When the Texas Supreme Court decided In re Deepwater Horizon earlier this year, it portended significant changes in the rights of companies named as "additional insureds" pursuant to contractual requirements. In limiting BP's coverage for the Gulf of Mexico oil spill, the Court departed from the principle that insurance policies should be interpreted based on their express terms. The Texas Supreme Court instead based its ruling on BP's drilling contracts, which were not mentioned in the insurance policies. Now the U.S. Court of Appeals for the Fifth Circuit, in Ironshore Specialty Insurance Co. v. Aspen Underwriting, Ltd., has extended Deepwater Horizon and starkly illustrated its implications.
Readers will remember that Deepwater involved an oil drilling contract, under which the drilling contractor agreed to name BP, the owner of an oil rig, as an additional insured. The insurance dispute was between BP and Transocean, the Deepwater Horizon oil rig owner and operator, over coverage for subsurface pollution liabilities arising from the explosion on the rig in 2010. In Deepwater, the court departed from the usual common-law rule that the interpretation of an insurance policy is governed by the language found in the "four corners" of the policy itself, concluding that the policy's reference to "insured contracts"—and language adding the insured "where required by written contract"—constituted sufficient references the drilling contract to incorporate its separate terms by reference, including terms not found in the policy itself that defeated BP's claim to coverage.
In Ironshore, which also involved Texas law, the owner of an oil well contracted with another company to operate a drilling rig. The companies entered into a master services agreement (MSA) that contained a mutual indemnification clause and a provision requiring the rig operator to name the well owner as an additional insured on $5 million worth of insurance coverage. The rig operator, however, named the well owner as an additional insured on its entire $51 million tower of liability coverage—and nothing in the policies themselves (as opposed to the MSA) limited the insurance available to the well owner to less than the full policy limits. But the policies did include "insured contracts" language similar to the language in the policies at issue in Deepwater.
When two of the rig operator's workers were killed in an accident, pursuant to the MSA the well owner faced liabilities far in excess of $5 million. This, in turn, led to a fight among the two companies' liability insurers. Because the well owner was named an additional insured on all $51 million of the rig operator's policies, the well owner's insurer argued that the rig operator's insurers should be required to pay up to their full policy limits. The rig operator's insurers argued that a $5 million limit should be read into the policies, because that was all the MSA required, and the MSA's requirement should be incorporated into the policies by reference.
The Fifth Circuit ruled in favor of the rig operator's insurers, holding that the policy's reference to an "insured contract" was enough, standing alone, to incorporate the $5 million limit specified in a particular insured contract—the MSA—by reference. This holding is remarkable, considering that the well owner was named as an additional insured on $51 million worth of coverage, and that the "insured contract" language in the policy appeared in a pre-printed form without specific reference to a particular contract. In essence, courts applying Texas law are now citing agreements outside the four corners of the policy to overcome the language of the policy itself.
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