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February 26, 2015

Implications on Additional Insured Status from the Texas Supreme Court’s Deepwater Horizon Decision

In Re Deepwater Horizon: Texas Supreme Court Resolves Important Additional Insured Questions

By: Michael A. Orlando and Mike A. Orlando, Jr., Meyer Orlando LLC

The burning question has been: may an underlying services contract (such as a master services agreement, marine charter agreement, etc.) be used to determine whether additional insured status is owed and if so the scope of such coverage in a liability policy, or, conversely, is additional insured coverage determined by only considering the insurance policy itself. Those questions were quite important to BP, Transocean, and Transocean’s insurers in connection with BP’s belief it was owed additional insured status and coverage under Transocean’s liability policies with $750 million of coverage related to the Macondo oil spill. The answers were provided recently by the Texas Supreme Court (2015 WL 674744, Feb. 13, 2015). The Court determined that BP was not owed coverage under Transocean’s insurance policies because the Court incorporated limitations on Transocean’s underwater-pollution liability from the BP-Transocean drilling contract into the insurance policy, thereby releasing Transocean and its insurers from paying BP’s underwater pollution costs. The Court’s decision carries broad implications/lessons for not just energy and marine liability insurers, but to all who deal with the scope and interpretation of additional insured issues in liability policies generally.

I. Court’s Holdings

The Court’s holdings are Transocean’s insurance policies include language that necessitates consulting the drilling contract to determine BP’s status as an additional insured; per the drilling contract, BP’s status as an additional insured is inextricably intertwined with limitations on the extent of coverage under Transocean’s policies; the only reasonable construction of the drilling contract’s additional insured provision is that BP’s status as an additional insured is limited to the liabilities Transocean assumed in the drilling contract; and, BP is not entitled to coverage for damages arising from subsurface pollution because BP, not Transocean, assumed liability in the incorporated drilling contract for such claims. The following discusses how the Court reached its decision.

II. Case Background

The drilling contract had standard “knock-for-knock” indemnities for personal injuries and property damage, and split pollution liabilities with Transocean agreeing to indemnify BP for above-surface pollution regardless of fault and BP taking on responsibility for all other pollution risks. Transocean was required to carry a number of insurance policies and to name BP as additional insured in each of Transocean’s policies except workers compensation “for liabilities assumed by [Transocean] under the terms of [the Drilling] Contract.” Transocean’s policies extended additional insured status to any “person or entity to whom the ‘Insured’ is obliged by oral or written ‘Insured Contract’…to provide insurance such as afforded by [the] Policy.” “Insured contract” had its usual definition, including an oral or written agreement pertaining to the insured’s business under which the insured assumes the tort liability of another party for bodily injury or property damage to a third party. There was no dispute that BP was an additional insured, the drilling contract was an insured contract under the insurance policies, and the insurers were not parties to the drilling contract – the dispute was the scope of the coverage.

III. Incorporating Underlying Contracts Into Insurance Policies

BP’s main argument towards a coverage grant was a court should only look to the 4-corners of an insurance policy in determining whether coverage is owed; BP believed it should be covered because the Transocean policies did not limit an insured’s pollution coverage to pollution occurring above or below the surface. Transocean argued that language in its insurance policies incorporated the additional insured and the indemnity provisions within its drilling contract with BP and those provisions eliminated Transocean’s duty to provide insurance to cover BP’s liability for pollution occurring below the surface. The Court sided with Transocean.

The Court’s incorporation of the drilling contract into the insurance policy stemmed from Texas contract law that allows incorporation of an extrinsic document if reference is made to that extrinsic document in the insurance policy language. The Court stated it does “not require ‘magic’ words to incorporate a restriction from another contract into an insurance policy; rather, it is enough that the policy clearly manifests an intent to include the contract as part of the policy.” Importantly, the Court specifically outlined the steps it will take when asked to incorporate an outside document into an insurance policy:

“[W]e determine the scope of coverage from the language employed in the insurance policy, and if the policy directs us elsewhere, we will refer to an incorporated document to the extent required by the policy. Unless obligated to do so by the terms of the policy, however, we do not consider coverage limitations in underlying documents.”

From this foundation, both the insured and the insurer can determine whether the language of the policy invites potential incorporation of other documents. In Deepwater Horizon, Transocean was the named insured under its policies; BP was not specifically named as an insured in the policies or endorsements, and was not issued a certificate of insurance. BP’s coverage under the policies originated from the requirement on the insurer to pay for losses “assumed by the ‘Insured’ under an ‘Insured Contract.’” The policies “who is an insured” section 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.” In sum, BP’s coverage under the policies hinged on the existence of a contract where Transocean assumed BP’s tort liability and was obligated to provide insurance for such liability. The policies’ language directed the Court to the BP-Transocean drilling contract’s additional insured provision to determine whether Transocean was obligated to indemnify BP and provide insurance.

The “who is an insured” section of liability policies plays a major role in determining whether a court will look to an underlying service contract to determine additional-insured status. The Texas Supreme Court case of Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., provides another example of the importance of the “who is an insured” policy provision. ATOFINA entered into a service contract with Triple S to perform maintenance and construction work at ATOFINA’S refinery; the contract required Triple S to indemnify ATOFINA for all personal injuries and property losses sustained during the performance of the contract, except for losses caused by the sole or concurrent negligence of ATOFINA, to obtain insurance to cover this indemnity obligation, and to furnish certificates of insurance to ATOFINA that showed ATOFINA as an additional insured under the policy. After a Triple S worker was injured at the refinery, ATOFINA sought coverage as an additional insured under Triple S’s primary and excess policies.

The excess policy’s “who is an insured section” contained two applicable clauses: 1) an insured included “a person or organization for whom you have agreed to provide insurance as is afforded by this policy; but that person or organization is an insured only with respect to operations performed by you or on your behalf, or facilities owned or used by you;” 2) “any other person or organization who is insured under a policy of ‘underlying insurance.’ The coverage afforded such insureds under this policy will be no broader than the ‘underlying insurance’ except for this policy’s Limit of Insurance.” The Court found that ATOFINA qualified as an “insured” under the first clause because it obtained a certificate of insurance physically naming it as an additional insured, thus meeting the “person or organization for whom you agreed to provide insurance” portion of the clause and the accident to the named insured’s employee occurred while that employee was performing operations on behalf of the named insured. Note that the Court’s analysis only went so far as the “who is an insured” clause allowed; the Court did not delve into the underlying service contract or whether ATOFINA’s negligence caused the accident because that sort of analysis was not prompted by the specific language of this “who is an insured” clause.

The Court’s analysis of the second “who is an insured” clause is instructive because this second clause’s “insured under a policy of underlying insurance” language incorporated-by-reference the primary insurance policy and all of its terms and restrictions. The primary policy contained an endorsement naming ATOFINA as additional insured for liabilities arising out of Triple S’s operations for ATOFINA, except for any liabilities caused by ATOFINA’s sole negligence. The Court incorporated the sole negligence limitation on coverage into the excess policy but ultimately found that the party at fault for the accident was never determined so it remained unknown whether ATOFINA’s sole negligence caused the employee’s accident and thus coverage could not be disclaimed. This “who is an insured” clause made specific reference to the primary policy, and thus the primary policy and its exclusions were incorporated into the coverage analysis.

The most important takeaway from these portions of In re Deepwater Horizon and ATOFINA is that the initial step has to be a review of the specific language in an insurance policy’s additional insured / “who is an insured” provisions to determine the scope of the parties’ agreed-upon additional insured coverage. The Court maintains its 4-corners rule, however, it allows parties to look outside the policy if the contents of those 4-corners direct it to an extrinsic agreement to determine the scope of what is owed.

IV. Post-Incorporation Coverage Analysis

The “Insured Contract” and “who is an insured” language in Transocean’s policies directed the Court to the BP-Transocean drilling contract’s additional insured clause in order to determine whether Transocean contractually agreed to indemnify BP for pollution damage. The drilling contract’s additional insured language stated: “[BP], its subsidiaries and affiliated companies, co-owners, and joint venturers, if any, and their employees, officers, and agents shall be named as additional insureds in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of this contract.” The Court read this entire provision so as to give meaning to every word and the intent of the parties.

Rejecting BP’s argument that the comma placement before “Workers Compensation” made the “liabilities assumed by Transocean under the terms of this contract” limitation applicable only to workers compensation liabilities, the Court found that Transocean’s indemnification of BP’s tortious conduct extended only to the liabilities assumed by Transocean in the entire drilling contract. This language next directed the Court to the contract’s indemnity section whereby BP agreed to be solely responsible for all subsurface pollution. As there was no obligation for Transocean to provide insurance for subsurface pollution risks, BP lacked status as an “insured” under the Transocean policies for those specific risks.

This was true even though the drilling contract contained a clause making the indemnity and insurance requirements separate and independent duties. Both could be congruent in the risks covered. The independent duties clause did not provide for different risks as to the extent of indemnity or the scope of additional insured coverage. In fact, the scope was the same for each and because there could be no indemnity there was no coverage as an additional insured for subsurface pollution in favor of BP.

V. Conclusion

If the wording of an insurance policy allows for incorporation of another contract so as to interpret the status and scope of coverage, then a court must do so, but only to the extent allowed by the insurance policy language. The differences in the ATOFINA case’s ‘who is and insured’ language with that of Transocean’s are instructive to note the power carried by specific language limiting or expanding an insurer’s coverage for additional insureds. In Re Deepwater Horizon should have the effect of reducing insurance coverage disputes between those seeking additional insured coverage and insurers when appropriate language exists in the insurance policy allowing incorporation of an underlying services contract.