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Maritime Update: Deepwater Horizon - Texas Supreme Court Answers A Question Presented By The U.S. Fifth Circuit

On February 13, 2015, the Texas Supreme Court issued an opinion in an insurance coverage dispute arising out of the April 2010 explosion and sinking of the Deepwater Horizon oil-drilling rig.  At issue was the interplay between insurance policies issued to Transocean and provisions in a drilling contract giving rise to Transocean's obligation to name BP as an additional insured.  The Court held that BP is not entitled to coverage under the Transocean insurance policies for damages arising from subsurface pollution.

A.    Background

Transocean and BP had a drilling contract with standard "knock for knock" allocation of risk.  Transocean would indemnify BP for injuries to its personnel and damage to its property and BP would indemnify Transocean for injuries to its personnel and damage to its property regardless of fault.  Transocean agreed to indemnify BP for above-surface pollution, and BP agreed to indemnify Transocean for all pollution risk not assumed by Transocean (i.e., subsurface pollution).  The drilling contract required Transocean to obtain various types and minimum limits of insurance and name BP as an additional insured for liabilities assumed by Transocean.

B.    Procedural History

Transocean filed suit for declaratory judgment in the U.S. District Court for the Eastern District of Louisiana.  Judge Barbier ruled in favor of Transocean determining that BP is not an "Insured" for subsurface pollution liabilities resulting from the Deepwater Horizon incident.  On appeal, the U.S. Fifth Circuit reversed, holding that under Texas law the coverage dispute must be decided from the four corners of the insurance policies.  The Fifth Circuit concluded that the Transocean insurance policies did not impose any limitations on the extent to which BP was covered.  Thus, BP was an additional insured for all purposes.  On rehearing, however, the Fifth Circuit withdrew its opinion and certified two questions of Texas law to the Texas Supreme Court.  The first question was:

  1. Whether BP is covered for the damages at issue (subsurface pollution) because the language in 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"?

Because the Texas Supreme Court answered this question in the negative, it did not reach the second question.

C.    Discussion

BP maintained that coverage must be ascertained exclusively from the four corners of the Transocean insurance policies and no limitations on the scope of coverage are expressly included in the policies.  Transocean and its insurers argued that BP is an "Insured" only by virtue of the status conferred to it under the drilling contract, to which the policies necessarily refer by predicating additional-insured status on the existence of an oral or written "Insured Contract" requiring such coverage.  The drilling contract required Transocean to name BP as an additional insured only for the above-surface pollution risk that Transocean assumed.

The Texas Supreme Court noted that BP was not named in any of the insurance policies or included as an additional insured in an endorsement or certificate of insurance.  The policies conferred coverage to BP by reference to the drilling contract in which Transocean assumed some liability for pollution.  Pursuant to the drilling contract, Transocean was obliged to procure insurance coverage for BP as an additional insured for liabilities assumed by Transocean.  Thus, BP was not entitled to coverage under the Transocean policies for damages for subsurface pollution.

D.    Why Is This Important?

  1. If a contract grants additional insured status and the corresponding insurance policy allows the insured to name additional insureds, the limits on coverage contained in the contract are likely valid and enforceable. 
  2. If a certificate of insurance or endorsement names a party as an additional insured, there may be no need for a court to look to an underlying contract for the scope of additional insured coverage.

  3. If an insurance policy does not include language that refers to or incorporates additional insured coverage limitations contained in a separate contract, there may be no limitation on the scope of additional insured coverage.

  4. Having a significant insurance coverage issue examined by seasoned coverage counsel can provide needed guidance and assistance in developing a plan of action.  


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