United States: The Supreme Court Of Texas Marries Contractual Limitations To Insurance Policies

In a case that has been closely watched by the oil and gas industry and its insurers, the Supreme Court of Texas issued its opinion in In re Deepwater Horizon on February 13, 2015, and settled the debate concerning whether a company's insurance policies stood alone or were married to and dependent upon an insured's limited obligation in a separate contract to insure and indemnify a third party. Specifically, the court found that Transocean's $750 million primary and excess insurance policies did not offer unrestricted coverage to BP as an additional insured, but instead incorporated and were bound by the limitations placed on Transocean's liability under the parties' drilling contract (the "Drilling Contract").

Major Takeaways: Know Your Partner, Know Your Risks, and Know Your Insurer

Offering practical guidance on contract drafting and interpretation, the decision highlights the importance of: (i) knowing the language of a party's insurance policies as they relate to assumed liabilities in third-party contracts; (ii) ensuring that the indemnification obligations in such third-party contracts are consistent with obligations to insure a third party; and (iii) clearly defining both parties' assumption of risks.

The Holding: It's a Mutual Relationship; the Underlying Contract Can Limit Insurance Coverage

The In re Deepwater Horizon, No. 13-0670, 2015 WL __________ (Tex. Feb. 13, 2015) decision responded to the 5th Circuit Court of Appeals' certified questions surrounding its prior withdrawn opinion that Transocean's insurance policy, read alone, did not limit the amount of coverage to BP even though the Drilling Contract did not require unrestricted indemnity of BP by Transocean. The Supreme Court of Texas made three instructive findings:

  1. Transocean's insurance policies incorporated the coverage limitations expressed in the Drilling Contract with BP;
  2. The Drilling Contract imposed a limitation on the additional insured coverage under Transocean's primary and excess insurance policies; and
  3. There was no ambiguity in the additional insured provision in the Drilling Contract.1.

The Underlying Case: In the Breakup, BP Claimed All of Transocean's Insurance Coverage

BP and Transocean's predecessors-in-interest entered into a Drilling Contract that provided that Transocean would indemnify BP for above-surface pollution regardless of fault and that BP would indemnify Transocean for all pollution risk Transocean did not assume.2. The Drilling Contract also required Transocean to name BP as an additional insured in each of Transocean's insurance policies, "except Workers' Compensation for liabilities assumed by [Transocean] under the terms of this contract."3. Following a catastrophic well blow-out resulting in a three-month-long oil spill into the Gulf of Mexico, BP sought coverage from Transocean's insurers for BP's liability for below-surface pollution.4. In response, Transocean's insurers sought a declaration that BP was not entitled to additional insured coverage for subsurface pollution claims because of the limitation of liability in the Drilling Contract.5. The District Court for the Eastern District of Louisiana agreed with Transocean's insurers; however, on appeal, the Fifth Circuit reversed in favor of BP.6.

Following a petition for rehearing, the Fifth Circuit withdrew its opinion and certified two questions to the Supreme Court of Texas:

  1. Whether BP was covered for the damages at issue, because the language of the umbrella polices alone determines the extent of BP's coverage as an additional insured if, and so long as, the additional insured and indemnity provision 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 given the facts of this case.7.

The Texas Court Analysis: It's a Two-Step Process

The Supreme Court of Texas began its analysis by reviewing the language in Transocean's insurance policies.8 The policies defined an "Insured" as:

"any person or entity to whom the 'Insured' is obligated by an oral or written 'Insured Contract'"

and further defined an "Insured Contract" 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."9.

Additionally the policies provided that "additional insured" status is afforded "where required by written contract, bid or work order."10. Based on the internal references to extrinsic documents in the insuring agreement, the court found that "at a minimum, [Transocean's] insurance policies require reference to the underlying Drilling Contract to determine BP's status as an additional insured."11.

Turning next to the Drilling Contract and the analysis of whether the additional insured and indemnity provisions of the Drilling Contract were "separate and independent," the court looked at the additional insured language which required Transocean to name BP as an additional insured on its insurance policies, "except Workers' Compensation for liabilities assumed by [Transocean] under the terms of this contract." (Emphasis added)12. The court noted that the insurance provision was "inexorably linked, at least in some respect," to Transocean's indemnity obligation; however, the parties differed as to the intended breadth of the limiting language.13.

Focusing on the lack of a comma between "Compensation" and "for," BP argued that the emphasized language was a narrow exception to Transocean's general obligation to name BP as an additional insured, arguing that the quoted exception applied only to Transocean's obligation to assume liability for workers' compensation policies covering Transocean's employees.14. Transocean and its insurers argued that the language excepted only workers' compensation policies from the general additional insured obligation and limited BP's additional insured status to the extent of Transocean's indemnity of BP.15.

The court agreed with Transocean and its insurers on the grounds that BP's argument was either inconsistent with other provisions in the Drilling Contract (which required BP to assume responsibility for "all claims, demands and causes of action" asserted by its employees for work-related personal injury) or rendered the words "liabilities assumed by [Transocean] under the terms of the contract" meaningless.16. As such, the court concluded that BP was an additional insured only as to liabilities assumed by Transocean under the Drilling Contract.

In addressing the second question certified to it, the court noted that the question was directed at resolving the parties' disagreement about whether the doctrine of contra proferentem (here, interpreting ambiguous language in favor of coverage) should apply to insurance-coverage disputes between sophisticated parties as well as the extent to which the rule applies to a contract incorporated by reference into an insurance policy.17. Because the court did not find any ambiguity in the insurance coverage provision in the Drilling Contract, it declined to answer this question.18.

Conclusion: Communication Is Critical; Focus on Congruency Between the Policy, the Contract, and the Insuring and Indemnity Clauses

The court's holding in In re Deepwater Horizon highlights the importance of ensuring that both agreements to indemnify and to insure a third party are congruent and consistent with any associated underlying policy of insurance. First, the insurance policy that supports indemnity and additional insured provisions in the drilling contract, master service agreement, or similar agreement should reference the fact that its scope and interpretation rely upon limitations in the underlying contract. Without the insurance policy's internal references to the underlying Drilling Contract, the Supreme Court of Texas may not have been required to go beyond the policy language to review the underlying contract to determine the scope of the agreement between Transocean and BP. Second, the parties to a services, equipment, or operations contract should clearly restrict the scope of any agreement to procure insurance for a third party to the amount of indemnity or other liability obligations expressly assumed by the insuring and indemnifying party. Absent language making the clauses dependent upon one another, the Supreme Court of Texas might not have relied upon the indemnity provisions as providing a limitation on Transocean's duty to add BP as an additional insured on its liability policy. A party cannot rely upon its insurer to address this issue through a specific and limited additional insured endorsement alone; the decision makes clear that oilfield participants must be clear in their agreements as to the interrelationship of the liabilities, indemnities, and insurance that they assume in their contracts.

Footnotes

1. In re Deepwater Horizon, No. 13-0670, 2015 WL __________ (Tex. Feb. 13, 2015) at *2.

2. Id. at *3—4.

3. Id. at *4.

4. Id. at *3.

5. Id. at *6.

6. Id. at *7.

7. Id. at *7.

8. In re Deepwater Horizon, at *9.

9. Id. at *5.

10. Id. at *18.

11. Id. at *13. In a footnote, the court found that BP's argument that it was an "Insured" was "facially suspect" on the grounds that "BP's construction of the policy would result in the extension of additional-insured coverage to a potentially unlimited number of 'other person[s] or entit[ies] to whom [BP as an] 'Insured' is obliged by any oral or written 'Insured Contract'... to provide insurance."

12. Id. at *18.

13. Id. at *19.

14. Id.

15. Id.

16. Id. at *20.

17. Id. at *24.

18. Id.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.