On March 1, 2013, a three-judge panel of the United States Court of Appeals for the Fifth Circuit, in In re Deepwater Horizon, No. 12-30230, 2013 WL 776354 (5th Cir. March 1, 2013), held that BP PLC ("BP") can access Transocean Holdings, Inc.’s ("Transocean") $750 million of liability insurance coverage for liability for damages caused by the oil spill from the Deepwater Horizon. The Fifth Circuit reversed the decision by the district court, holding that the drilling contract between BP and Transocean (the "Drilling Contract") only required Transocean to name BP as an additional insured with respect to liabilities specifically assumed by Transocean in the Drilling Contract, which did not include BP’s liabilities for the Deepwater Horizon disaster.

The Fifth Circuit, relying primarily on Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), and Pasadena Refining System, Inc. v. McCraven, Nos. 14-10-00837-CV, 14-10-00860-CV, 2012 WL 1693697 (Tex. App., May 15, 2012), found that, under Texas law, where the insurance procurement and indemnity provisions in an underlying contract are "separate and independent," the insurance policy, and not the indemnification agreement, determines the scope of coverage for an additional insured.

The Drilling Contract included indemnification provisions as well as a provision requiring that Transocean shall maintain insurance covering the operations to be performed pursuant to the contract, "as set forth in Exhibit C." Exhibit C established the minimum level of insurance that Transocean was required to maintain, and also required that Transocean name BP as an "additional insured" under its insurance policies. The court noted that, under Texas law, "to render an additional insured provision separate from an indemnity provision," it need only be a "discrete requirement," and not an entirely separate provision.

The Fifth Circuit found the BP insurance requirement and indemnification agreements "separate and independent," and thus looked to the policy terms, and not the indemnity agreement, to determine the scope of the additional insured coverage. The court found that, because the Transocean policies did not limit additional insured coverage or incorporate limits from the Drilling Contract, BP was entitled to full direct coverage under the Transocean policies.

Because both Transocean and BP have rights under the Transocean policies, the limits will almost certainly be inadequate, which will likely lead to further litigation regarding the parties’ respective rights to priority for the insurance coverage under the Transocean policies.

The principal lesson from this decision for policyholders is that they should not grant additional insured status or enter into contracts with indemnification agreements casually. Whether the goal is to maximize potential coverage as an additional insured, or to limit access of additional insureds to your insurance coverage, it is prudent to seek legal counsel before you sign on the dotted line. Reed Smith’s 70+ insurance recovery lawyers have extensive experience in assisting policyholders in structuring their contract and indemnity agreements to best protect their assets.