Ironshore Specialty Insurance Co. v. Aspen Underwriting Ltd. et al., No. 13-51027 (5th Cir. June 10, 2015)
In March 2013, the federal Fifth Circuit ruled in the Deepwater Horizon litigation, under Texas law, that the scope of additional insured coverage was to be determined based only upon the four corners of the policy and that specific reference to an underlying contract or some other express wording in the policy was necessary to incorporate coverage limitations from the contract into the policy. The Fifth Circuit subsequently withdrew its opinion and certified the key issues to the Texas Supreme Court.
In February 2015, the Texas Supreme Court handed down its decision in In re Deepwater Horizon, __ S.W.3d __, 2015 WL 674744 (Tex. Feb. 13, 2015). Answering the questions certified by the Fifth Circuit, the Supreme Court held that two provisions contained in Transocean’s insurance policy were sufficient to incorporate intended additional insured coverage limitations in the contract into the policy: (1) the definition of “Insured” to include any entity to whom the named insured is obliged, in an “Insured Contract,” to provide insurance, and (2) the provision adding additional insureds “as required by written contract.” While the Supreme Court’s decision provided some degree of clarity, it left undecided whether both of the cited policy provisions were needed to incorporate contract limitations into the policy, or, instead, was one or the other provision sufficient.
On June 10, 2015, the Fifth Circuit further addressed this area of contract and insurance interplay with its decision in Ironshore Specialty Insurance Co. v. Aspen Underwriting Ltd. et al., No. 13-51027, (5th Cir. June 10, 2015). The appellate court was asked to determine whether, under Texas law, contractual requirements in a master service agreement obligating the contractor (Basic) to name the oil company (Endeavor) as an additional insured and provide $5 million in additional insured coverage served to limit the amount of insurance provided to $5 million notwithstanding that the liability limit of the contractor’s insurance program was significantly greater ($50 million). Because the contractor’s policy included only one of the two policy provisions cited by the Texas Supreme Court in the February 2015 Deepwater Horizon decision (the “Insured Contract” provision), the Fifth Circuit was forced to make its best “Erie guess” as to whether, under Texas law, the “Insured Contract” provision alone was sufficient to incorporate what the court determined to be the contract’s intended limitation of coverage to $5 million. The Court ultimately concluded that the “Insured Contract” provision discussed in Deepwater Horizon was sufficient to incorporate the limitations of the MSA. Below are key excerpts from the opinion:
Because Basic was “obliged by a written ‘Insured Contract’ . . . to provide insurance” to Endeavor, there is no dispute that the company meets the definition of “Insured” under Basic’s excess policies and is therefore covered by those policies. And there is no disagreement that under the MSA, Basic was only required to provide $5 million in insurance coverage to Endeavor. The dispute is limited to whether that provision in the MSA is incorporated into Basic’s insurance policies as a limit on Endeavor’s coverage. Ironshore contends that the policies do not limit Defendants’ coverage obligations, either expressly or through the incorporation of the MSA’s limitations. Defendants argue that their policies must be read “in conjunction” with the MSA, including its insurance provision, and therefore that Endeavor’s coverage is limited to $5 million.
As mentioned above, the “Insured Contract” provision in Basic’s policies is essentially the same as the corresponding provision in Transocean’s policies. That does not resolve the question, however, because it is not clear what effect the Deepwater Horizon court gave to the “Insured Contract” provision alone. The court also relied on another provision that is not present in Basic’s policies, adding additional insureds “where required by written contract.” We must decide, therefore, whether both the “Insured Contract” and “where required” provisions were necessary to Deepwater Horizon’s result, or whether each provision standing alone was an independent basis for the decision.
Our best reading of Deepwater Horizon is the latter. …
Our Erie guess, therefore, is that the “Insured Contract” provision was a sufficient ground in Deepwater Horizon to incorporate the Drilling Contract’s limitation on coverage for above-surface pollution. The nearly identical language in Basic’s policies thus compels the same result. Because Basic was only “obliged” to procure $5 million in insurance, we AFFIRM the district court’s grant of summary judgment in favor of Defendants.
Most standard form liability insurance policies contain a provision equivalent to the “Insured Contract” provision at issue in Deepwater Horizon and Ironshore Specialty. With an “Insured Contract” provision present in the policy, the Fifth Circuit’s decision in Ironshore Specialty indicates that, at least under Texas law, coverage limitations imposed on additional insured coverage in an underlying master service agreement will be enforced. Had the additional insured wording in the underlying contract in Ironshore Specialty been broader (e.g., provide additional insured coverage with limits of “at least $5 million”), it is conceivable that a different ultimate outcome may have been reached in the case.