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Can An Underlying Contract Impose Limits On The Coverage Available To An Additional Insured Under A Policy?

By: Tara Sohlman


The Texas Supreme Court Answers the Questions Raised In re Deepwater Horizon

Factual Background

Transocean owned the Deepwater Horizon, a semi-submersible, mobile offshore drilling unit.  The predecessors to BP America Production Company and Transocean had entered into a drilling contract under which BP used the Deepwater Horizon for exploratory drilling.  An onboard explosion occurred on the Deepwater Horizon, and, after burning for two days, the unit sank.  It caused an extremely large oil spill in the Gulf of Mexico.  

BP sought coverage as an additional insured under Transocean’s primary and excess insurance policies for claims relating to the event.  BP was an additional insured under Transocean’s policies.  The dispute centered on whether BP was entitled to coverage for this event.  Transocean had $50 million of general liability coverage and $700 million of additional coverage under four layers of excess policies.  All the policies contained materially identical provisions.

The policies contain language that requires one look at the drilling contract to determine whether BP was covered as an additional insured.  The question arose as to whether the courts should look only at the language of the policies to determine if there was coverage or whether they had to look at the drilling contract, too.  (BP only sought coverage as an additional insured; it did not seek indemnity.).

The ATOFINA Rule

Whether courts should look only at the policy or also at the underlying contract to determine if BP was entitled to coverage as an additional insured had been examined previously by the Texas Supreme Court.  In Evanston Ins. Co. v. ATOFINA Petrochems., Ins., the Texas Supreme Court said to look only at the policy’s terms rather than the underlying contract to determine “whether a commercial umbrella policy that was purchased to secure the insured’s indemnity obligation in a service contract with a third party also provides direct liability coverage for the third party.”   Evanston Ins. Co. v. ATOFINA Petrochems., Ins., 256 S.W.3d 660, 664 (Tex. 2008).  This rule must be followed as long as the indemnity and additional insured provisions of the underlying contract are separate and distinct.  Id.  The Fifth Circuit followed this rule when it was first presented with the issues in the Deepwater Horizon case.

The Policies’ Language and the Drilling Contract between BP and Transocean

Specific language from the policies and the drilling contract was at issue in the litigation.  The courts disagreed as to whether to look at only the insurance policies’ language to determine if there were limitations on BP’s additional insured coverage or whether the limitations of the drilling contract could be applied.

The insurance policies at issue define an “insured” and “insured contract” in part as follows:

Insured: (c) any person or entity to whom the “Insured” is obligated by any oral or written “Insured Contract” . . . to provide insurance such as is afforded by this Policy . . . .

Insured Contract . . . shall mean 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 to pay for “Bodily Injury” [or] “property Damage . . .  to a “Third Party” or organization.

None of the policies contained any direct reference to BP being an additional insured.  Further, none of them set forth the limitations on additional insured coverage that were set forth in the drilling contract.

The drilling contract contained language that limited when BP would be covered as an additional insured.  The drilling contract’s insurance provisions statee in part as follows:

Art. 20.1 Insurance: Without limiting the indemnity obligations or liabilities of [Transocean], at all time during the term of this contract, [Transocean] shall maintain insurance covering the operations to be performed under this contract as set forth in Exhibit C.

Exhibit C, Paragraph 1(c): The insurance required to be carried by [Transocean] . .. is as follows (c) Comprehensive General Liability Insurance, including contractual liability insuring the indemnity agreement as set forth in the Contract.

Exhibit C, Paragraph 3: “[BP] . . . 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 liability assumed by Transocean under the drilling contract was defined in Article 24.  The drilling contract’s indemnity provision stated as follows:

Art. 24.1: [Transocean} shall assume full responsibility for and . . . indemnify . . . BP . . . for pollution or contamination . . . originating on or above the surface of the land or water. . . .

Art. 24.2: [BP] shall assume full responsibility for and . . . indemnify . . . [Transocean] for pollution or contamination . . . arising out of or connected with operations under this Contract hereunder and not assumed by [Transocean] in Article 24.1 above.

Thus, the question arose as to how interpret the language of Exhibit C’s Paragraph 3, which that limited when BP would be covered as an additional insured under the policies.  The language at issue stated, “except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of the contract.”  Was BP entitled to coverage as an additional insured if Transocean had not assumed the liability in question under the contract?  The courts had to determine if one should look only at the four corners of the policy or should consider whether the drilling contract’s indemnity language narrowed when BP would receive coverage as an additional insured. 

The District Court’s Decision

The District Court determined that one needs to examine the drilling contract to determine the extent of coverage available to BP.  It examined the scope of coverage in light of the limitations imposed by the drilling contract.  The spill occurred underwater while the Deepwater Horizon was engaged in drilling operations for BP.  Under the drilling contract, Transocean did not owe BP indemnity IF the spill occurred beneath the water’s surface.  As a result, the District Court determined that BP was not entitled to coverage as an additional insured.

The Fifth Circuit’s First Opinion

In contrast to the District Court, the Fifth Circuit followed the ATOFINA rule and said that, under Texas law, only the insurance policy should be examined to determine the scope of coverage available to BP was an additional insured.  Transocean’s policies did not contain any language that limited BP’s additional insured coverage.  Further, what the drilling contract said as to whether BP was an additional insured for liabilities assumed by Transocean was immaterial.  One paragraph of the contract required that BP be named an additional insured; it was completely separate and independent from the indemnity paragraph under which BP agreed to forego contractual indemnity in specific circumstances.  As a result, the indemnity and additional insured provisions of the contract were separate and distinct.  The Fifth Circuit limited its examination to the four corners of the policies, which contained no language limiting the extent of coverage for BP as an additional insured.  In re Deepwater Horizon, 710 F.3d 338, 347-350 (5th Cir. 2013, withdrawn on r’hrg).

The Fifth Circuit’s Second Opinion

On rehearing, Transocean and its insurers raised key distinctions between the drilling contract and the contract in ATOFINA.  This contract required BP be named as an additional insured only for liabilities that Transocean assumed in the contract.  In contrast, in ATOFINA, the services contract imposed a broad requirement for ATOFINA to be listed as an additional insured.  The umbrella policies required an “insured contract” to exist between Transocean and BP; no such requirement was present in the policy at issue in ATOFINA.  In addition, Transocean argued that the drilling contract’s language linked the additional insured provision inextricably with the indemnity provision; these provisions were separate and distinct. 

The Fifth Circuit determined that these distinctions resulted in the outcome of this case not being entirely clear.  It certified two questions to the Texas Supreme Court:

  1. Whether Evanston Ins. Co. v. ATOFINA Petrochems., Ins., 256 S.W.3d 660 (Tex. 2008), compels a finding that BP is covered for the damages at issue, because the language of the umbrella policies alone determines the extent of BP’s coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the Drilling Contract are “separate and independent”.
  2. Whether the doctrine of contra proferentum applies to the interpretation of the insurance coverage provision of the Drilling Contract under the ATOFINA case, 246 S.W.3d at 668, given the facts of this case.[1]

In re Deepwater Horizon, 728 F.3d 491, 500 (5th Cir. 2013). 

The Texas Supreme Court (In re Deepwater Horizon, ___ S.W.3d ___, No. 13-0670, 2015 WL 674744 (Tex. February 13, 2015))

The parties disputed whether the insurance policies incorporated the provisions of the drilling contract that contained language limiting when BP would be entitled to coverage as an additional insured.  Transocean and its carriers argued that BP was not entitled to coverage as an additional insured for liabilities that it expressly assumed in the drilling contract.  In contrast, BP asserted that the Court could only look at the four corners of the policies to determine the existence and extent of coverage under the policies per ATOFINA

The Court first examined the insurance policy terms under which BP asserted it was an additional insured.  Examining the definitions of insured and insured contract, which are set forth above, the Court determined that the additional insured status hinged on the following:

  1. the existence of an oral or written contract,
  2. pertaining to the business of an “Insured,” and
  3. under which an “Insured” assumes the tort-liability of another party and is “obliged” to provide insurance to such other party.

In re Deepwater Horizon, 2015 WL 674744, at *3.  There was no dispute as to the following facts:

  1. BP is an additional insured under the Transocean policies for some purposes,
  2. The Drilling Contract is an insured contract as defined by the insurance policies, and
  3. The Insurers are not parties to the Drilling Contract.

Id. at *4. 

The Court began its analysis with the four corners of the policies.  These policies contained no language that expressly limited the scope of the additional insured coverage.  However, the Court noted that “we have long held insurance policies can incorporate limitations on coverage encompassed in extrinsic documents by reference to those documents.”  Id. at *5.  There are no “magic words” required.  “[I]t is enough that the policy clearly manifests an intent to include the contract as part of the policy.”  Id.  The Court further stated:

Thus, while the court's inquiry must begin with the language in an insurance policy, it does not necessarily end there.  In other words, the court determines the scope of coverage from the language employed in the insurance policy, and if the policy directs us elsewhere, the court 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, the court does not consider coverage limitations in underlying transactional documents.

Id.

External documents can impact a policy.  A policy can incorporate an external limitation on additional insured coverage.  The external limit acts as an endorsement to the policy.  When additional insured coverage is tied to the terms of an underlying agreement, the parties procure only the coverage that the insured is obligated to provide contractually.  This approach minimizes an insurer’s exposure under the policy as well as an insured’s premiums.  Id.  at *6.  See Urrutia v. Decker, 992 S.W.2d 440 (Tex. 1999) (The policy referred to a rental agreement to determine if a customer was an additional insured.  The policy incorporated the rental agreement, and the rental agreement limited the customer’s liability protection.). 

When the policy does not link coverage to the terms of an agreement to provide additional insured coverage, then an insured can end up securing more coverage for an additional insured than what is required in the underlying contract.  When the policy’s coverage is only limited by the policy’s terms, only the policy’s language will be examined.  In re Deepwater Horizon, 2015 WL 674744, at *6.

In ATOFINA, a Triple S employee drowned while performing work at an ATOFINA refinery pursuant to a service contract between Triple S and ATOFINA.  Under the service agreement, Triple S agreed to indemnify ATOFINA but not for ATOFINA’s own negligence.  ATOFINA was named in a certificate of insurance as an additional insured under Triple S’s policies.  The issue was whether ATOFINA was entitled to coverage as an additional insured under Triple S’s excess policy.  The excess policy contained no limitations on coverage based on the service contract’s limitations; its only limitation on the scope of the additional insured coverage was that the claim must involve Triple S’s operations or facilities.  Given there was a certificate of insurance naming ATOFINA as an additional insured, the service agreement did not need to be examined with regard to coverage under the excess policy.  The claim at issue related to Triple S’s operations.  As a result, ATOFINA was entitled to coverage under the excess policy without regard to whether it was negligent or not.  In re Deepwater Horizon, 2015 WL 674744, at *6-7.  Only the four corners of the policy needed to be examined in that case.

In ATOFINA, the Court examined an additional insurance provision in the excess policy that defined an insured and contained the limitation “’the coverage afforded such insured under this policy will be no broader than the ‘underlying insurance’ except for this policy’s Limit of Insurance.’”  Id., quoting ATOFINA, 256 S.W.3d at 667.  This language was interpreted as applying the limitations on coverage in the CGL policy to the excess policy.  The excess policy expressly incorporated the CGL policy’s limits on coverage by reference to the underlying policy.  In re Deepwater Horizon, 2015 WL 674744, at *7, citing ATOFINA, 256 S.W.3d at 667.  Thus, ATOFINA was consistent with Urrutia; “an insurance policy may refer to another document to determine the extent to which an additional insured is covered.  In re Deepwater Horizon, 2015 WL 674744, at *7. 

ATOFINA encompassed three principles relevant to In re Deepwater Horizon:

  1. [I]t is possible for a named insured to purchase a greater amount of coverage of an additional insured than an underlying service contract requires.
  2. [T]he scope of indemnity and insurance clauses is not necessarily congruent.
  3. [M]ost importantly, we rely on the policy’s language in determining the extent to which, if any, we must look to an underlying service contract to ascertain the existence and scope of additional-insured coverage.

Id.

Thus, the Court had to look at the underlying contract to the extent the policy directed it to do so.  In this case, BP was not named in any of the policies, in an endorsement or on a certificate of insurance as an additional insured.  By reviewing only the policies, BP would not have coverage at all.  However, the policies provide coverage by referencing the drilling contract where “(a) Transocean assumed some liability for pollution that might otherwise be imposed on BP (making that contract an ‘Insured Contract’) and (2) Transocean is ‘obliged’ to procure insurance for BP as an additional insured (making BP an ‘Insured’).”  Id. at 9.  Under the policies, an additional insured is only included automatically where required by written contract.  As the policies provide additional insured coverage “where required,” and “as obliged,” the Court must examine the drilling contract.  In doing so, the Court determined the “only reasonable interpretation of that clause is that the parties did not intend for BP to be named as an additional insured for the subsurface pollution liabilities BP expressly assumed in the Drilling Contract.”  Id.

The additional insured provision of the drilling contract required that Transocean 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.”  Id.  [The italicized language was key.  The Court examined the reach of the italicized language.  BP argued that the italicized language applied only to worker compensation policies covering Transocean’s employees.  Transocean asserted that the language imposed a general insurance limitation that was consistent with Transocean’s contractual indemnity obligations.]  Id. at 10.

The Court determined that BP’s interpretation of the language was unreasonable.  BP’s interpretation made the italicized language “inconsistent with other provisions in the contract or rendered the language meaningless.  BP’s interpretation would mean that Transocean was obligated to name BP as an additional insured under every type of policy identified in the contract’s Exhibit C except for workers’ compensation policies for liabilities assumed by Transocean.  Essentially, this interpretation would add nothing, and the clause would be functionally inoperative."  Id. at 10-11.

In contrast, the Court found Transocean’s interpretation of the italicized contract language reasonable.  Its interpretation “is in harmony with the allocation of liabilities in the contract, gives meaning to all the language the parties employed, and is consistent with the standard use of such language and the purpose of such clauses.”  Id. at 11. 

The Court concluded BP was an additional insured only to the extent that Transocean assumed liabilities under the drilling contract.  Transocean did not assume liability for subsurface pollution; thus, BP was not an additional insured for that risk.  Id.

In addition, another provision in the drilling contract provided that Transocean’s duty to maintain insurance did not relieve it of its duty to indemnify BP.  “[I]ndemnity and insurance clauses can impose separate and independent duties.”  Id. at 12.  In this case, the indemnity and insurance duties are congruent regarding the risk at issue.  The Court chose to decline BP’s request to ignore the indemnity obligation when construing the drilling contract.  Id.

The Court answered the Fifth Circuit’s first certified question in the negative: BP is not covered due to the limitations imposed on the coverage available to it as an additional insured by the drilling contract and incorporated into the insurance policies.  The second certified question was not answered by the Texas Supreme Court.  It explained that the ambiguity rule did not come up as there was only one reasonable interpretation of the contract in this case, so it did not need to address this question.  Id. at 13.

 


[1] Texas law requires that a court interpret an insurance coverage provision in favor of the insured if there is more than one interpretation possible and that interpretation is reasonable.  This is to be done even if the insurer’s interpretation is more reasonable.  The question arose then as to how to interpret the underlying contract.  Should it be interpreted against the insurer when the insurer did not draft it?  In re Deepwater Horizon, 728 F.3d 491, 499 (5th Cir. 2013).  

 


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