United States: The $750,000,000 Missing Comma?

Last Updated: October 15 2013
Article by Keith B. Letourneau

In April 2010, the mobile offshore drilling unit ("MODU") Deepwater Horizon suffered an explosion and catastrophic fire that led to the rig's sinking, the loss of eleven lives, and the largest oil spill disaster in U.S. history. The event sparked an onslaught of litigation, which was consolidated in a multi-district litigation ("MDL") proceeding in New Orleans. Transocean Offshore Deepwater Drilling Inc. ("Transocean") owned the rig and insured it through Ranger Insurance Co. Ranger provided $50 million in general liability coverage, and underwriters from London market syndicates provided four layers of excess coverage worth $700 million. The Ranger and excess policies contained materially equivalent terms. BP America Production Company ("BP") had entered a Drilling Contract with Transocean to employ the rig to exploit the Macondo well. Various BP companies were included as additional insureds under Transocean's policy.

In a short-lived decision, In re Deepwater Horizon (Ranger Insurance, Limited v. Transocean Offshore Deepwater Drilling, Inc.), 710 F.3d 338 (5th Cir. 2013), the Fifth Circuit held that the umbrella insurance policy, and not the indemnity provisions in the Drilling Contract, controlled the extent to which BP was covered for operations under the Drilling Contract.

The Drilling Contract required Transocean to maintain insurance covering its operations per Exhibit C to the contract, which obligated Transocean to name BP and its affiliated companies "as additional insureds in each of [Transocean's] policies, except Worker's Compensation for liabilities assumed by [Transocean] under the terms of this Contract." While the parties agreed that the Drilling Contract constituted an "Insured Contract" under the policy, the insurers sought declaratory judgment that they owed no additional insured obligation to BP with respect to pollution claims emanating from the Macondo well. BP argued that it was an additional insured under the policies, and that the policies alone—and not the Drilling Contract's indemnity obligations—governed the scope of BP's additional insured coverage.

But for a missing comma, the world was lost? The insurers argued that their additional insured obligation was limited to liabilities assumed by Transocean under the Drilling Contract's terms. Because the Drilling Contract did not impose indemnity obligations upon Transocean with respect to pollution-related liabilities, the lower court found that BP was not covered under Transocean's policies for such liabilities. The Fifth Circuit, however, found that the phraseology in the highlighted language above only applied to the Workers Compensation policy because no comma followed the word "Compensation."

Nonetheless, the Fifth Circuit noted that under Texas law (Evanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d 660 (Tex. 2008)), so long as the indemnity agreement and insurance provisions are separate and independent, the court looks to the applicable insurance policy, not the underlying service contract, to ascertain whether additional insurance coverage exists.

The Fifth Circuit also considered its earlier decision in Aubris Resources LP v. St. Paul Fire & Marine Ins. Co., 566 F.3d 483 (5th Cir. 2009), which, relying upon ATOFINA, similarly held that a separate indemnity clause does not apply to limit the scope of insurance coverage. In the final analysis, the Fifth Circuit held that it does not matter how the indemnity provision reads, for it is the language in the policy itself that dictates the extent of additional insured coverage, and because the policy did not exclude pollutionrelated liabilities from such coverage, BP was entitled to that coverage under Transocean's policies.

The missing comma, as it turns out, was just that after all, except that on August 29, 2013, the Fifth Circuit panel thought better of its decision, unanimously withdrew it, and asked the Texas Supreme Court to weigh in. In re Deepwater Horizon (Ranger Insurance Limited v. Transocean Deepwater, Inc.), No. 12-30230, 2013 WL 4606533 (5th Cir. Aug. 29, 2013). On petition for rehearing, the panel decided that no controlling Texas Supreme Court precedent existed. The court noted that uncertainty over the scope of the Texas Supreme Court's opinion in ATOFINA precipitated its decision to certify two questions for that court's consideration:

  1. Whether [ATOFINA] compels a finding that BP is covered for the damages at issue, because the language of the umbrella policies alone determines the extent of BP's coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the Drilling Contract are "separate and independent"?
  2. Whether the doctrine of contra proferentem applies to the interpretation of the insurance coverage provision of the Drilling Contract under [ATOFINA] given the facts of this case?

While BP argued that the additional insured and indemnity provisions were separate and independent, the insurers and Transocean argued that the Drilling Contract's indemnity clause differed markedly from the one in ATOFINA. Specifically, while the ATOFINA indemnity clause broadly required ATOFINA to be named as an additional insured, the Drilling Contract's indemnity clause only required BP to be named as an additional insured to the extent of liabilities assumed in the Drilling Contract. Thus, the indemnity clause and additional insured provisions were not separate and independent, but inextricably intertwined. Moreover, the policy at issue required the existence of an "insured contract," where none was required in ATOFINA.

The Fifth Circuit concluded that "[b]ecause there are potentially important distinctions between the facts of the instant case and ATOFINA, the outcome is not entirely clear."

Not forgetting about the missing comma in the Drilling Contract's additional insured clause, the court next addressed whether a longstanding Texas interpretative rule governing insurance policies applies to sophisticated parties. In Texas, when an insurance provision susceptible to more than one reasonable interpretation exists, the court must choose the one that benefits the insured, even if the more reasonable interpretation favors the insurer. The court noted that the Texas Supreme Court has never recognized a sophisticated insured exception to the foregoing rule, but perhaps it should given that the parties here were all "highly capable contractors." However, the insurers were not involved in drafting the Drilling Contract, and thus construing ambiguities in that contract might not be appropriate, though they were involved in drafting the insurance policy's additional insured clause.

The answers to these questions posed to the Texas Supreme Court promise to illuminate how contractual indemnity and additional insurance clauses in separate contracts and policies will be construed and crafted in the years to come, and whether a missing comma is worth $750,000,000.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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