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From Products Liability Law Daily, February 13, 2015

BP not covered for Deepwater Horizon subsurface pollution

By Susan Engstrom

BP was not entitled to coverage as an additional insured for subsurface-pollution claims arising from the oil spill that followed the explosion, fire, and sinking of the Deepwater Horizon offshore drilling rig, the Texas Supreme Court held. In so ruling, the court answered in the negative a question certified by the U.S. Court of Appeals for the Fifth Circuit asking whether the language of the insurance policies alone determined the extent of BP’s coverage as an additional insured. According to the Texas high court, the policies—which were held by the drilling rig’s owner, Transocean—included language that required consulting the drilling contract between Transocean and BP. The only reasonable interpretation of the drilling contract was that BP’s status as an additional insured was limited to the liabilities Transocean assumed in the drilling contract. Because Transocean had not assumed liability for subsurface pollution in the contract, BP was not entitled to coverage for that liability (In re Deepwater Horizon, February 13, 2015, Guzman, E.).

Background. In April 2010, the Deepwater Horizon, a semi-submersible, mobile offshore drilling unit owned by Transocean Offshore Deepwater Drilling, Inc. and its affiliates (collectively, Transocean) experienced an onboard explosion, burned for two days, and sank into the Gulf of Mexico, resulting in a significant oil spill that damaged marine and wildlife habitats, fishing and tourism industries, property, and the health of coastline residents in several affected states.

At the time of the explosion, the Deepwater Horizon was engaged in exploratory drilling activities at BP’s Macondo Well under a drilling contract between BP’s predecessor and Transocean’s predecessor. In that contract, Transocean agreed to indemnify BP for above-surface pollution regardless of fault, and BP agreed to indemnify Transocean for all pollution risk Transocean did not assume, i.e., subsurface pollution. The contract also required that Transocean maintain certain minimum insurance coverage for the benefit of BP as an additional insured.

Insurance policies. Transocean held primary liability insurance policies with Ranger Insurance Ltd., as well as several excess liability policies led by London market syndicates. The Ranger policy provided at least $50 million of general liability coverage, and the excess policies provided an additional $700 million of coverage in four layers directly above the Ranger policy.

The policies required the insurers to pay for a loss “on behalf of the ‘Insured’” for liability “assumed by the ‘Insured’ under an ‘Insured Contract.’” Although BP was not specifically named as an insured, the policies extended “Insured” status to:

[a]ny person or entity to whom the “Insured” is obligated by oral or written “Insured Contract” … to provide insurance such as afforded by [the] Policy.

The term “Insured Contract” was defined as:

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.

Thus, under the express terms of the policies, additional-insured status hinged on: (1) the existence of an oral or written contract, (2) pertaining to the business of an “Insured,” and (3) under which an “Insured” assumes the tort liability of another party and is “obliged” to provide insurance to that other party. The policies also provided that:

where required by written contract, bid or work order, additional insureds are automatically included hereunder[.]

Coverage denial. The parties did not dispute that BP was an additional insured under the policies or that the drilling contract was an “insured contract” as defined by the policies. However, the insurers asserted that BP was not entitled to additional-insured coverage for subsurface-pollution claims arising from theDeepwater Horizon incident because the drilling contract limited the additional-insured obligation to “liabilities assumed by [Transocean] under the terms of [the Drilling] Contract.”

Previous rulings. A Louisiana federal court ruled in favor of the insurers, finding that BP was not an “Insured” for subsurface pollution liabilities. On appeal, the Fifth Circuit reversed, but withdrew its opinion on rehearing and certified the following questions to the Texas Supreme Court:

  1. whether relevant case precedent compels a finding that BP is covered for the damages at issue because the language of the insurance policies alone is determinative if, and so long as, the drilling contract’s additional insured and indemnity provisions are “separate and independent”; and

  2. whether the doctrine of contra proferentem applies to the interpretation of the insurance coverage provision of the drilling contract under the above-mentioned precedent.

Applicable policy-construction principles. Relevant case law provides that it is possible for a named insured to purchase a greater amount of coverage for an additional insured than an underlying service contract requires. In addition, the scope of indemnity and insurance clauses in service contracts is not necessarily congruent. Most importantly, courts rely upon the policy’s language in determining the extent to which, if any, they must look to an underlying service contract to ascertain the existence and scope of additional-insured coverage.

Incorporation by reference. In this case, the policies conferred coverage on BP by reference to the drilling contract in which: (1) Transocean assumed some liability for pollution that might otherwise be imposed on BP (making that contract an “Insured Contract”); and (2) Transocean was “obliged” to procure insurance coverage for BP as an additional insured (making BP an “Insured”). Moreover, additional insureds were automatically included under the policies only “where required by written contract, bid or work order.” The language providing additional-insured coverage “where required” and as “obliged” required the court to consult the drilling contract’s additional-insured clause to determine whether the stated conditions existed.

Contractual limitations on additional-insured status. The additional-insured provision in the drilling contract stated that BP and its affiliates:

shall be named as additional insureds in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of this contract. (Emphasis added.)

In the court’s view, it was immediately apparent from this language that BP’s status as an insured was inexorably linked, at least in some respect, to the extent of Transocean’s indemnity obligations. The issue in dispute was the intended breadth of the limiting language in the italicized portion of this provision.

BP interpreted the provision to mean that Transocean was obligated to name BP as an additional insured under every type of insurance policy specified in Exhibit C to the drilling contract, including workers’ compensation policies for liabilities assumed by BP, but not workers’ compensation policies for liabilities assumed by Transocean. However, this construction was either inconsistent with other provisions in the contract or rendered the words “liabilities assumed by [Transocean] under the terms of this contract” meaningless.

Transocean and the insurers read the provision as: (1) excepting only workers’ compensation policies from the general additional-insured obligation, and (2) imposing a limitation on the general insurance obligation that was coterminous with all of Transocean’s contractual indemnity obligations. According to the court, this interpretation was reasonable because it was in harmony with the allocation of liabilities in the drilling contract, gave meaning to all the language the parties employed, and was consistent with the standard use of such language and the purpose of such clauses. For example, additional-insured provisions are often phrased in terms of extending coverage to all policies except workers’ compensation policies, which quintessentially involve an employer insuring its own employees. Moreover, a manifest purpose of an additional-insured clause is to provide supplemental protection when the additional insured may be sued for conduct within the contractor’s scope of risk.

Therefore, BP was an additional insured only with respect to liabilities assumed by Transocean under the drilling contract and no others. Because Transocean did not assume liability for subsurface pollution, Transocean was not “obliged” to name BP as an additional insured for that risk, and BP lacked status as an “Insured” for it. Accordingly, the court answered the Fifth Circuit’s first certified question in the negative.

Applicability of contra proferentem doctrine. Given that there was only one reasonable interpretation of the insurance-coverage provision of the drilling contract, the court did not answer the second certified question.

Dissent. A dissenting justice stated that he would have answered “yes” to the first certified question because BP was covered by the policies and its coverage was not limited to liabilities assumed by Transocean in the drilling contract.

The case is No. 13-0670.

Attorneys: Allan B. Moore (Covington & Burling LLP), Deborah G. Hankinson (Hankinson LLP), and Thomas L. Cubbage, III (Covington & Burling LLP) for BP PLC. Richard N. Dicharry (Phelps Dunbar LLP) for Certain Underwriters at Lloyd’s London. Kent C. Sullivan (Sutherland Asbill & Brennan LLP), John M. Elsley (Royston, Rayzor, Vickery & Williams, LLP), and Reagan W. Simpson (Yetter Coleman LLP) for Transocean Offshore Deepwater Drilling, Inc. Byron C. Keeling (Keeling & Downes, PC), and Mr. Dwayne Richard Day (Dwayne R. Day, PC) for Ranger Insurance Ltd.

Companies: BP PLC; Certain Underwriters at Lloyd’s London; Transocean Offshore Deepwater Drilling, Inc.; Ranger Insurance Ltd.

MainStory: TopStory DamagesNews DefensesLiabilityNews ChemicalNews TexasNews

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