Fifth Circuit Parses Texas Supreme Court’s Reasoning in  Deepwater Horizon and Upholds Limit on Additional Insured Coverage

                                               Ironshore Specialty Ins. Co. v. Aspen Underwriting, Ltd., 2015 WL 3621857

On Wednesday, the Fifth Circuit Court of Appeals became the first court to apply the Texas Supreme Court’s decision in In re Deepwater Horizon, in a substantive way.  In an opinion authored by Circuit Judge Greg Costa, the Fifth Circuit held that coverage under several insurance policies was limited to the amount required by a master service agreement (MSA), although the policies themselves contained far greater limits.

Ironshore Specialty Ins. Co. v. Aspen Underwriting, Ltd., 2015 WL 3621857, arose out of the wrongful death claims of two Basic Energy Services employees who were killed at a well-site owned by Endeavor Energy Resources.  Basic and Endeavor maintained a MSA containing an indemnity provision in which both parties agreed to cover any liability resulting from claims brought by their own employees, even if the other party was at fault.  The MSA contained separate obligations for each party to maintain at least $5 million for any claims one party’s employees made against the other.  Basic obtained far greater coverage that included:  (1) a $1 million CGL policy issued by National Union Fire Insurance Company; (2) a $10 million first-layer excess policy issued by Aspen Underwriting; and (3) a $40 million second-layer excess policy issued by Dornoch, Ltd.  Endeavor’s excess carrier, Ironshore Specialty, brought a declaratory judgment action against Basic’s insurers to determine whether coverage was limited to the MSA requirement or for the full limits afforded by the policies.

In applying In re Deepwater Horizon, the Fifth Circuit held that coverage was limited to the $5 million MSA agreement.  The Court first noted that there was no dispute that Endeavor was an additional insured under Basic’s policies or that the MSA included a $5 million limit.  It then recognized that to incorporate terms of another contract into an insurance policy, the policy must reflect a clear intent to do so.  Endeavor’s own policies clearly reflected that intent by limiting coverage to “the minimum Limits of Insurance [Endeavor] agreed to procure in [a] written Insured Contract.”  Basic’s policies, however, were not so clear.

Basic’s policies contained familiar “Insured Contract” language that provided coverage to “any person or entity to whom [Basic] is obliged by a written “Insured Contract”…to provide insurance such as is afforded by this Policy.”  Although the Fifth Circuit “initially had doubts” that the “Insured Contract” language was sufficient to limit coverage, its deeper analysis of In re Deepwater Horizon showed that it did.  The “Insured Contract” language in Basic’s policy was essentially the same as analyzed in Deepwater Horizon, but it did not include the provision “where required by written contract.”  The Court held that the omission did not matter.  The Texas Supreme Court majority had based its holding on the provision language providing additional insured coverage as “obliged.”  As well, the Texas Supreme Court also “appeared to treat the ‘where required’ and ‘Insured Contract’ provisions as functionally identical…”   Given that analysis, the Fifth Circuit concluded that coverage under Basic’s policies was limited to the $5 million MSA agreement.

The Fifth Circuit’s analysis in Ironshore Specialty indicates that a policy’s AI endorsement can employ variations of the language required to limit AI coverage in invoking the insured contract’s terms.  Insurers would be wise, however, not to stray too far from the AI language approved in Deepwater Horizon if they seek to limit AI coverage to the amount their insureds agreed to obtain.