Texas Supreme Court Holds BP Not Entitled To Full Coverage Under Transocean Policies

Additional insured provisions are a common risk allocation technique. Unfortunately, they often give rise to litigation over the scope of coverage afforded to the additional insured, and particularly over the role of the underlying contract in determining that scope of coverage. The latest illustration is the Texas Supreme Court's much anticipated opinion issued on Friday, February 13, in In re Deepwater Horizon, No. 13-0670, ___ S.W.3d ___ (Tex. Feb. 13, 2015). As will be seen, this holding appears to represent a significant expansion of the type of policy language that will be considered sufficient to incorporate limitations on the scope of coverage from an outside contract.

The History of the Case

Shortly after the Macondo blowout, BP made a claim as an additional insured seeking full coverage on Transocean's entire $750 million insurance stack. Given the magnitude of the spill, this claim could seriously deplete coverage for Transocean's own potential liabilities. Transocean and its insurers naturally contended that the scope of coverage to which BP was entitled was no broader than Transocean's very limited indemnity obligations and, in particular, did not protect BP for subsurface pollution.

The litigation in federal court illustrates the difficulty courts have in addressing this type of additional insured coverage issue. The federal district court held that BP's coverage was no broader than Transocean's indemnity obligations. The Fifth Circuit later reversed that decision (see our earlier post here) and granted BP full access to the policies but—on rehearing—vacated its own decision and certified two questions to the Texas Supreme Court (as discussed in our follow up post).

The first certified question was whether, under Evanston Insurance Co. v. ATOFINA Petrochemicals Inc., 256 S.W.3d 660 (Tex. 2008), BP and its affiliates are covered for below-the-surface pollution by Transocean's insurance policies as "additional insureds." The second was whether the doctrine that an ambiguous insurance contract will be interpreted in the insured's favor applies to the drilling contract's insurance-coverage provision under ATOFINA.

The Texas Supreme Court held that BP's coverage under the Transocean policies was constrained by the parties' underlying drilling contract. The Court also found the only reasonable interpretation of the drilling contract to be that Transocean was only required to extend limited coverage to BP. It therefore declined to answer the second question, reasoning that the ambiguity rule comes into play only if more than one reasonable interpretation of the contract exists.

The...