Incorporation by Reference After Deepwater Horizon

By: Heather Blumberg

For more than a century, Texas has made it a “cardinal principle” of insurance law that “[t]he policy is the contract; and if outside papers are to be imported into it, this must be done in so clear a manner as to leave no doubt of the intention of the parties.”[1]  One or two cases allowed the terms of extrinsic documents to affect the construction of a policy, but the bar was set high.[2]

Many in the legal community have thought that the Texas Supreme Court was beginning to relax the rigorous standards in the context of additional insured coverage.  In 2015, the Court decided In re Deepwater Horizon, answering a certified question from the U.S. Fifth Circuit Court of Appeals.^[3]  The Deepwater Horizon case was one of several arising from the explosion and sinking of a drilling rig in April 2010.  BP, the developer of the oil field involved, was seeking coverage as an additional insured under the policies of the rig owner.  On the language of the policy alone, BP’s coverage under the policy would be the same as the named insured.  The carrier and BP disputed, however, whether the contract between BP and the rig owner could be incorporated to limit the coverage available. 

The certified question in Deepwater Horizon related to a prior decision of the Court, Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc.^[4]  In ATOFINA, the Court had refused to limit an additional insured’s rights under an excess policy based on the requirements of the insured contract between the additional insured and the insured.  Now, in Deepwater Horizon, the Court was being asked to determine, based on that prior holding, what language was required to incorporate limitations from an underlying services agreement. 

In a somewhat surprising decision, the Court held the drilling contract did, in fact, limit coverage to the additional insured, despite the absence of explicit language incorporating the contract into the policy.  The Court explained that there is no need for “magic words to incorporate a restriction from another contract into an insurance policy.”[5] The drilling contract required BP to be named an additional insured “for liabilities assumed” under the contract, and, therefore, the Court reasoned that BP’s coverage was also limited to the items listed in the drilling contract.

At the time of the decision, many speculated that Deepwater Horizon demonstrated a significant shift in the Court’s mentality regarding incorporating terms in outside documents.  There was much hand-wringing in the legal community about overinclusion of extrinsic papers in insurance policy interpretation. 

Two recent case by the Court, however, indicate that the Deepwater Horizon decision was, perhaps, not intended to be so dramatic.  Both cases involved insurance carriers providing additional insured coverage to ExxonMobil Corp. (“Exxon”) in a case arising from the same refinery accident.[6]  In both cases, the insurance carriers were trying to use terms in Exxon’s service contract with the insured to limit coverage under their policies.  Eventually, in both cases, the Court would rely on ATOFINA instead of Deepwater Horizon in determining that the policy at issue did not clearly incorporate the limiting term in the contract. 

The first case, decided by the Court in 2019, involved the incorporation of a waiver of subrogation term in Exxon’s services agreement with independent contractor Savage Refinery Services.  The workers’ compensation policy at issue contained a blanket waiver of subrogation, while the services agreement only required a waiver of subrogation “to the extent liabilities are assumed by [the insured].”[7]  To take advantage of the maximum waiver available, Exxon wanted the interpretation of the policy to be limited to the four corners of the policy.  In turn, to limit the required waiver, the insurance company sought to incorporate the term from Exxon’s services agreement.

The Court determined that, unlike Deepwater Horizon, the subrogation waiver in the policy did not “refer to, and thus does not incorporate, any limits on coverage that might exist outside the policy's four corners.”[8]  While the policy referenced the services agreement to determine what entities were entitled to a subrogation waiver and for what operations subrogation was being waived, it did not otherwise incorporate the terms of the services agreement.  Even though the policy allowed the Court to reference the services agreement in some instances, the Court concluded that, as in ATOFINA, the reference to the services agreement was strictly limited to the inquiries raised in the text of the policy.

The second case, decided just last year, involved a different carrier for Savage in essentially the same position.  Savage had an umbrella policy with National Union Fire Insurance Company of Pittsburgh, PA.  National Union denied additional insured coverage to Exxon under the theory that the services agreement limited Exxon’s entitlement to further policy proceeds, and, therefore, there was no coverage under the umbrella policy.  As a result of the denial, Exxon self-funded $19 million of a settlement that exceeded $24 million.  Exxon then sued National Union to determine its rights under the umbrella policy.

The posture of the case looked remarkably similar to the prior case involving the same accident.  Exxon took the position that its status as additional insured is unlimited and National Union took the position that its policy incorporated limits from Savage’s services agreement. The trial court initially decided with Exxon, but the appellate court reversed in favor of National Union, concluding that the primary policy did incorporate the limitations of the services agreement. 

The Supreme Court, however, reversed again, deciding that National Union did not, in fact, incorporate any limitations from the services agreement.  In reaching this decision, the Court began  to distill its ruling in Deepwater Horizon to the following rules of interpretation:  “we begin with the text of the policy at issue; we refer to extrinsic documents only if that policy clearly requires doing so; and we refer to such extrinsic documents only to the extent of the incorporation and no further.”[9]  The decision further cautioned that “[a]ny venture beyond the four corners of an insurance policy must be carefully limited to the scope of that policy’s clearly authorized reference.”

Based on this roadmap, the Court again concluded that—despite language in the services agreement limiting Exxon’s additional insured coverage to Savage’s primary policies—Exxon would be entitled to coverage under the National Union’s umbrella policy.  National Union defined an “insured” as any person or organization qualifying as an insured included in the primary policy, but “not for broader coverage that would have been afforded” in that policy.  The primary policy determined insured status by Savage’s insured contracts.  Further, a limitation of coverage to the primary policies was not providing “broader” coverage than the primary policies. 

Absent some other language in the umbrella policy incorporating the terms of the services agreement, the Court could not reference the agreement when determining Exxon’s right to coverage.  Exxon, like the additional insured in ATOFINA before it, would be entitled to the full limits of Savage’s umbrella policy despite no requirement to provide such coverage in its services agreement.

In each of the cases discussed, ATOFINA, Deepwater Horizon, Exxon I, and Exxon II, the insurance company tried to rely on limits outside the policy as written.  This perhaps indicates that the insurance industry needs to consider the latest roadmap in Exxon II when drafting their schedules and endorsements.  Notably, general terms in excess and umbrella policies stating that coverage will not be broader than policies lower in the tower has not been effective to limit the additional insured’s coverage in the Court’s prior decisions.[10]

Of the cases discussed, only Deepwater Horizon involved coverage under a primary commercial general liability (“CGL”) policy.  This is likely because many CGL policies have already written their additional insured endorsements to specifically incorporate all limitations of the contract that create coverage for the additional insured.  Perhaps umbrella and excess carriers need to incorporate any limitations on coverage to an insured, whether in the policy itself or incorporated from an outside document, that is available to policies lower in the tower. 

Whatever the response from the insurance industry, the two Exxon decisions have demonstrated that Deepwater Horizon was not the departure from narrow policy interpretation that everyone initially feared.  Further, the newest Exxon II decision provides a basic roadmap for future courts trying to determine the availability of incorporation by reference and its scope.