(Article from Insurance Law Alert, February 2015)
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The Texas Supreme Court ruled that BP Plc was not entitled to additional insured coverage under primary and excess policies issued to Transocean Ltd., the owner of the Deepwater Horizon oil rig, because the Drilling Contract between the parties expressly provided that BP was responsible for subsurface pollution liabilities.
In re Deepwater Horizon, Relator, 2015 WL 674744 (Tex. Feb. 13, 2015).
The parties did not dispute that BP was an additional insured under Transocean’s policies. However, Transocean and the insurers argued that BP was not entitled to coverage for subsurface pollution liabilities because it explicitly assumed those risks in the Drilling Contract. A Louisiana federal district court agreed, ruling that any additional insured coverage available to BP under Transocean’s policies was limited to liabilities assumed by Transocean in the Drilling Contract. The district court held that because Transocean had not assumed subsurface pollution liability risks, BP could not be deemed an additional insured as to those risks.
In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mex. On Apr. 20, 2010, 2011 WL 5547259 (E.D. La. Nov. 15, 2011) (discussed in
December 2011 Alert) The Fifth Circuit reversed, reasoning that coverage should be ascertained solely from the “four corners of the insurance policies” without reference to the Drilling Contract. On rehearing, the Fifth Circuit withdrew its opinion and sought guidance from the Texas Supreme Court.
The central issue referred to the Texas Supreme Court was whether the insurance policies incorporated the terms of the Drilling Contract, such that the allocation of liabilities in the Drilling Contract would define the scope of additional insured coverage. BP argued that nothing in the insurance policies indicated an intent to incorporate the Drilling Contract, and that under the terms of the policies, BP is covered for all “liability imposed by law,” including subsurface pollution. In contrast, Transocean and the insurers argued that BP is an additional insured “only by virtue of the status conferred to it under the Drilling Contract, to which the policies necessarily refer by predicating additional-insured status on the existence of an oral or written ‘Insured Contract’ requiring such coverage.” The insurers therefore contended that the Drilling Contract was necessarily incorporated into the policies. Because the Drilling Contract required Transocean to name BP as an additional insured only for above-surface pollution risks (assumed by Transocean), the insurers argued that BP is not entitled to additional insured coverage for subsurface pollution liabilities. The Texas Supreme Court agreed. The court reasoned that the language in the insurance policies providing additional insured coverage “where required” necessitates reference to the Drilling Contract, which assigned liability for subsurface pollution to BP, not Transocean.
The decision leaves unanswered the question of what language is necessary to establish the incorporation of a separate contract in insurance policies, such that the scope of coverage is governed by the terms of an agreement to provide additional insured coverage, rather than the insurance policy itself. The court noted that there are no “magic” words required to do so. Rather, a clear manifestation of intent to include the contract as part of the policy must be established. Under
In re Deepwater Horizon, a relevant factor in this analysis is whether the additional insured is specifically named in the policy, or alternatively (as was the case here), is made an additional insured by virtue of a separate indemnity contract, which, under the terms of the insurance policy, establishes additional insured status. As the decision illustrates, if incorporation is established, a separate contract can operate to limit the scope of coverage even where the insurance policy contains no such limitation.