Insurance Law Blog

February 13, 2015
Dear Colleague,

Today the Supreme Court of Texas issued its much-anticipated decision in In Re Deepwater Horizon, which had been sent to the Court on certified questions from the U.S. Fifth Circuit Court of Appeals. The Court held that Transocean’s insurance did not provide coverage for BP for the claims asserted against it arising out of the explosion and sinking of the Deepwater Horizon oil-drilling rig in the Gulf of Mexico. As explained in detail below (sorry, there simply is not a way to shortcut the Court’s analysis), the Court reasoned that—under the facts presented—BP’s coverage as an additional insured is limited by the specific terms of its contract with Transocean.

The Certified Questions
In 2013, the Fifth Circuit certified the following questions to the Court regarding BP’s status as an additional insured:

1. Whether Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), compels a finding that BP is covered for the damages at issue, because the language of the umbrella policies alone determines the extent of BP’s coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the Drilling Contract are “separate and independent”?

2. Whether the doctrine of contra proferentem applies to the interpretation of the insurance coverage provision of the Drilling Contract under the ATOFINA case, 256 S.W.3d at 668, given the facts of this case?

Ultimately, the Court held that, under the first question, BP was not covered by the policies for damages arising from subsurface pollution because BP, not Transocean, assumed liability for such claims. And because the court did not find any ambiguity in the policies, the second certified question was not addressed by the Court.

Background Facts
After the explosion and sinking of the drilling rig, both BP and Transocean sought coverage under Transocean’s primary and excess insurance policies for the claims asserted against them. While not disputing that BP was an additional insured, Transocean and its insurers argued that the company was not an additional insured for liabilities it assumed in the Drilling Contract with Transocean. In particular, they claimed that BP was not an additional insured in connection with pollution-related liabilities arising from subsurface oil releases that occurred. In the Drilling Contract, Transocean agreed to indemnify BP for above-surface pollution claims regardless of fault, and BP agreed to indemnify Transocean for all other pollution risk, including subsurface pollution.

Without limiting such obligations, Transocean also was required to carry multiple types of insurance, including a CGL policy with contractual liability coverage for the indemnity agreement of at least $10 million. BP and others were to be named “as additional insureds in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of [the Drilling] Contract.” (Emphasis added.) Adhering to its contractual obligation, Transocean secured policies that extended “Insured” status to “[a]ny person or entity to whom the ‘Insured’ is obliged by oral or written ‘Insured Contract’ . . . to provide insurance such as afforded by [the] Policy,” where “Insured Contract” meant “any written or oral contract or agreement entered into by the ‘Insured’ . . . 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.”

With that information, the Court made the following conclusions: (1) BP is an additional insured under the Transocean policies for some purposes; (2) the Drilling Contract is an Insured Contract as defined by the insurance policies; and (3) the Insurers are not parties to the Drilling Contract. The central question, though, was whether and to what extent the policies incorporated terms of the Drilling Contract that may limit BP’s additional insured status. In other words, the central issue was the interplay between the insurance policies and provisions in the Drilling Contract. The district court ruled against BP and, on appeal, the Fifth Circuit initially reversed that decision. On rehearing, however, the Fifth Circuit withdrew its opinion and certified the above questions to the Supreme Court.

The Arguments and Decision
BP argued to the Court that the decision in ATOFINA mandated that the existence and extent of coverage for BP be determined exclusively from the four corners of the insurance policies. The company claimed that the policy language was no different than language previously interpreted by the Supreme Court and others to be insufficient to import external limitations into the policies. On the other hand, Transocean and its insurers argued that BP’s analysis fell short because it ignored the fact that BP only is an “Insured” by virtue of its status conferred by the Drilling Contract, to which the policies specifically refer by predicating additional insured coverage on the existence of an “Insured Contract.” Such language, they argued, constituted an exception to the four-corners analysis. And, because BP’s status as an “Insured” could not be ascertained without looking to the Drilling Contract, the language in that provision that limited the scope of such additional insured coverage had to be given its fair weight.

In addressing the parties’ arguments, the Court discussed two of its prior holdings: Urrutia v. Decker, 992 S.W.2d 440 (Tex. 1999), and ATOFINA, 256 S.W.3d 660. In Urrutia, the Court held that an insurance policy incorporated a car rental agreement and that agreement, in turn, limited the customer’s liability protection to $20,000. In ATOFINA, on the other hand, the insurance policy had two coverage provisions—one of them was tied to the terms of another agreement, but the second was tied only to the terms of the policy itself. Because the one provision was not tied to the service contract at issue, there was no need to look at that document to ascertain ATOFINA’s status as an additional insured; rather, all that was necessary was to satisfy the terms of the policy. The Court, in construing ATOFINA and other cases, determined that:

[W]hile our inquiry must begin with the language in an insurance policy, it does not necessarily end there. In other words, we determine the scope of coverage from the language employed in the insurance policy, and if the policy directs us elsewhere, we will refer to an incorporated document to the extent required by the policy. Unless obligated to do so by the terms of the policy, however, we do not consider coverage limitations in underlying transactional documents.

In the instant case, unlike in ATOFINA, the Transocean policies required reference to the Drilling Contract to determine BP’s status as an additional insured because those policies did not specifically name BP as such. Thus, in line with the decision in ATOFINA, the Court noted that it would “rely on the policy’s language in determining the extent to which, if any, [the Court] must look to an underlying service contract to ascertain the existence and scope of additional-insured coverage.” Also, the Court found that two other cases relied on by BP actually affirmed “the principle that we must consider the terms of an underlying contract to the extent the policy language directs us to do so.” See Aubris Resources LP v. St. Paul Fire & Marine Ins. Co., 566 F.3d 483 (5th Cir. 2009); Pasadena Refining System, Inc. v. McRaven, 2012 WL 1693697 (Tex. App.—Houston [14th Dist.] May 15, 2012, pet. dism’d by agr.); see also Urrutia, 992 S.W.2d at 442.

Applying the foregoing, the Court concluded that BP was an additional insured only as to liabilities specifically assumed by Transocean under the Drilling Contract. And, because Transocean did not assume liability for subsurface pollution claims, Transocean had no obligation to obtain additional insured coverage for BP for that risk. Therefore, BP was not an additional insured for that risk.

In closing, the Court also rejected BP’s claim that the additional insured clause in the policies could not limit the scope of its coverage based on the indemnity agreements because the insurance and indemnity agreements in the Drilling Contract were separate and independent. The Court explained that Transocean’s insurers did not owe any obligation to BP except as stated in Exhibit C of the parties’ contract, so while a separate article of the Contract could be read as saying the insurers’ indemnity obligation was not limited by the requirements in Exhibit C, the indemnity obligation to BP would not arise in the first place except on the conditions stated in that Exhibit. Moreover, while indemnity and insurance may be separate, that does not prevent them from being congruent; therefore, “a contract may reasonably be construed as extending the insured’s additional-insured status only to the extent of the risk the insured agreed to assume,” which was the case before the Court.

Based on the foregoing analysis, the Court answered the first certified question in the negative “because BP is not covered for the damages at issue by virtue of the limitations on the scope of its additional-insured status imposed in the Drilling Contract and incorporated into the Transocean insurance policies by reference.” Having answered in that manner, the Court noted that the second certified question need not be addressed, as the ambiguity rule only applies if there is more than one reasonable interpretation of an insurance policy and the Court found that that was not the situation before it.

The Dissent
Justice Johnson issued a dissent, noting that he did not disagree with the Court’s recitation of the principles applicable to construing insurance contracts, but he did disagree with how they were applied by the Court. He looked to the policy language wherein the Insurers agreed that “where required by written contract, bid or work order, additional insureds are automatically included hereunder, and/or waiver(s) of subrogation are provided as may be required by contract,” and argued that the phrase “as may be required by contract” applied only to waivers of subrogation and not to additional insureds. He also noted that neither the definition of “Insured” nor the definition of “Insured Contract” limited the terms of additional insured coverage to the scope of the obligation assumed by the “Insured” in that “Insured Contract.” Justice Johnson also compared the original policy language that restricted additional insured coverage to that which was no broader than provided under the underlying policies to the language provided by an endorsement that extended additional insured status to any person or organization included as an additional insured under the underlying policies. He further noted that, based on such comparison, the insurers knew how to restrict additional insured coverage to parties covered because of a collateral agreement and chose not to do so here.

Ultimately, Justice Johnson argued that, like in ATOFINA, the Court should have determined the scope of coverage based solely on the terms of the policy and not the collateral indemnity agreement. He disagreed with the Court’s holding for several reasons, including the fact that the Drilling Contract’s language was not explicitly incorporated into the policies and was not deemed incorporated as the policies provided for other documents that were intended to be part of the policies. Further, Justice Johnson urged that nothing in the policies or Drilling Contract precluded BP from having broader additional insured coverage than Transocean agreed to provide, so BP was an Insured for whom coverage extended for “liability (a) imposed upon [BP] by law or (b) assumed by [Transocean] under [the drilling contract].” And, finally, even if BP’s status as an additional insured was limited, BP also qualified as an “Insured,” which afforded BP full coverage.

The Supreme Court’s decision in In Re Deepwater Horizon makes clear that a distinction exists between contracts whose indemnity and insurance provisions are separate and independent and those whose provisions are inextricably intertwined. In the former scenario, the Court’s prior decision in ATOFINA remains alive and well. However, when the provisions are inextricably intertwined as was the case before the Court, Texas courts will be required to look at the terms of the incorporated contract to determine the scope of coverage available to an additional insured. If additional insureds want to avoid resort to extrinsic documents, they will need to make sure that the additional insured provisions stand on their own and do not refer back to (and, therefore, incorporate) contractual limitations.

Just as importantly, because the Court did not reach the second certified question, an issue remains in Texas as to whether there should be a “sophisticated insured” exception to the contra proferentum doctrine. As it stands, a split remains between two federal district courts on this issue, so it remains to be seen whether ambiguous provisions should be construed in favor of coverage—at least when the insured is deemed to be a sophisticated party. Stay tuned . . . We’ve Got You Covered.


Lee Shidlofsky
Member of Shidlofsky Law Firm

Douglas P. Skelley
Member of Shidlofsky Law Firm