Resolving one of the cases on our 2015 watch list, the Texas Supreme Court responded on Friday, February 13 to certified questions from the Court of Appeals for the Fifth Circuit that arose from an insurance dispute 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.

The first certified question was whether BP was an "additional insured" under Transocean's excess liability policy and if so, whether the coverage afforded under the policy was limited to the contractual liabilities assumed by Transocean in its drilling contract with BP. BP contended that the terms of the excess policy should be considered without reference to the drilling contract; in other words, that the scope of coverage should be determined from the "four corners" of the excess policy. Transocean and its insurers argued that the excess policy incorporated the drilling contract, thereby limiting the scope of coverage.

As reported on Friday in numerous media outlets, including Law360, Bloomberg, and Insurance Journal, the Court, in an 8-1 opinion, adopted Transocean's interpretation. Although the Court acknowledged that the excess policy did not specifically identify the drilling contract or expressly incorporate it, it found that the policy nevertheless incorporated the drilling contract by the mere reference to an "Insured Contract." The Court then construed the drilling contract's insurance provisions to limit BP's coverage as an additional insured to the obligations assumed by Transocean under the drilling contract. Because Transocean's responsibility under the drilling contract was limited to liability for pollution "originating on or above the surface of the land or water," the Court concluded that BP was not covered for its subsurface pollution liabilities. At least in Texas, policyholders who are additional insureds by virtue of an "insured contract" may want to expressly broaden or clarify the scope of the insurance coverage by use of an endorsement.

The second certified question involved the application of contra proferentem to the terms of drilling contract. The Court declined to answer this question, given its ruling regarding the first question.

Finally, those of you who relish the parsing of contract language may find interesting the Court's explanation of why it inserted a comma into the insurance provisions of the drilling contract. The Court found that BP's reading of a critical clause of a key provision, which relied on the absence of a comma in the clause, was an "unreasonable construction." Rather, the Court agreed with Transocean's interpretation of the clause, which required the insertion of a comma to make grammatical sense.

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