Action Item: Courts must consider whether an insurance policy incorporates other documents and the extent thereof in evaluating the existence of additional insured coverage. Parties should evaluate the policy and underlying contract language to ascertain whether the insurance coverage matches indemnity obligations.
In the ongoing Deepwater Horizon saga, Transocean and its insurers contested whether BP was entitled to additional insured status under Transocean’s policy and the parties’ drilling contract. The case went before the Fifth Circuit Court of Appeals, which at first ruled in BP’s favor, and then withdrew its opinion and certified two questions for the Texas Supreme Court’s consideration. The first asked whether an earlier decision in Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), compelled a finding that BP was covered for the subsurface pollution damages claimed because the language in the umbrella policy alone determines the extent of BP’s coverage as an additional insured so long as the additional insured and indemnity provisions of the drilling contract are “separate and distinct.”
In a long-awaited decision, the Court ruled 8-to-1 on February 13, 2015, that BP’s additional insured claim is inextricably intertwined with the provisions of its drilling contract with Transocean. See In Re Deepwater Horizon, Relator, No. 13-0670, slip opinion (Tex. Feb. 13, 2015). Because the only reasonable construction of that contract’s additional insured clause is that BP’s status as an additional insured is limited to liabilities assumed by Transocean, and BP assumed liabilities for subsurface pollution, BP is not covered for the damages claimed. Id. Because of that holding, the Court did not reach the second question, which asked whether the contra proferentum doctrine applied to the interpretation of the insurance coverage provision in the drilling contract.
One portion of BP’s argument hinged on a missing comma (following the word “Compensation”) in the drilling contract’s additional insured clause, which read:
BP argued that the missing comma meant that its coverage extended to the full limit of the policy and was not limited by liabilities assumed by Transocean, except with respect to Workers’ Compensation coverage. The Court found BP’s construction “unreasonable” because it would render the words “liabilities assumed by [Transocean] under the terms of this contract” meaningless.
Discussing its insurance-policy-construction principles, the Court noted that it starts with a review of the insurance policy’s “four corners.” Thereafter, the Court will examine an incorporated document to the extent the policy requires, but will not consider coverage limitations in underlying contract documents, unless the policy’s terms obligate it to do so. Applying these principles, the Court concluded that it had to look to the underlying drilling contract to determine BP’s status as an additional insured. The language in the policy extending additional insurance coverage “where required” and as “obliged” required the Court to look to the drilling contract’s additional insured clause to determine whether such obligations existed. The Transocean policies also referred to an “Insured Contract” that required Transocean “to provide insurance as a predicate to status as an ‘Insured.’”
For risk management purposes, there are several take-away points from this decision. Firstly, when Texas law applies, parties need to pay close attention to the insurance policy’s language to determine the extent to which a court will look to the underlying service contract “to ascertain the existence and scope of additional-insured coverage.” To tighten up liability exposure, it may be worthwhile to vet these provisions now to evaluate whether policy language bleeds to another document. If so, it may be time to apply bandage language. Secondly, insurance and indemnity clauses in service contracts are not always congruent—that is, unless properly drafted, additional insurance clauses may afford more protection than an indemnity clause obligates a party to provide. To make them congruent, the additional insured language should limit liability to that assumed under the service contract.
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