The Implications of the Deepwater Horizon Decision

by Veronica Martinsen Bates

In a case worth hundreds of millions of dollars, the Texas Supreme Court definitively ruled that coverage to an additional insured, when acquired by contract, is limited not only by the policy terms but also by the terms of the contract itself. In Re Deepwater Horizon, 2015 WL 674744 (Feb. 13, 2015). The dispute arose from the April 2010 explosion and sinking of the Deepwater Horizon oil-drilling rig resulting in what is commonly known as the BP oil spill in the Gulf of Mexico. Transocean owned the drilling unit and operated it under a drilling contract with BP. Under the contract, Transocean agreed to indemnify BP for above-surface pollution regardless of fault, and BP agreed to indemnify Transocean for subsurface pollution. The contract also required Transocean to carry insurance naming BP as an additional insured, but specified that the scope of the additional insured coverage was for liabilities assumed by Transocean under the terms of the contract. The policies obtained by Transocean provided additional insured status to any person or entity to whom Transocean was obligated by way of an “insured contract” to provide such coverage.

BP strenuously contended that, pursuant to the case of Evanston Ins. Co. v. ATOFINA Petrochems., Inc, 256 S.W.3d 660 (Tex. 2008), the additional insured coverage was governed by the policy language alone, not the indemnities assumed in the contract. The Court in Atofina did, in fact, hold that the contractual agreement to name ATOFINA as an additional insured was separate and independent from the limitations found in the contractual indemnity agreement. Id. at 670.

The question in the BP case became whether the Court was expressing a bright line test whereby coverage to an additional insured can never be limited by the terms of a collateral contract, or whether the ruling based upon the contract and policy language in that particular case. Deciding this issue was so close and the impact on the oil and gas industry was so great that the Fifth Circuit declined to rule and instead certified the question to the Texas Supreme Court. In a majority decision with only one dissent, the Court held that the contract and policy language involved in Deepwater was distinguishable from that in ATOFINA and that the contract language did limit the scope of the additional insured coverage to liability for above-surface pollution.

The Court noted that it has long held that insurance policies can incorporate limitations on coverage encompassed in extrinsic documents by reference to those documents. Therefore, the inquiry begins with a review of the policy; and if the policy language directs the reader to another document, then that document must be read in conjunction with the policy in order to determine the existence and scope of additional insured coverage.

The additional insured provisions in the Transocean policies did reference the contract. Indeed, without the contractual requirement for insurance, BP would not be an insured under the policies. Therefore, it was necessary for BP to refer to the contract as well in order to assert additional insured status. Turning to the contract, the Court focused on the insurance clauses which specified that BP was to be named as an additional insured under Transocean’s policies for liabilities assumed by Transocean under the contract. Since the contract terms only obligated Transocean to indemnify BP for above-surface pollution, BP was only insured under the policy for that type of liability – not for liability due to subsurface pollution. The Court noted that “under the terms of the drilling contract, BP’s status as an additional insured is inextricably intertwined with the limitations on the extent of coverage to be afforded under the Transocean policies . . .”

In Re Deepwater Horizon sheds light on the Court’s earlier ruling in Atofina with a reminder that an insurance policy cannot be read in a vacuum. A policy is a contract which can incorporate terms of other contracts to define the scope of the coverage provided therein.