Texas Supreme Court Rejects Additional Insured Coverage for BP To the Tune of $750 Million

In a decision handed down by the Supreme Court of Texas on Friday, the court determined that BP was not entitled to additional insured coverage under several insurance policies issued to Transocean by a variety of insurers.  In re:  Deepwater Horizon, No. 13-0670 (Tex. Feb. 13, 2015).  The opinion also provides significant insights regarding the relationship between insurance and indemnity as risk transfer mechanisms, namely, that:  (1) a named insured can purchase a greater amount or scope of coverage for an additional insured than required to under the underlying contract; (2) the scope of indemnity and additional insured provisions are “not necessarily congruent”; and (3) the policy language dictates “the extent to which, if any, [courts] must look to an underlying service contract to ascertain the existence and scope of additional-insured coverage.”  Nonetheless, because the subject policies required that the insurance policy provisions be construed in accordance with the underlying contract provisions, including the indemnity provisions, the Supreme Court believed it must go beyond the four corners of the insurance policies in narrowly construing additional insured coverage for BP in accordance with the limitations in the underlying contract.

The underlying dispute arose from the highly publicized April 2010 explosion and sinking of the Deepwater Horizon, an oil-drilling rig operating in the Gulf of Mexico.  The explosion resulted in the death of 11 crew members, the sinking of the rig, and the release of millions of gallons of oil into the Gulf of Mexico.  In this coverage action stemming from the explosion, BP, the oil-field developer, sought coverage under the primary and excess policies issued to Transocean, the drill-rig owner.  The limits of those policies totaled $750 million.  BP was not specifically named as an insured on the policies.

In response to BP’s demand for coverage, the insurers sought a declaration that they had no duty to defend or indemnify BP as an additional insured against claims involving subsurface pollution.  Transocean intervened and aligned with its insurers.  The subject additional insured endorsement in the insurers’ policies extended coverage to “[a]ny person or entity to whom [Transocean] is obliged by oral or written ‘Insured Contract’ … to provide insurance such as afforded by [the] policy.”  The policy defined “Insured Contract” as “any written or oral contract or agreement entered into by [Transocean] … 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 coverage dispute centered on language in the Drilling Contract between BP and Transocean that:  (1) required Transocean to indemnify BP for above-surface pollution, regardless of fault, and required BP to indemnify Transocean for all pollution risks not assumed by Transocean; and (2) required Transocean to name BP as an additional insured “in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of [the Drilling] Contract.”

BP contended that Texas law did not allow for the incorporation of the specific provisions found in the Drilling Contract to limit BP’s status as an additional insured.  The district court granted summary judgment in the insurers’ favor, holding that insurance policies should be construed in accordance with the terms of the Drilling Contract.  On appeal, the Fifth Circuit reversed and concluded that coverage disputes should be resolved based solely on the four corners of the insurance policies.  The Fifth Circuit subsequently withdrew its decision and certified questions to the Supreme Court of Texas, including, in relevant part, whether Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), directed the court to find coverage for BP if the insurance and indemnity provisions of the Drilling Contract are “separate and independent.”

In deciding this question, the Supreme Court of Texas concluded that the provisions in the Drilling Contract must be read in conjunction with the insurance policies, which would have the effect of denying BP coverage under the policies.  The Supreme Court further concluded that the Drilling Contract limited any additional insured obligations to BP to only the liabilities assumed by Transocean under the contract.

With respect to BP’s argument that only the four corners of the policies can be referenced in coverage disputes, the Supreme Court pointed to longstanding precedent that “insurance policies can incorporate limitations on coverage encompassed in extrinsic documents by reference to those documents.”  Moreover, the court refused to require any “magic” words in order to incorporate provisions from another contract into the policy, so as long as the policy clearly manifests intent to incorporate the contract.  The Supreme Court also distinguished the ruling in ATOFINA because the policy therein did not link coverage to the terms of contract; instead, the only coverage restrictions were in the policy itself.  Therefore, the Supreme Court stated that the subject insurance policies allowed for consideration of limitations in the Drilling Contract.

Additionally, the Supreme Court rejected BP’s assertion that the indemnity and insurance agreements in the underlying contract were separate and independent.  While BP pointed to a particular provision in the Drilling Contract that appeared to indicate the insurance obligation was to be provided without limitation, the Supreme Court found that BP’s interpretation improperly disregarded the context for the provision.

Does your jurisdiction allow for the consideration of extrinsic evidence in construing additional insured provisions?  Does your jurisdiction typically consider indemnity provisions when construing additional insured coverage?  We encourage you to submit your questions or comments.