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At a Glance:
Title:
In re Deepwater Horizon
Date:
February 14, 2015
Citation:
470 S.W.3d 452
Court:
Texas Supreme Court
Status:
Published Opinion

In re Deepwater Horizon

Supreme Court of Texas.

IN RE DEEPWATER HORIZON, Relator

No. 13–0670

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Argued September 16, 2014

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OPINION DELIVERED: February 13, 2015

*454 ON CERTIFIED QUESTIONS FROM THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

Attorneys & Firms

Rick Thompson, Hankinson LLP, Dallas, for Appellant BP P.L.C.

William P. Maines, Fulbright & Jaworski L.L.P., Houston, for Amicus Curiae Allianz Global Corporate.

Kenneth G. Engerrand, Brown Sims, P.C., Houston, for Amicus Curiae International Association of Drilling Contractors.

George B. Hall Jr., Phelps Dunbar, LLP, Houston, for Appellee Certain Underwriters at Lloyd’s London.

Daniel O. Goforth, Goforth Easterling, LLP, Houston, for Appellee Transocean Offshore Deepwater Drilling, Inc.

Michael J. Maloney, Maloney Martin, L.L.P., Houston, for Appellee Ranger Insurance Limited.

Bradley A. Jackson, RJones Walker LLP, Houston, for Amicus Curiae B & G Risk Strategies LLC.

*455 Glenn Richard Legge, Legge Farrow Kimmitt McGrath & Brown, LLP, Houston, for Amicus Curiae Lloyd’s Market Association, International Underwriting Association, Property Casualty Insurers Association of America, and American Institute of Marine Underwriters.

Meredith A. Welch, Reed Smith LLP, Houston, for Amicus Curiae United Policyholders.

Barry S. Alexander, Schnader Harrison Segal & Lewis LLP, New York, NY, for Amicus Curiae Aviation Insurance Association.

Pamela Stanton Baron, Austin, for Amicus Curiae National Association of Manufacturers.

Opinion

Justice Brown joined.

This is an insurance-coverage dispute arising from the April 2010 explosion and sinking of the Deepwater Horizon oil-drilling rig, which claimed eleven lives and resulted in subsurface discharge of oil into the Gulf of Mexico at alarming rates for nearly three consecutive months. The ensuing damage spawned a spate of state and federal litigation, but the issue presented to this Court concerns only the extent of insurance coverage afforded to the oil-field developer, BP,1 as an additional insured under primary- and excess-insurance policies procured by the drilling-rig owner, Transocean.2 At issue is the interplay between the subject insurance policies and provisions in a drilling contract giving rise to Transocean’s obligation to name BP as an additional insured. Regarding that matter, the U.S. Court of Appeals for the Fifth Circuit has certified the following two questions:

1. Whether Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 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 proferentem applies to the interpretation of the insurance coverage provision of the Drilling Contract under the 256 S.W.3d at 668, given the facts of this case?3

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

As to the first question, we hold that (1) the Transocean insurance policies include language that necessitates consulting the drilling contract to determine BP’s status as an “additional insured”; (2) under the terms of the drilling contract, BP’s status as an additional insured is inextricably intertwined with limitations on the extent of coverage to be afforded under the Transocean *456 policies; (3) 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 (4) BP is not entitled to coverage under the Transocean insurance policies for damages arising from subsurface pollution because BP, not Transocean, assumed liability for such claims. We therefore answer the first certified question in the negative, and based on our analysis of that issue, do not reach the second question.

I. Background

At the time of the events giving rise to the underlying litigation, 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).4 After an explosion, the rig caught fire and fully submersed after burning for more than a day. The incident killed eleven crew members, propagated numerous personal-injury claims, and begat a myriad of 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 primary- and excess-insurance policies for claims related to this catastrophic event. Although not disputing that BP is an additional insured under the Transocean policies, Transocean and its insurers dispute that BP is entitled to coverage for liabilities it expressly assumed in the Drilling Contract. Based on the parties’ respective assumptions of liability in the Drilling Contract, Transocean and its insurers contend that BP is not entitled to additional-insured coverage for pollution-related liabilities arising from subsurface oil releases in connection with the Deepwater Horizon incident.

In the Drilling Contract, BP and Transocean agreed to a “knock-for-knock” allocation of risk that is standard in the oil and gas industry.5 Among other indemnity provisions, Transocean agreed to indemnify BP for above-surface pollution regardless of fault,6 and BP agreed to indemnify Transocean for all pollution risk Transocean did not assume, i.e., subsurface pollution. *457 7

Without limiting Transocean’s indemnity obligations, the Drilling Contract further required Transocean to carry multiple types of insurance at its own expense.8 Among the required policies, Transocean was obliged to carry comprehensive general liability insurance, including contractual liability insurance for the indemnity agreement, of at least $10 million. Transocean was also charged with naming BP, its affiliates, officers, employees, and a host of other related individuals and entities:

as additional insureds in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of [the Drilling] Contract. (Emphasis added.)

To the extent the terms of the Drilling Contract are incorporated into Transocean’s insurance policies, the proper construction of the emphasized portion of the foregoing additional-insured provision becomes central to the resolution of the coverage issue before us. Before reaching that issue, however, we must first consider the insurance-policy terms under which BP claims additional-insured status.

To cover Transocean’s worldwide drilling operations, including its obligations under the Drilling Contract with BP, Transocean maintained (1) a $50 million general-liability policy with Ranger Insurance, Ltd. as its primary policy and (2) four layers of excess insurance from a multitude of additional insurers with an additional $700 million in coverage (Ranger and the excess insurers, collectively, are referred to herein as “the Insurers”).

Under the operative provisions of the insurance policies, each insurer is obligated to pay for a loss “on behalf of the ‘Insured’ ” for liability:

(a) imposed upon the “Insured” by law or

(b) assumed by the “Insured” under an “Insured Contract.”9

As the named insured, Transocean is an “Insured” under the policies. BP is not specifically named as an insured in the policies, an endorsement, or a certificate of coverage. However, the policies extend “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.” An “Insured Contract” is defined as “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 *458 party to pay for ‘Bodily Injury’ [or] ‘Property Damage’ ... to a ‘Third Party’ or organization.”10 Thus, under the express terms of the policies, additional-insured status hinges on (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. The policy further specifies that “where required by written contract, bid or work order, additional insureds are automatically included hereunder....”

After BP made a demand for coverage, the Insurers sought a declaration that BP would not be entitled to additional-insured coverage for subsurface-pollution claims arising from the Deepwater Horizon incident because the Drilling Contract limits the additional-insured obligation to “liabilities assumed by [Transocean] under the terms of [the Drilling] Contract.” With its interests in a finite sum of insurance imperiled by BP’s coverage claim, Transocean intervened in the litigation and aligned itself with the Insurers.

There is no dispute that (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. The parties, however, join issue regarding whether and to what extent the policies incorporate provisions in the Drilling Contract that may limit BP’s status as an additional insured. The federal district court resolved that issue adversely to BP and, considering the insurance policies in connection with the terms of the Drilling Contract, determined that BP is not an “Insured” for subsurface pollution liabilities deriving from the Id.

On appeal, the Fifth Circuit reversed, holding that 728 F.3d 491, 493, 500 (5th Cir.2013).

II. Discussion

The key points of contention among the parties are (1) whether the language employed in the insurance policies refers to, and thus incorporates, coverage limitations in the Drilling Contract from which BP’s additional-insured status derives; (2) whether the Drilling Contract actually imposes any limitation on the extent of additional-insured coverage under the primary- and excess-insurance policies; and (3) who gets the benefit of the doubt if there is any ambiguity.

BP argues that Deepwater Horizon incident, because it is undisputed that (1) the Drilling Contract is an “Insured Contract,” (2) the Drilling Contract obligates Transocean to provide additional-insured coverage, (3) BP is thereby an “Insured” as that term is specially defined in the insurance policies, and (4) no limitations on the scope of coverage are expressly included in the policies.11

In Transocean and the Insurers’ view, BP’s analysis glosses over the inconvenient reality that BP is an “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. They rely on Id. at 442. Applying this exception to Evanston’s four-corners analysis, they contend that the Drilling Contract is incorporated into the Transocean insurance policies by virtue of policy language limiting additional-insured status to “where required” and as “obliged” by an oral or written contract. Because BP’s status as an “Insured” cannot be ascertained without consulting the additional-insured provision in the Drilling Contract, Transocean and the Insurers further assert that we must give decisive weight to language in that provision limiting the scope of additional-insured coverage to “liabilities assumed by [Transocean] under the terms of [the Drilling] Contract.” Under their contract-construction theory, the Drilling Contract requires Transocean to name BP as an additional insured only for the above-surface pollution risk that Transocean assumed and, as a result, BP lacks additional-insured status for subsurface pollution risks.

A. Applicable Policy–Construction Principles

Determining whether BP’s additional-insured coverage is coextensive with Transocean’s *460 coverage necessarily begins with the four corners of the policies. See ATOFINA, 256 S.W.3d at 664. As the parties acknowledge, Transocean’s insurance policies contain no language explicitly limiting the scope of additional-insured coverage.

However, we have long held insurance policies can incorporate limitations on coverage encompassed in extrinsic documents by reference to those documents. See Owen v. Hendricks, 433 S.W.2d 164, 166 (Tex.1968) (for purposes of incorporation by reference “[t]he language used is not important provided the [contract] plainly refers to another writing”).

Thus, while our inquiry must begin with the language in an insurance policy, it does not necessarily end there. In other words, we 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 transactional documents. Our application of these foundational principles in ATOFINA guides our analysis of the policies and Drilling Contract at issue here.

In Id.

Given the language in the policy, a customer’s status as an additional insured depended on the existence of a rental agreement, and coverage was expressly limited to the amount specified in such agreement. See Id. at 443–44 (“An insurer may validly agree to add as an additional insured ‘any person or organization to which the named insured is obligated by virtue of a written contract to provide insurance.’ Such an endorsement also ‘may provide lower coverage limits to the additional insured than to the named insured.’ ” (quoting 21 DORSANEO, TEXAS LITIGATION GUIDE § 341.07[2][h] at 341–57–58) (July 1998)).

As id. (“The endorsement ... allowed [the insured] to determine in the rental contracts themselves which customers would be insured and the amount of their respective coverage.”).

ATOFINA, on the other hand, recognizes that a named insured may gratuitously choose to secure more coverage for an additional insured than it is contractually required to provide. This occurs when the language of an insurance policy does not link coverage to the terms of an agreement to provide additional-insured coverage. In that event, only coverage restrictions embodied in the policy will be given effect. As discussed below, ATOFINA involved one coverage provision that was tied to the terms of another agreement and one coverage provision that was limited only by the terms of the policy itself.

In Id.

In determining the existence and extent of coverage, we considered two independent coverage provisions in the excess-insurance policy. Id. We disagreed. In doing so, we distinguished between Triple S’s indemnity obligation under the contract and the insurer’s indemnity obligation under the terms of the excess policy because the insurer’s obligation depended on what it contracted to do, not what the insured contracted with another person to do.

Although the underlying service contract did not require Triple S to indemnify ATOFINA for ATOFINA’s negligence, we concluded that the insurance policy neither included nor incorporated a similar limitation. Id.

The existence of a certificate of insurance naming ATOFINA as an additional insured meant that, unlike ATOFINA made no reference to the service contract in determining the scope of additional-insured coverage, while the Transocean policies refer to an “Insured Contract” that requires Transocean to provide the insurance as a predicate to status as an “Insured.”

The significance of these distinctions is supported by our analysis of a second insurance provision at issue in Urrutia that an insurance policy may refer to another document to determine the extent to which an additional insured is covered.

ATOFINA embodies several principles that are pertinent to the matter at hand. First, it is possible for a named insured to purchase a greater amount of coverage for an additional insured than an underlying service contract requires. Second, the scope of indemnity and insurance clauses in service contracts is not necessarily congruent. Third, and most 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.

In addition to Id. at 490.

BP presents Aubris, whatever limitation exists is entwined with the “liabilities [Transocean] assumed ... under the terms of this Contract.”

The other case BP cites is Pasadena, the Transocean policies *464 require that the additional-insured obligation arise from a contract involving an indemnity agreement and specify that additional-insured coverage is extended as “obliged” and “where required” therein.

Contrary to any suggestion otherwise, the foregoing authority cannot be interpreted as excluding from consideration restrictions on the scope of additional-insured coverage contained in a contract that has been incorporated into the terms of an insurance policy. Rather, this authority affirms the principle that we must consider the terms of an underlying contract to the extent the policy language directs us to do so. See, e.g., Urrutia, 992 S.W.2d at 442.

B. Application

1. Incorporation by Reference

The next order of business is to determine whether the Transocean insurance policies incorporate any limitations in the Drilling Contract with respect to the extent of BP’s status as an additional insured. In making this determination, we construe the policies as we would any other contract. Id. With these principles in mind, we turn now to the policy language at issue.

BP is not named in any of the insurance policies nor is there any claim or evidence that it is expressly included as an additional insured in an endorsement or certificate of insurance; thus, if the coverage inquiry were constrained to the language in the insurance policy, BP would have no coverage at all. But that is not the case. Instead, the policies confer coverage by reference to the Drilling Contract in which (1) 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 coverage for BP as an additional insured (making BP an “Insured”). Moreover, additional insureds are automatically included under the policy only “where required by written contract, bid or work order.” The language in the insurance policies providing additional-insured coverage “where required” and as “obliged” requires us to consult the Drilling Contract’s additional-insured clause to determine whether the stated conditions exist.13 As explained more fully below, *465 when we do so, it becomes apparent that 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.

2. Contractual Limitations on Additional–Insured Status

The additional-insured provision is contained in Exhibit C to the Drilling Contract, which obligates Transocean to acquire various types and minimum limits of insurance, including CGL, workers’ compensation, and employer’s liability insurance. Subsection 3 of Exhibit C states in its entirety:

[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. (Emphasis added.)

It is immediately apparent from the plain language of this provision that BP’s status as an insured is inexorably linked, at least in some respect, to the extent of Transocean’s indemnity obligations. What is in dispute is the intended breadth of the limiting language in the emphasized portion of the provision.

BP reads the emphasized language as a narrow and specific exception to the general obligation to name it as an additional insured, applying only to workers’ compensation policies covering Transocean’s employees since that would be the only indemnity obligation implicated under BP’s construction. Transocean and the Insurers read the language as (1) excepting only workers’ compensation policies from the general additional-insured obligation and (2) imposing a limitation on the general insurance obligation that is coterminous with all of Transocean’s contractual indemnity obligations. BP asserts that such an interpretation is unreasonable because there is a comma before, but not after, the phrase “except Workers’ Compensation” and further contends that a comma cannot be inserted where it does not exist when it would alter the plain meaning of the contract.14

*466 In construing the additional-insured provision, we give effect only to reasonable interpretations of the contract’s terms. As construed by BP, Transocean was obligated to name BP as an additional insured under every type of insurance policy specified in Exhibit C, including workers’ compensation polices for liabilities assumed by BP, but not workers’ compensation policies for liabilities assumed by Transocean. BP’s construction of the contract is not reasonable because it is either inconsistent with other provisions in the Drilling Contract or renders the words “liabilities assumed by [Transocean] under the terms of this contract” meaningless.

Assuming third-party additional-insured coverage for workers’ compensation claims is available, which Transocean and the Insurers dispute, construing the additional-insured provision to require BP to be named as an insured under such policies for its own employees’ work-related losses is in tension with at least two other provisions in the Drilling Contract. The first is the employee-indemnity clause in which BP assumed responsibility for “all claims, demands and causes of action” asserted by its employees for work-related “personal injury,” including bodily injury and death. The second involves the provision in Exhibit C that imposes an obligation on Transocean to obtain workers’ compensation insurance for “employees”; it does not mention acquiring insurance for workers “employed” by someone other than the contractor, Transocean.

If third-party additional-insured coverage for workers’ compensation claims cannot be secured, as Transocean and the Insurers claim, the universe of workers’ compensation policies that would exist would be inherently limited to covering Transocean’s employees. In that case, a carve-out for workers’ compensation policies covering Transocean’s employees adds nothing and would, therefore, be superfluous and functionally inoperative. We will not construe the absence of a comma to produce an unreasonable construction. See Schaefer, 124 S.W.3d at 159 (refusing an interpretation that would render certain contract language meaningless).

Our inquiry does not end there, however, as we can only credit Transocean and the Insurers’ alternative construction if it is reasonable. We conclude that it is. Transocean and the Insurers’ construction 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. Additional-insured provisions are often phrased in terms of extending coverage to all policies except workers’ compensation policies, which quintessentially involve an employer insuring its own employees.15 *467 Moreover, a manifest purpose of an additional-insured clause is to provide supplemental protection when the additional insured may be sued for conduct within the contractor’s scope of risk.16 Applying the only reasonable construction of the additional-insured provision, we conclude that BP is an additional insured only as to liabilities assumed by Transocean under the Drilling Contract and no others. Because Transocean did not assume liability for subsurface pollution, Transocean was not “obliged” to name BP as an additional insured as to that risk. Because there is no obligation to provide insurance for that risk, BP lacks status as an “Insured” for the same.

Despite the additional-insured clause’s explicit reference to the liabilities Transocean assumed in the Drilling Contract, BP contends that clause cannot limit BP’s additional-insured status to the extent of Transocean’s indemnity obligations because the Drilling Contract’s indemnity and insurance provisions are separate and independent. As support, BP relies on Article 20.1 of the Drilling Contract, which provides that “[w]ithout limiting the indemnity obligation or liabilities of [Transocean] or its insurer, at all times 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.” BP takes this to mean that the insurer’s indemnity obligation (which is conferred by the insurance policy) cannot be limited by anything in Exhibit C. BP’s argument is unavailing for at least two reasons.

First, Transocean’s insurers owe no indemnity obligation to BP except on the terms stated in subsection 3 of Exhibit C; so while Article 20.1 might generally be read as saying that the insurer’s indemnity obligation is not limited by the requirements in Exhibit C, the insurer’s indemnity *468 obligation to BP does not arise in the first instance except on the conditions stated therein.

Second, BP’s argument conflates duty with scope. We have long recognized that the contractual duties to indemnify and to maintain insurance may be separate and independent.17 Consequently, a statute invalidating an indemnification clause does not relieve a party of a separate duty to obtain insurance. See TEX. CIV. PRAC. & REM. CODE § 127.005 (exempting from the Texas Oilfield Anti–Indemnity Act certain indemnity agreements supported by liability insurance furnished by the indemnitor). But simply because the duties to indemnify and maintain insurance may be separate and independent does not prevent them from also being congruent; that is, a contract may reasonably be construed as extending the insured’s additional-insured status only to the extent of the risk the insured agreed to assume.

Such is the case here. The Drilling Contract required Transocean to name BP as an additional insured only for the liability Transocean assumed under the contract. Accordingly, Transocean had separate duties to indemnify and insure BP for certain risk, but the scope of that risk for either indemnity or insurance purposes extends only to above-surface pollution. Article 20.1 of the Drilling Contract, on which BP relies, provides that Transocean’s duty to maintain insurance does not alleviate its duty to indemnify BP. This merely confirms our holding in 845 S.W.2d at 804. Article 20.1 does not provide that the scope of the indemnity and insurance duties are different. Instead, the additional-insured clause confirms they are congruent regarding the risk at issue by requiring Transocean to insure BP “for liabilities assumed by [Transocean] under the terms of this Contract.” Because the scope of Transocean’s duty to indemnify governs the scope of Transocean’s duty to insure BP, we decline BP’s request to ignore the indemnity obligation when construing the Drilling Contract.

In sum, we answer the first certified question in the negative because BP is not covered for the damages at issue by virtue of the limitations on the scope of its additional-insured status imposed in the Drilling Contract and incorporated into the Transocean insurance policies by reference.

C. Applicability of the Contra Proferentum Doctrine

The second certified question asks whether the ambiguity rule governs interpretation of the insurance-coverage provision in the Drilling Contract, given the facts of this case. ATOFINA, 256 S.W.3d at 668. Because that is not the *469 situation here, we do not answer the second question.

III. Conclusion

Texas law has long allowed insurance policies to incorporate other documents by reference, and policy language dictates the extent to which another document is so incorporated. The policies here provide additional-insured coverage automatically where required and as obligated by written contract in which an insured has agreed to assume the tort liability of another party. Because BP is not named as an insured in the Transocean policies or any certificates of insurance, the insurance policies direct us to the additional-insured provision in the Drilling Contract to determine the existence and scope of coverage. Applying the only reasonable construction of that provision, we conclude that, as it pertains to the damages at issue, BP is an additional insured under the Transocean policies only to the extent of the liability Transocean assumed for above-surface pollution. We therefore answer the first certified question in the negative and refrain from answering the second question.

Justice Johnson filed a dissenting opinion.

Justice Johnson, dissenting.

I do not materially disagree with the Court’s explication of principles applicable to construing insurance contracts, but I disagree with how it applies them in this case. I would hold that BP’s coverage under the policy1 is the coverage provided in the policy’s “COVERAGE” section, and the coverage is not limited to liabilities Transocean assumed in the drilling contract.

I. The Drilling Contract

In the drilling contract,2 BP and Transocean agreed that Transocean would maintain certain specified types of insurance. Part of the agreement was that the insurance requirements would not limit the liability of Transocean’s insurer:

20.1 INSURANCE

Without limiting the indemnity obligation or liability of [Transocean] or its insurer, at all times 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. (emphasis added)

Exhibit C to the drilling contract, which is referenced in paragraph 20.1, lists nine different types of insurance. One type is Comprehensive General Liability Insurance, including—but notably not limiting coverage to—coverage for Transocean’s contractual indemnity:

[1.]c. Comprehensive General Liability Insurance, including contractual liability insuring the indemnity agreement as set forth in the Contract and products-completed operations coverage.... (emphasis added)

A separate paragraph in Exhibit C provides that

3. [BP], its subsidiaries and affiliated companies ... shall be named as additional insureds in each of [Transocean’s] policies, except Worker’s Compensation *470 for liabilities assumed by [Transocean] under the terms of this Contract.

II. The Policy Language

Despite this latter requirement in Exhibit C, paragraph 3 of the drilling contract, neither the policy nor an endorsement to it named BP as an additional insured. However, the policy provided in its GENERAL CONDITIONS section that additional insureds would be automatically covered “where required” by written contract, and/or subrogation waivers provided “as may be required by contract”:

3. ADDITIONAL INSURED/WAIVER OF SUBROGATION

Underwriters agree where required by written contract, bid or work order, additional insureds are automatically included hereunder, and/or waiver(s) of subrogation are provided as may be required by contract.

The first phrase of the one-sentence paragraph specifies who will be covered as additional insureds under the policy: those parties where a written contract, bid, or work order requires the Insured to provide additional insured coverage. The second phrase specifies that waivers of subrogation are provided as a contract requires them to be. Additional insured status and waivers of subrogation are two different matters. Additional insured status provides for defense against and payment of covered claims made against an insured, while waiver of subrogation effectively provides for release of third parties from claims the insurer might have as a result of payments to or on behalf of an insured. And even if the paragraph does not unambiguously distinguish between the two, it is reasonable to construe its language as specifying who will be an additional insured while separately specifying that waivers of subrogation will be provided only as specified in a contract.

In addition to the foregoing ADDITIONAL INSURED/WAIVER OF SUBROGATION provision, the policy’s definitions of “Insured” and “Insured Contract” bring BP within the policy’s coverage as an Insured:

IV. DEFINITIONS:

INSURED

Only the following are included in the definition of the “Insured” under this Policy:

...

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

...

INSURED CONTRACT

The words “Insured Contract”, whenever used in this Policy, shall mean any written or oral contract or agreement entered into by the “Insured” ... under which the “Insured” assumes the tort liability of another party.... Tort Liability means a liability that would be imposed by law in the absence of any contract or agreement.

Plainly, in the drilling contract Transocean assumed the obligation to provide BP with Comprehensive General Liability Insurance, including “contractual liability insuring the indemnity agreement as set forth in the Contract.” Just as plainly, Transocean assumed the tort liability of BP to some degree under the drilling contract. So, BP is an insured under the policy’s language.

Notably, neither the definition of “Insured” nor “Insured Contract” limit the terms to the scope of the obligation assumed by the “Insured” in a written contract or agreement, such as the language of the original policy would have done *471 when it extended additional insured coverage to insureds of underlying policies. In regard to insureds in underlying policies, the language in Transocean’s basic policy provided that coverage would be “not for broader coverage than is available to such person or organization under such underlying policies.” This language was amended by an endorsement to read that an insured is “any person or organization, other than the Named Insured, included as an additional insured in the policies listed in the Schedule of Underlying Insurance.” Nevertheless, the original policy language demonstrates that Transocean’s insurer knew exactly how to restrict coverage of persons or entities who were covered because of a collateral agreement, but chose not to use restrictive language that would apply to persons or entities in situations similar to that of BP. And such language, as was in the original policy, is not unusual in insurance policies. See, e.g., United Nat’l Ins. Co. v. Motiva Enters., L.L.C., No. Civ. A. H–04–2924, 2006 WL 83482, at *3 (S.D.Tex. Jan. 12, 2006) (construing policy language that states “the extent and scope of coverage under this insurance for the additional insured will be no greater than the extent and scope of indemnification of the additional insured which was agreed to by the named insured”).

Which brings us to the policy’s INSURING AGREEMENTS section. There, coverage for an “Insured” is specified to be for both liabilities imposed by general law and liabilities assumed by an “Insured” under an “Insured Contract”:

I. INSURING AGREEMENTS

1. COVERAGE

In consideration of the payment of the premium set out in Item 7 of the declarations and in reliance upon the proposal for this policy (hereinafter Policy), statements made, and any supplementary information pertaining to the proposal which are all deemed incorporated herein, Underwriters agree, subject to the Insuring Agreements, Conditions, Exclusions, Definitions and Declarations contained in this Policy, to pay on behalf of the “Insured” in respect of their operations anywhere in the World, for “Ultimate Net Loss” by reason of liability:

(a) imposed upon the “Insured” by law or

(b) assumed by the “Insured” under an “Insured Contract,” for damages....

III. Discussion

As the Court explains, when the scope of coverage for an insured such as BP is in question, the language of the policy itself determines whether a contract other than the policy expands or restricts coverage. 470 S.W.3d at 459 (citing Urrutia, 992 S.W.2d at 442 (language external to a policy is incorporated into the policy only “by an explicit reference clearly indicating the parties’ intention to include that contract as part of their agreement”). The Court says that the policy’s reference to the drilling contract in two places effectively incorporates the drilling contract’s language. In the first, paragraph 3 of the GENERAL CONDITIONS, the insurer agreed that “where required by written contract ... additional insureds are automatically included hereunder.” The Court concludes that the phrase “where required *472 by written contract” is specific enough to limit BP’s coverage under the policy to only those liabilities Transocean assumed in the drilling contract. The Court also points to the policy definition of “Insured” which includes “any person or entity to whom the ‘Insured’ is obliged by an oral or written ‘Insured Contract’ ... to provide insurance such as is afforded by this Policy.” The Court states that this language requires the Drilling Contract to be consulted in order to interpret those clauses, effectively incorporating a limitation of coverage to the liabilities Transocean agreed to assume. I disagree.

As set out above, the basic policy language demonstrates that the insurer was familiar with and had previously used language limiting coverages it provided in connection with relevant extrinsic agreements when it desired to do so. Further, language in the COVERAGE provision of the policy explicitly “deemed incorporated” documents external to the policy when they were to be considered as part of the policy, but the policy did not “deem incorporated” any part of the drilling contract that would limit BP’s coverage as an “Additional Insured” or “Insured.”

Further, in Id. at 664. Here, we should do the same. BP is an insured under the unambiguous language of the policy because it is “an entity to whom the ‘insured’ [Transocean] is obliged by any oral or written ‘insured contract’ to provide insurance coverage as is provided by this policy,” and the drilling contract is an “Insured Contract” because in it Transocean assumes tort liability of BP. And there is no language in either the policy or the drilling contract demonstrating intent to alter BP’s status as to that part of the policy covering an “Insured” for “liability [ ] imposed upon the ‘Insured’ by law.”

In sum, I disagree with the Court’s holding for several reasons. First, the policy explicitly covers liability either “imposed upon the ‘Insured’ by law” or “assumed by the ‘Insured’ under an ‘Insured Contract.’ ” The policy language providing that parties will be covered as additional insureds “where required by written contract ... and/or waiver(s) of subrogation are provided as required by contract” arguably and reasonably describes coverage by designating who is an additional insured, and that subrogation waivers are automatically provided as required by contract. But even if such language is construed to limit BP’s coverage, the drilling contract’s language is not explicitly incorporated into the policy, nor is it “deemed” incorporated as the policy provides for other documents intended to become part of the policy. See Phillips Petroleum Co. v. St. Paul Fire & Marine Ins. Co., 113 S.W.3d 37, 44 (Tex.App.–Houston [1st Dist.] 2003, pet. denied) (policy language naming Phillips Petroleum as an additional insured “as required by contract” was not “ ‘an explicit reference clearly indicating the parties’ intention’ to include the terms and provisions of the M.S.A. as part of the policy”).

Second, BP qualifies as an “Insured” under the policy’s definition of “Insured” *473 as well as being an “additional insured” under the policy. And as an “Insured” BP is entitled to all coverages the policy affords. Even assuming the policy’s “where required by contract” or “as provided by contract” language incorporates the drilling contract’s language as to what insurance Transocean must provide for BP, not just who is an additional insured, there still is no language in the policy or the drilling contract precluding BP from being insured under the policy for greater coverage than what Transocean agreed to provide. See 470 S.W.3d at 462 (recognizing ATOFINA made clear that a named insured contractor may provide more coverage than it was required to provide in an underlying contract). In other words, there is simply no agreement in the drilling contract that would preclude Transocean’s insurer from providing the coverage that this policy says it provides to an “Insured”: coverage for “liability (a) imposed upon [BP] by law or (b) assumed by [Transocean] under [the drilling contract].”

Third, assuming BP’s coverage as an “additional insured” is limited to Transocean’s liabilities under its indemnity obligation as the Court holds, BP also has the status of an “Insured” as defined in the policy and that status affords it full coverage. And under such circumstances one of the insurance policy’s GENERAL CONDITIONS paragraphs resolves the conflict as to different coverages in favor of BP’s being covered as an “Insured” without our having to resort to canons of construction to resolve the conflict:

GENERAL CONDITIONS

2. CONFLICTING CONDITIONS CLAUSE

In the event of a conflict between the clauses contained in the General Conditions, Sections I and II, and endorsements, the broadest interpretation will inure to the benefit of the Insured.

IV. Conclusion

I would hold that BP is covered by the policy and its coverage is not limited to liabilities assumed by Transocean in the drilling contract. I would answer the first certified question “yes” and would not answer the second. Because the Court holds otherwise, I respectfully dissent.

Footnotes

1

“BP” refers to BP America Production Company; BP Exploration & Production Inc.; BP Corporation North America Inc.; BP Company North America Inc.; BP Products North America Inc.; BP America Inc.; BP Holdings North America Limited; and BP p.l.c.

2

“Transocean” refers to Transocean Offshore Deepwater Drilling, Inc.; Transocean Holdings, L.L.C.; Transocean Deepwater Incorporated; and Triton Asset Leasing GmbH.

3

The doctrine of contra proferentem, also known as the ambiguity rule, requires that courts favor an insured’s interpretation of an insurance policy if there is more than one reasonable interpretation. Ramsay v. Maryland Am. Gen. Ins. Co., 533 S.W.2d 344, 349 (Tex.1976).

4

The Drilling Contract was executed on December 9, 1998, between Vastar Resources Inc. (BP’s predecessor) and R & B Falcon Drilling Co. (Transocean’s predecessor).

5

See Cary A. Moomjian, Jr., Contractual Insurance and Risk Allocation in the Offshore Drilling Industry, Drilling Contractor, Mar.–Apr.1999, at 14 (observing that offshore operators typically agree to accept responsibility for losses from a blowout that include control of the well, damage to the hole, pollution cleanup and removal, pollution damage to third parties, and reservoir loss or damage); Daniel B. Shilliday, et al., Contractual Risk–Shifting in Offshore Energy Operations, 81 TUL. L. REV. 1579, 1599 (2007) (defining “knock-for-knock” indemnity agreements as agreements that “require each party to contractually assume responsibility for injuries to its own employees and damage to its own property, without regard to who caused the injury or how such damage occurred”).

6

Article 24.1 of the Drilling Contract provides:

[Transocean] shall assume full responsibility for and shall protect, release, defend, indemnify, and hold [BP] and its joint owners harmless from and against any ... liability for pollution or contamination, including control and removal thereof, originating on or above the surface of the land or water, from spills, leaks, or discharges ... without regard to negligence of any party or parties and specifically without regard to whether the spill, leak, or discharge is caused in whole or in part by the negligence or other fault of [BP].

(Capitalization and boldfacing removed.)

7

Section 24.2 of the Drilling Contract states:

[BP] shall assume full responsibility for and shall protect, release, defend, indemnify, and hold [Transocean] harmless from and against any ... liability for pollution or contamination, including control and removal thereof, arising out of or connected with operations under this contract hereunder and not assumed by [Transocean] in Article 24.1 above, without regard for negligence of any party or parties and specifically without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of [Transocean].

(Capitalization and boldfacing removed.)

8

As is typical for a supermajor oil company, BP has been self-insuring its risk since 1991, because maintaining third-party insurance for an operation of its magnitude would be cost prohibitive. “Supermajor” is the industry term for the five largest publicly traded oil companies: ExxonMobil, Shell, BP, Total (from France), and Chevron. Tom Bergin, Oil Majors’ Output Growth Hinges on Strategy Shift, REUTERS, Aug. 1, 2008, available at http://www.reuters.com/article/2008/08/01/us-oilmajors-production-idUSL169721220080801.

9

The parties agree that the terms of the primary- and excess-insurance policies are materially identical and are governed by Texas law.

10

“Tort liability” is defined as “a liability that would be imposed by law in the absence of any contract or agreement.”

11

Because the policies also extend coverage to an “Insured” for liability “assumed by the ‘Insured’ under an ‘Insured Contract,’ ” BP’s construction of the policy would result in the extension of additional-insured coverage to a potentially unlimited number of “other person[s] or entit[ies] to whom [BP as an] ‘Insured’ is obliged by any oral or written ‘Insured Contract’ ... to provide insurance....” Under BP’s interpretation, those other persons or entities would also meet the definition of an “Insured,” with the potential for an endless chain of “Insureds” created by contracts that each in turn has with someone else. The validity of a construction of the policy that would permit such a scenario is facially suspect.

12

In what appears to be an alternative holding, or dicta, the court concluded that the contractual-indemnity obligation was separate and independent from the contractual obligation to extend additional-insured coverage because the service agreement did not require the contractor to obtain insurance to secure its indemnity obligation. Pasadena Refining is present here.

Somewhat relatedly, BP contends that the Insurers cannot rely on the indemnity allocation in the Drilling Contract because they are not third-party beneficiaries to it. But Transocean is a named party to the Drilling Contract and has intervened in this dispute. Moreover, BP cites no authority requiring that both parties to a contract that incorporates another document by reference be parties to the referenced document.

13

Cf. Certain Underwriters at Lloyd’s London v. Oryx Energy Co., 142 F.3d 255, 258 (5th Cir.1998) (applying Texas law to construe policy language providing coverage for an additional insured “when required” to call for an examination of the extent of the indemnity agreement in the underlying contract).

14

The parties dispute whether Texas or maritime law governs this construction issue based on a perceived difference as to the weight accorded missing punctuation under these bodies of law. Compare Becker, 586 F.3d at 369 (“A maritime contract containing an indemnity agreement ... should be read as a whole and its words given their plain meaning unless the provision is ambiguous.” (quotation marks omitted)).

15

See, e.g., ATOFINA required Triple S to name ATOFINA “as an additional insured in each of [Triple S’s] policies, except Workers’ Compensation....” 1 ATOFINA CR 71 (emphasis added).

16

Cf. 3 ALLAN D. WINDT, INSURANCE CLAIMS & DISPUTES: REPRESENTATION OF INSURANCE COMPANIES & INSUREDS § 11:30A (6th ed. 2013) (“As a general rule, no premium is charged for making the third party an additional insured because it is the insurance company’s intent ... that the third party be an insured solely for any vicarious liability created by the named insured’s conduct, not for the third party’s own negligence.”); Shilliday, supra note 5, at 1618 (“Frequently, a contractor/indemnitor entering into a contractual indemnity arrangement is asked to supplement its indemnity obligation with a commitment to procure insurance to cover its own liabilities and also to cover its indemnity obligation to the customer. It is also common that the contractor/indemnitor will be asked to name the customer/indemnitee as an additional insured under the indemnitor’s liability policy.”).

17

See Getty Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d 794, 804 (Tex.1992) (“[T]he additional insured provision of the contract does not support the indemnity agreement, but rather is a separate obligation.” (emphasis added)).

1

Multiple insurance policies are involved. For ease of reference and for the reasons expressed by the Court, I will do as the Court does and reference all the policies by the term “the policy” and all the insurers as “the insurers.” The policies were effective from May 1, 2009 to May 1, 2010; the Deepwater Horizon exploded and sank in April 2010.

2

The drilling contract between BP and Transocean was dated December 9, 1998, and was executed by their predecessors in interest.

End of Document
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