Additional insured provisions are a common risk allocation technique. Unfortunately, they often give rise to litigation over the scope of coverage afforded to the additional insured, and particularly over the role of the underlying contract in determining that scope of coverage. The latest illustration is the Texas Supreme Court's much anticipated opinion issued on Friday, February 13, in In re Deepwater Horizon, No. 13-0670, ___ S.W.3d ___ (Tex. Feb. 13, 2015). As will be seen, this holding appears to represent a significant expansion of the type of policy language that will be considered sufficient to incorporate limitations on the scope of coverage from an outside contract.

The History of the Case

Shortly after the Macondo blowout, BP made a claim as an additional insured seeking full coverage on Transocean's entire $750 million insurance stack. Given the magnitude of the spill, this claim could seriously deplete coverage for Transocean's own potential liabilities. Transocean and its insurers naturally contended that the scope of coverage to which BP was entitled was no broader than Transocean's very limited indemnity obligations and, in particular, did not protect BP for subsurface pollution.

The litigation in federal court illustrates the difficulty courts have in addressing this type of additional insured coverage issue. The federal district court held that BP's coverage was no broader than Transocean's indemnity obligations. The Fifth Circuit later reversed that decision (see our earlier post here) and granted BP full access to the policies but—on rehearing—vacated its own decision and certified two questions to the Texas Supreme Court (as discussed in our follow up post).

The first certified question was whether, under Evanston Insurance Co. v. ATOFINA Petrochemicals Inc., 256 S.W.3d 660 (Tex. 2008), BP and its affiliates are covered for below-the-surface pollution by Transocean's insurance policies as "additional insureds." The second was whether the doctrine that an ambiguous insurance contract will be interpreted in the insured's favor applies to the drilling contract's insurance-coverage provision under ATOFINA.

The Texas Supreme Court held that BP's coverage under the Transocean policies was constrained by the parties' underlying drilling contract. The Court also found the only reasonable interpretation of the drilling contract to be that Transocean was only required to extend limited coverage to BP. It therefore declined to answer the second question, reasoning that the ambiguity rule comes into play only if more than one reasonable interpretation of the contract exists.

The Underlying Contract and Policy Language

The BP/Transocean drilling contract contained a "knock-for-knock" allocation of risk, essentially requiring each party to assume responsibility for injuries to its own employees and damage to its own property, without regard to who caused the injury or how the damage occurred. One indemnity clause required Transocean to indemnify BP "for pollution . . . originating on above the surface of the . . . water," and required BP, in turn, to indemnify Transocean for any pollution risks not expressly assumed by Transocean, i.e. subsurface pollution risks. The upshot of these provisions was that if something leaked from the Deepwater Horizon drilling vessel itself, Transocean had to indemnify BP. For anything else, including the Macondo well blowout, BP had to indemnify Transocean.

Without limiting the scope of Transocean's indemnity obligations, the drilling contract separately required Transocean to secure insurance coverage and to name BP and its affiliates and related entities:

as additional insureds in each of [Transocean's] policies, except Workers' Compensation for liabilities assumed by [Transocean] under the terms of [the Drilling] Contract. (emphasis added).

The policies did not contain an additional insured endorsement explicitly naming BP as an additional insured. Instead, the policies themselves extended "Insured" status to:

[a]ny person or entity to whom the 'Insured' is obliged by oral or written 'Insured Contract' . . . to provide insurance such as afforded by [the] Policy.

The policies also stated that "where required by written contract, bid or work order, additional insureds are automatically included hereunder." They then defined an "Insured Contract" as including:

 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 to pay for 'Bodily Injury' [or] 'Property Damage' . . . to a 'Third Party' or organization.

There was no dispute that the drilling contract was an "Insured Contract" and, consequently, no dispute that BP was an additional insured on Transocean's policies. The question was the scope of that coverage; specifically, whether it was limited to "liabilities assumed by Transocean under the terms of [the Drilling] Contract."

The Court's Analysis

"Texas law has long provided that a separate contract can be incorporated into an insurance policy by an explicit reference clearly indicating the parties' intention to include that contract as part of their agreement." See Urrutia v. Decker, 992 S.W.2d 440 (Tex. 1999); Evanston Insurance Co. v. ATOFINA Petrochemicals Inc., 256 S.W.3d 660 (Tex. 2008). While this basic proposition was never in doubt, courts have sometimes found it difficult to apply. BP claimed that the four corners of the policies neither limited its status as an additional insured nor contained language incorporating by reference the external limitations of the drilling contract into the policy itself. It therefore claimed it was entitled to full coverage for the Macondo spill without regard to the fact that the incident arose from subsurface pollution—a risk it assumed in the drilling contract.

The Texas Supreme Court disagreed. It concluded that language in Transocean's policies conferring "Insured" status to other parties "where required by written contract, bid or work order" was sufficient to incorporate the parties' external drilling contract into the insuring agreement, thereby limiting BP's coverage as an additional insured to above-surface pollution. The Court reasoned that the policy language conferring additional-insured coverage "where required" and as "obliged" required it to consult the drilling contract's additional-insured clause to determine whether the stated conditions exist.

The language relied on by the Texas Supreme Court should be compared with the language of policies previously deemed sufficient to incorporate underlying contractual limitations. For example, the policy at issue in Urrutia v. Decker, 992 S.W.2d at 442, provided coverage "only to the extent and for the limits of liability agreed to under contractual agreement with the named insured." Similarly, the policy in Becker v. Tidewater, Inc., 586 F.3d 358 (5th Cir. 2009), clearly stated that, "[i]n no event shall Insurance coverage be afforded hereunder to such other assureds to any greater extent than that which the Named Insured [Tidewater] is expressly obligated by contract to provide." And in Aubris Resources L.P. v. St. Paul Fire & Marine Ins. Co., 566 F.3d 483 (5th Cir. 2009), the Fifth Circuit found it appropriate to look to the underlying contract to determine the scope of coverage where the policy provided coverage only "if that [underlying] written contract ... specifically requires such coverages for that person...."  All of these cases not only required resort to the underlying contract to determine additional insured status, but were explicit in limiting coverage scope as provided by those underlying contracts.

The Court next turned to the language of the drilling contract stating that Transocean was only required to extend additional insured status "for liabilities assumed by [Transocean] under the terms of [the Drilling] Contract." The Court concluded that the only reasonable interpretation of the contract was that "Transocean had separate duties to indemnify and insure BP for certain risk, but the scope of that risk for either indemnity or insurance purposes extends only to above-surface pollution."

Potential Impact

The Court's ruling seems to be an expansion of what constitutes "an explicit reference clearly indicating the parties' intention to include [an underlying] contract as part of their agreement." See Urrutia, supra. It could have relied on the reference to an "Insured Contract" in the policy as an explicit reference to the indemnity provisions of the underlying drilling contract, and held that reference was sufficient evidence of intent to incorporate those provisions as limitations on the scope of coverage. Instead, the Court appeared to rely more heavily on general language making entities additional insureds "where required by written contract."

For practitioners and their clients, the In re Deepwater Horizon opinion may present a number of issues going forward beyond determining whether policy language sufficiently incorporates an outside contract.

For example, the policy at issue in Evanston v. ATOFINA extended coverage to any "person or organization for whom you [the named insured] have agreed to provide insurance as is afforded by this policy...."  Thus, it plainly required resort to the underlying contract to determine if the named insured "agreed to provide insurance as is afforded by this policy." The Court, however, distinguished ATOFINA from In re Deepwater Horizon on the basis that "the existence of a certificate of insurance naming ATOFINA as an additional insured meant that ... there was no need to look to the underlying service contract to ascertain ATOFINA's status as 'a person or organization for whom you have agreed to provide insurance as is afforded by this policy.'"

This is a rather interesting distinction given that the existence of an insurance certificate was not the basis for the ATOFINA holding. This conclusion also seems inconsistent with the traditional role of certificates of insurance, which evidence insurance coverage but do not confer or define it. In fact, by statute, insurance certificates cannot "amend[], extend or alter[], coverage" or "convey contractual rights." Tex. Ins. Code §1811.051, 1811.152. Further, the standard ACORD insurance certificate expressly states, in bold capitalized print:

THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.

Insurance certificates can be wrong and are no substitute for looking to the underlying contract as the predicate document providing coverage to an additional insured.

Of additional interest, the In re Deepwater Horizon Court noted that "BP is not named in any of the policies" or "expressly included as an additional insured in an endorsement or certificate of insurance." This raises the question of what would have happened had BP been named as an insured in an endorsement or insurance certificate? Would the Court have held that this precluded any need to look to the underlying contract (even though the endorsement or certificate was issued only because of an underlying contractual obligation) and changed the result in the case?

Finally, the decision does not address how far courts will go in inferring coverage limitations from underlying contracts. The drilling contract at issue was fairly clear in stating that Transocean was only required to extend additional insured status "for liabilities assumed by [Transocean]." However, underlying contracts are not always as clear in this regard and sometimes fail to explicitly state that the required additional insured coverage is limited to the scope of any applicable indemnity obligations. Parties and insurers should therefore continue to be careful to use clear drafting and to insure that the policy and underlying contract are consistent with each other.

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.