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In re Deepwater Horizon, No.13-0670 (Tex. Feb. 13, 2015)

Today the Texas Supreme Court issued its opinion in In re Deepwater Horizon, which involved a certified question from the U.S. Fifth Circuit Court of Appeals concerning the scope of additional insured coverage.  After the Deepwater Horizonoil spill in 2010, a dispute arose between BP and Transocean and its excess insurers regarding the scope of additional insured coverage afforded to BP under Transocean’s insurance policies for subsurface pollution in the Gulf of Mexico.  The first, and only, question reached by the Texas Supreme Court involved whether its prior opinion in Evanston Insurance Company v. ATOFINA Petrochemicals, Inc.compelled a holding that BP was owed additional insured coverage unrestricted by the indemnity obligations of Transocean in the drilling contract. The court answered this question in the negative, distinguishing ATOFINAbased on how the policies in that case defined who is an insured, and the underlying contractual language between the named insured and the additional insured.

ATOFINArecognized that, depending on the policy language, a named insured’s policy may provide more coverage for an additional insured than the named insured was contractually required to obtain.  This occurs when, the court noted, the language in the named insured’s policy does not tie the coverage it affords additional insureds to the terms of the named insured’s agreement to provide such coverage.  In ATOFINA, a certificate of insurance demonstrated a contractor’s agreement to obtain additional insured coverage for ATOFINA, so there was no need to refer to the underlying service contract to determine ATOFINA’s status as “[a] person or organization for whom you have agreed to provide insurance as is afforded by this policy.”

In contrast, Transocean’s excess policies specifically required a review of the underlying Drilling Contract with BP to determine its status as an additional insured.  The policies extended additional insured coverage to entities to whom Transocean was “obliged” by an “insured contract” to provide such coverage.  In its Drilling Contract, Transocean was obliged to obtain additional insured coverage for BP “for liabilities assumed by [Transocean] under the terms of [the Drilling] Contract.”  Transocean’s indemnity obligation in the Drilling Contract (the “Insured Contract”) did not extend to subsurface pollution claims.  The court held that because Transocean did not assume liability for subsurface pollution claims, its excess policies’ additional insured coverage likewise did not extend to such liabilities of BP.

In reaching its holding, the Texas Supreme Court emphasized several principals in ATOFINAthat were pertinent to its analysis:

First, it is possible for a named insured to purchase a greater amount of coverage for an additional insured than an underlying service contract requires.  Second, the scope of indemnity and insurance clauses in service contracts is not necessarily congruent. Third, and most importantly, we rely on the policy’s language in determining the extent to which, if any, we must look to an underlying service contract to ascertain the existence and scope of additional-insured coverage.

The court’s opinion confirms Texas’ long-accepted practice of allowing insurance policies to incorporate other documents by reference, whereby the policy language controls the extent to which the other document is so incorporated.  Because the court found only one reasonable interpretation of the additional insured clause and underlying contract language at issue, it did not reach the second certified question concerning whether a “sophisticated insured” exception exists to the contra proferentumdoctrine, which dictates that ambiguous insurance clauses be interpreted against the drafting insurer.

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J. Richard Harmon

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