April 20, 2010, an explosion on the Deepwater Horizon rig in the Gulf of Mexico touched off a subsurface leak in a BP oil well at the ocean’s floor. At the time, the Deepwater Horizon was reportedly conducting drilling activities pursuant to a contract between Transocean Ltd. and Transocean subsidiaries, and BP America Production Company.

Nearly a month later, Transocean’s excess insurers have commenced a Declaratory Judgment action to determine their additional insured obligations to BP with respect to pollution claims against BP for oil emanating from BP’s well. On May 21, 2010, Lloyd’s of London filed a complaint for declaratory relief in U.S. District Court, Southern District of Texas (Houston), asking the court to declare that it and various other excess insurers subscribing excess liability policies issued to Transocean Ltd. (listed in an exhibit to the complaint) have no additional insured or other coverage obligations to BP for remediation and damage claims stemming from the Deepwater Horizon explosion and oil spill. For a complete copy of Lloyd’s complaint please click here.

In Certain Underwriters at Lloyd’s London v. BP P.L.C., Lloyd's asserts that its additional insurance coverage duties with respect to BP do not extend to subsurface releases, based on the terms of the drilling contract between BP and Transocean. According to the Complaint, the contract between Transocean and BP provides that Transocean “shall assume full responsibility for and shall protect, release, defend, indemnify and hold [BP] … harmless from and against any loss, damage, expense, fine, penalty, demand or liability for pollution or contamination … originating above the surface of the land or water from spills, leaks or discharges….” Lloyd’s asserts that the liabilities that BP faces are for pollution emanating from below the surface and from BP’s well, and thus those are not within the scope of the additional insured protection. The complaint also refers to other policy terms and exclusions that may preclude coverage.

According to the Complaint, BP provided or attempted to provide notice of claim on May 14, 2010, and the limits of liability under the policies in issue are, in the aggregate, $700 million.

Needless to say, this is likely to be just the first of several coverage disputes to arise from the Deepwater Horizon explosion.