In a ruling delivered on 13 February 2015, the Texas Supreme Court (answering a certified question from the US Fifth Circuit of Appeals1) held that BP is not entitled to coverage under Transocean’s insurance policies in respect of the DEEPWATER HORIZON spill.

The Court reasoned as follows:

Transocean’s insurance policies required reference to the Drilling Contract to determine BP’s status as an additional insured.

As when construing any other contract, the Court must examine the policy’s language in determining the extent to which, if any, it should look to an underlying service contract to ascertain the existence and scope of additional-insured coverage. There is no need for “magic words” to incorporate a restriction from another contract into an insurance policy; it is enough that the policy clearly manifests an intent to include the contract as part of the policy.

BP was not named as an additional insured in the Transocean policies or certificates of insurance, but the policies provided additional-insured coverage only “where required” and as “obliged” by the Drilling Contract, so coverage was conferred by reference to the Drilling Contract.

The Drilling Contract imposed limitations on BP’s coverage as an additional insured.

The Drilling Contract provided (inter alia):

“[BP] ... shall be named as additional insureds in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of this contract.” (Emphasis added)

The only reasonable construction of this provision was that BP’s coverage as an additional insured was limited to liabilities Transocean assumed in the Drilling Contract.

Transocean argued that the italicised wording imposed a limitation on the general insurance obligation corresponding with Transocean’s contractual indemnity obligations.

BP on the other hand argued that the restriction applied only to Workers’ Compensation insurance, since there is a comma before, but not after, the phrase “except Workers’ Compensation”.

The Supreme Court held that, in the context of the Drilling Contract as a whole, BP’s construction was unreasonable, and Transocean’s construction was the only reasonable one. The Court added that “We will not construe the absence of a comma to produce an unreasonable construction”.

It followed that BP was an additional insured under Transocean’s policies only to the extent of the liability assumed by Transocean, and was therefore not entitled to coverage for damages arising from subsurface pollution (for which BP had expressly assumed responsibility in the Drilling Contract).