 12-30230, Slip Op. (5th Cir. Aug. 29, 2013) (“Slip Op.”). In its place, the Fifth Circuit certified two questions to the Supreme Court of Texas:

  1. Whether Atofina 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 proferentum applies to the interpretation of the insurance coverage provision of the Drilling Contract under the Atofina case, given the facts of this case?

Id. at 14.

The Supreme Court answered the first question in the negative, and therefore did not reach the second question. Specifically, the court held the Transocean insurance contracts included the language required to necessitate “consulting the drilling contract” to determine BP’s status as an additional insured. The court then found that, under the drilling contract, BP’s status as an additional insured was inextricably intertwined with the limitations on the extent of coverage to be provided by the Transocean policies. Further, the court found that the only reasonable interpretation of the drilling contract’s additional insured provision is that BP’s status as an additional insured is limited to liabilities assumed by Transocean in the drilling contract. As such, the court held BP is not entitled to coverage under Transocean’s policies for subsurface pollution because BP had assumed liability for subsurface pollution under the contract.

In reaching its decision, the court distinguished the Deepwater Horizon facts from the facts in Evanston Ins. Co. v. Atofina Petrochems., Inc., 256 S.W.3d 660, 665 (Tex. 2008). In Atofina, the Supreme Court of Texas 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. Here, the court opined that the language in the Transocean insurance policy limited the coverage afforded additional insureds by premising coverage on the existence of an “Insured Contract,” which the policy defined as “any written or oral contract or agreement entered into by the ‘Insured’…and pertaining to business under which the ‘Insured’ assumes tort liability of another party to pay for ‘Bodily Injury’ or ‘Property Damage’…to a ‘Third Party’ or organization.” Given the requirement of a “contract or agreement” to assume the tort liability of another, the court held the drilling contract was necessarily incorporated in the insurance policy. The language in the Atofina case was distinguished insofar as it did not use the term “Insured Contract” and instead simply required an agreement by the Insured to “provide insurance as is afforded by this policy; but…only with respect to operations performed by you or on your behalf, or facilities owned or used by you.” Id. at 664. The court noted Atofina had been issued a certificate of insurance so there was no need to consult the underlying service contract to determine whether there was an agreement to name Atofina as an additional insured. BP had not been issued a certificate of insurance, so the court held that the drilling contract had to be consulted to determine whether Transocean was required to name BP as an additional insured. Furthermore, the court pointed out the Transocean insurance policy extended additional insured status “where required” or as “obliged”—which the court felt was further evidence of the intent to incorporate the Insured Contract into the insurance policy in order to determine the extent of coverage “required,” or which Transocean was “obliged” to provide.

After establishing the drilling contract must be consulted to determine the scope of additional insured status, the court went on to determine the only reasonable interpretation of the drilling contract requirement for BP and its affiliates to be “named as additional insureds in each of Transocean’s policies, except Worker’s Compensation for liabilities assumed by Transocean under the terms of this contract,” was that the parties did not intend for BP to be insured for the subsurface pollution liabilities it expressly assumed in the drilling contract.

The court also made clear that the mere fact the indemnity and insurance requirements in the drilling contract were separate and independent obligations did not entitle BP to broad additional insured coverage. In explaining its reasoning for rejecting BP’s argument that the separate and independent duties of indemnity and insurance creates broad coverage for the additional insured, the court pointed out that the only grant of indemnity from the insurance company was created by the insurance requirement—the insurance company did not have an indemnity duty under the indemnity clause in the drilling contract requiring Transocean to indemnify BP for certain liabilities. Further, the court reasoned the independence of the indemnity and insurance provisions did not preclude them from being congruent, and the contract between Transocean and BP demonstrated a clear intent to limit additional insured status to the extent of Transocean’s indemnity obligations.

After having disposed of the first question, the court then expressly declined to respond to the second question involving contra proferentum. As a result, contra proferentum remains the law in Texas, without any “sophisticated insured” exception.

The court’s decision means policyholders and additional insureds must be extremely cautious with the verbiage of both their additional insured provisions, and their master service agreements, drilling agreements, or other agreements to ensure the desired additional insured coverage is provided.

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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 action in state and federal courts. For assistance in protecting your insurance proceeds and properly limiting coverage for your additional insureds, please contact the authors of this Alert; the Reed Smith Insurance Recovery Group’s Global Practice Group Leader, Douglas E. Cameron; or any Reed Smith coverage attorney with whom you routinely work.

For the second year in a row, U.S. News-Best Lawyers “Best Law Firms” named Reed Smith its “National Law Firm of the Year” in Insurance Law (2014–2015). In addition, the group is named among the best policyholder coverage practices by Chambers USA, Chambers UK, Legal 500 US and Legal 500 UK. American Lawyer Media’s Legal Intelligencer named Reed Smith’s Insurance Recovery Group one of Pennsylvania’s “Litigation Departments of the Year” for 2014 – the only policyholder-focused firm recognized in the Pennsylvania-based publication – and The National Law Journal named the Chicago Insurance Recovery team the 2014 “Chicago Litigation Department of the Year: Insurance.”

 

Client Alert 2015-036