In a decision handed down by the Supreme Court of Texas on
Friday, the court determined that BP was not entitled to additional insured
coverage under several insurance policies issued to Transocean by a variety of
insurers. In re: Deepwater Horizon, No. 13-0670 (Tex. Feb. 13,
2015).
The opinion also provides significant insights regarding the
relationship between insurance and indemnity as risk transfer mechanisms,
namely, that: (1) a named insured can purchase a greater amount or scope
of coverage for an additional insured than required to under the underlying
contract; (2) the scope of indemnity and additional insured provisions are “not
necessarily congruent”; and (3) the policy language dictates “the extent to
which, if any, [courts] must look to an underlying service contract to
ascertain the existence and scope of additional-insured coverage.”
Nonetheless, because the subject policies required that the insurance policy
provisions be construed in accordance with the underlying contract provisions,
including the indemnity provisions, the Supreme Court believed it must go
beyond the four corners of the insurance policies in narrowly construing
additional insured coverage for BP in accordance with the limitations in the
underlying contract.
The underlying dispute arose from the highly publicized
April 2010 explosion and sinking of the Deepwater Horizon, an oil-drilling rig
operating in the Gulf of Mexico. The explosion resulted in the death of
11 crew members, the sinking of the rig, and the release of millions of gallons
of oil into the Gulf of Mexico. In this coverage action stemming from the
explosion, BP, the oil-field developer, sought coverage under the primary and
excess policies issued to Transocean, the drill-rig owner. The limits of
those policies totaled $750 million. BP was not specifically named as an
insured on the policies.
In response to BP’s demand for coverage, the insurers sought
a declaration that they had no duty to defend or indemnify BP as an additional
insured against claims involving subsurface pollution. Transocean
intervened and aligned with its insurers.
The subject additional insured
endorsement in the insurers’ policies extended coverage to “[a]ny person or
entity to whom [Transocean] is obliged by oral or written ‘Insured Contract’ …
to provide insurance such as afforded by [the] policy.” The policy
defined “Insured Contract” as “any written or oral contract or agreement
entered into by [Transocean] … 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.”
The
coverage dispute centered on language in the Drilling Contract between BP and
Transocean that: (1) required Transocean to indemnify BP for
above-surface pollution, regardless of fault, and required BP to indemnify
Transocean for all pollution risks not assumed by Transocean; and (2) required
Transocean to name BP as an additional insured “in each of [Transocean’s]
policies, except Workers’ Compensation for liabilities assumed by [Transocean]
under the terms of [the Drilling] Contract.”
BP contended that Texas law did not allow for the
incorporation of the specific provisions found in the Drilling Contract to
limit BP’s status as an additional insured. The district court granted
summary judgment in the insurers’ favor, holding that insurance policies should
be construed in accordance with the terms of the Drilling Contract. On
appeal, the Fifth Circuit reversed and concluded that coverage disputes should
be resolved based solely on the four corners of the insurance policies.
The Fifth Circuit subsequently withdrew its decision and certified questions to
the Supreme Court of Texas, including, in relevant part, whether Evanston
Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008),
directed the court to find coverage for BP if the insurance and indemnity
provisions of the Drilling Contract are “separate and independent.”
In deciding this question, the Supreme Court of Texas
concluded that the provisions in the Drilling Contract must be read in
conjunction with the insurance policies, which would have the effect of denying
BP coverage under the policies.
The Supreme Court further concluded that
the Drilling Contract limited any additional insured obligations to BP to only
the liabilities assumed by Transocean under the contract.
With respect to BP’s argument that only the four corners of
the policies can be referenced in coverage disputes, the Supreme Court pointed
to longstanding precedent that “insurance policies can incorporate limitations
on coverage encompassed in extrinsic documents by reference to those
documents.” Moreover, the court refused to require any “magic” words in
order to incorporate provisions from another contract into the policy, so as
long as the policy clearly manifests intent to incorporate the contract.
The Supreme Court also distinguished the ruling in ATOFINA because the policy
therein did not link coverage to the terms of contract; instead, the only
coverage restrictions were in the policy itself. Therefore, the Supreme
Court stated that the subject insurance policies allowed for consideration of
limitations in the Drilling Contract.
Additionally, the Supreme Court rejected BP’s assertion that
the indemnity and insurance agreements in the underlying contract were separate
and independent. While BP pointed to a particular provision in the
Drilling Contract that appeared to indicate the insurance obligation was to be
provided without limitation, the Supreme Court found that BP’s interpretation
improperly disregarded the context for the provision.