On February 13 2015 the Texas Supreme Court handed down its decision in In re Deepwater Horizon (13-0670 (Tex 2014)). The case arose out of the massive damages caused by the 2010 offshore well blowout in the Gulf of Mexico involving British Petroleum (BP) and its drilling contractor, Transocean. The issue was whether BP was entitled to $750 million in insurance proceeds as an additional insured under Transocean's liability policy – and the answer was no.
The additional insured provision in Transocean's policies extended coverage 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". The policies further defined 'insured contract' as:
"any written or oral contract or agreement 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' or organization."
The drilling contract at issue also contained an insurance provision under which Transocean agreed to name BP "as additional insureds in each of [Transocean's] policies, except Worker's Compensation for liabilities assumed by [Transocean] under the terms" of the drilling contract.
The parties did not dispute that BP had agreed in the drilling contract to be responsible for all subsurface pollution, while Transocean agreed to assume liability for all above-surface pollution. The blowout and ensuing oil spill occurred below the surface of the water.
BP sought coverage, arguing that the scope of its coverage under Transocean's policies as additional insured could be determined only by the four corners of Transocean's policies. More specifically, BP argued that:
- the drilling contract was an 'insured contract';
- the drilling contract obliged Transocean to provide additional insured coverage;
- BP was therefore an additional insured under the additional insured provision in Transocean's policies;
- there were no limitations on the scope of coverage in Transocean's policies; and
- BP was therefore covered for all liabilities (including subsurface pollution liabilities) in connection with the well at issue under Transocean's policies.
In response, Transocean and its insurers argued that Transocean's policies incorporated the drilling contract by reference and thereby limited the scope of BP's coverage to those liabilities Transocean agreed to assume in the drilling contract (ie, above-surface pollution liabilities).
The Supreme Court of Texas held for Transocean and its insurers. The court first noted that Texas cases, including Evanston Insurance Co v ATOFINA Petrochemicals, Inc (256 S W 3d 660 (Tex 2008)), require courts to consider the terms of an underlying 'insured contract' to the extent the policy language directs them to do so. The court then opined that because BP's status as an additional insured was predicated on the drilling contract, the scope of BP's coverage under Transocean's policies required reference to the drilling contract's insurance provisions. Relying on the drilling contract's requirement that Transocean add BP as an additional insured only "for liabilities assumed by [Transocean] under the terms of [the drilling contract]", the court then held that the additional insured provision extended coverage to BP only for the above-surface liabilities assumed by Transocean in the drilling contract. Because the liability here related to subsurface pollution and Transocean had agreed to assume liabilities only for above-surface pollution, the court held that BP was not an additional insured for the Deepwater Horizon claim.
The ruling is intriguing because while the court quite logically noted that courts must consider the terms of an underlying insured contract to the extent that the policy language directs them to do so, it did not explain at length how Transocean's policies directed the court to consider the terms of the drilling contract in relation to limitations on the scope of coverage.
While it is clear that Transocean's policies directed the court to consider the drilling contract to determine whether BP was an additional insured by virtue of being an "entity to whom [Transocean was] obliged by oral or written 'Insured Contract'... to provide insurance such as afforded by [Transocean's Policy", Transocean's policies did not explicitly state that the coverage afforded under the additional insured provision was limited in scope such that it matched the scope of Transocean's obligation to procure insurance for BP as stated in the drilling contract. Instead of relying on an explicit textual 'hook', the court relied on the interrelated nature of Transocean's policies and the drilling contract to find that a limitation on the scope of coverage that Transocean had agreed to provide to BP in the drilling contract necessarily limited coverage under Transocean's policies.
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