In Deepwater Horizon Case, Texas Supreme Court Rules that BP Was Not Entitled to Coverage as an Additional Insured

The Texas Supreme Court, in response to questions certified by the U.S. Court of Appeals for the Fifth Circuit, has ruled that the BP oil company was not entitled to coverage as an additional insured under primary and excess insurance policies obtained by the owner of the Deepwater Horizon drilling rig, Transocean, in connection with the explosion and sinking of the rig in April 2010.

The Case

Transocean owned the Deepwater Horizon, a mobile offshore drilling unit operating in the Gulf of Mexico pursuant to a drilling contract between Transocean’s predecessor and BP’s predecessor (the “Drilling Contract”). After an explosion, the rig caught fire and fully submersed after burning for more than a day. The incident killed 11 crew members and led to numerous personal injury claims and claims for environmental and economic damages stemming from the discharge of millions of gallons of oil into the Gulf of Mexico.

Both BP and Transocean sought coverage under Transocean’s $50 million general liability insurance policy and under $700 million of excess insurance policies for claims related to the Deepwater Horizon event.

After BP made a demand for coverage, the insurers sought a declaration that BP was not entitled to additional insured coverage for subsurface-pollution claims arising from the Deepwater Horizon incident based on the liabilities BP expressly had assumed in the Drilling Contract because the Drilling Contract limited the additional insured obligation to “liabilities assumed by [Transocean] under the terms of [the Drilling] Contract.”

Although not disputing that BP was an additional insured under the Transocean policies, the insurers argued that, in the Drilling Contract:

• BP and Transocean had agreed to a “knock-for-knock” allocation of risk that was standard in the oil and gas industry (each party assumes responsibility for injuries to its employees and damage to its property regardless of fault);
• Transocean had agreed to indemnify BP for above-surface pollution regardless of fault; and
• BP had agreed to indemnify Transocean for all pollution risk Transocean did not assume, i.e., subsurface pollution.

A federal district court in Louisiana determined that BP was not an insured for subsurface pollution liabilities deriving from the Deepwater Horizon incident and granted summary judgment in favor of the insurers.

BP appealed.  The Fifth Circuit certified questions to the Texas Supreme Court concerning the interplay between the policy language and the Drilling Contract. 

The Texas Supreme Court’s Decision

The Texas Supreme Court held that:

• the Transocean insurance policies included language that necessitated consulting the Drilling Contract to determine BP’s status as an “additional insured”;
• under the terms of the Drilling Contract, BP’s status as an additional insured was “inextricably intertwined with limitations on the extent of coverage to be afforded under the Transocean policies”;
• the only reasonable construction of the Drilling Contract’s additional insured provision was that “BP’s status as an additional insured” was limited to the liabilities Transocean had assumed in the Drilling Contract; and
• BP was not entitled to coverage under the Transocean insurance policies for damages arising from subsurface pollution because BP, not Transocean, had assumed liability for such claims.

In its decision, the court explained that an insurance policy “may incorporate an external limit” on additional insured coverage. By tying additional insured coverage to the terms of an underlying agreement, the court continued, the parties obtained only the coverage the insured was contractually obligated to provide, “thereby minimizing the insurer’s exposure under the policy and the named insured’s premiums.”

The court then found that the Transocean insurance policies incorporated the limits in the Drilling Contract with respect to the extent of BP’s status as an additional insured. The court reasoned that BP was not named in any of the policies and that there was no evidence that it was expressly included as an additional insured in an endorsement or certificate of insurance. Thus, it said, if the coverage inquiry were constrained to the language in the policies, BP would have no coverage at all. The policies, though, conferred coverage by reference to the Drilling Contract, in which Transocean assumed some liability for pollution that might otherwise be imposed on BP (making that contract an “Insured Contract”), and Transocean was “obliged” to obtain insurance coverage for BP as an additional insured (making BP an “Insured”). Accordingly, the court turned to the Drilling Contract’s additional insured clause and concluded that the “only reasonable interpretation of that clause” was that the parties had not intended for BP to be named as an additional insured for the subsurface pollution liabilities BP expressly had assumed in the Drilling Contract.

The court concluded that, applying the “only reasonable construction” of the additional insured provision, BP was an additional insured “only to the extent of the liability Transocean assumed for above-surface pollution.”

The case is In re Horizon, No. 13-0670 (Tex. Feb. 13, 2015).