On March 1, the Fifth Circuit Court of Appeals ruled that $750 million of primary and excess coverage issued to Transocean Holdings, Inc. (“Transocean”) “imposes no relevant limitations upon the extent to which BP [BP American Production Company] is covered” as an additional insured in connection with the Deepwater Horizon incident in April 2010. The Court’s decision was premised on the conclusion that “only the umbrella policy itself may establish the limits upon the extent to which an additional insured is covered in situations such as the one now before us,” “so long as the indemnity agreement and the insurance coverage provision are separate and independent.”

Now, six months later, the Court of Appeals has withdrawn its original opinion and has certified two issues to the Texas Supreme Court, which the Fifth Circuit describes as having “wide ramifications, both throughout the oil and gas industry and for insurance law” and are “better gauged by the state high court than by a federal court.”

The first issue “is the scope of BP’s coverage as an additional insured, and whether the umbrella policy itself determines the extent of coverage, or the indemnity clauses in the Drilling Contract effectively limit BP’s coverage.” Specifically, the Texas Supreme Court will have to examine whether its prior decision in Evanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d 660 (Tex. 2008) is controlling or distinguishable in this matter.1 In Evanston, the Court found that ATOFINA’s additional insured status was determinable solely from the terms of a policy that required additional insured (“AI”) coverage for organizations, for which ATOFINA’s counterparty agreed to provide insurance, but only with respect to operations performed or facilities owned by the counterparty. The Evanston Court did not consider the terms of ATOFINA’s services contract, which permitted indemnity for all but ATOFINA’s own negligence, and instead allowed AI coverage for ATOFINA’s sole negligence based on the terms of the policy alone.

Here, BP will argue that the insurance and indemnity provisions in its Drilling Contract with Transocean are “separate and independent” as they were in Evanston. Transocean’s insurers will argue instead that the insurance requirement in BP’s Drilling Contract is narrower than that considered in Evanston, rendering the insurance and indemnity requirements in BP’s Drilling Contract inextricably intertwined. The insurers will also argue that the requirement of an “insured contract” in Transocean’s policy justifies the Court’s examination of the Drilling Contract to determine the scope of AI coverage for BP.

Second, to the extent that the answer to the first question requires an interpretation of the Drilling Contract itself, the Texas Supreme Court will consider whether the interpretive doctrine of contra proferentem applies to the construction of the agreement, particularly given the sophisticated nature of the parties and their relation to the Drilling Contract at issue. In short, is a “sophisticated insured” exception to contra proferentem justified in this case, and is appropriate to apply the doctrine against insurers, who were not parties to the Drilling Contract, but nonetheless failed to limit coverage in the policy they drafted to conform to the liabilities assumed in the Drilling Contract?2

A decision from the Texas Supreme Court may be expected next year. In the interim, contracting parties will continue to be governed by the general principle that the plain language of an insurance policy - as opposed to the terms of an underlying indemnity contract - controls the scope of additional insured coverage, so long as the insurance and indemnity provisions of the underlying indemnity contract are “separate and independent.”