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In Re: Deepwater Horizon Insurance Litigation - The Fifth Circuit Reverses the District Court's Additional Insured Decision but then Withdraws its Decision and Certifies Issues to the Texas Supreme Court

September 30, 2013 Published Work

Originally published in Tort Trial & Insurance Practice Insurance Coverage Litigation Committee Newsletter, Fall 2013
©2013 American Bar Association, Tort Trial & Insurance Practice Section.

This article is adopted with permission from articles by the authors published this year in Volume 35 of the Insurance Litigation Reporter.

One of the interesting insurance coverage cases resulting from the Deepwater Horizon explosion and oil spill arises out of the claim by BP that it was entitled to coverage as an additional insured under the Transocean liability insurance policies. We have been following this litigation since its inception, and have written several articles reporting on ongoing developments in the litigation, all of which were published in the Insurance Litigation Reporter (Thomson Reuters), beginning in 2010 when the litigation first commenced. This year has seen two very interesting and important developments. In March 2013, the Fifth Circuit Court of Appeals reversed a decision of the United States District Court for the Eastern District of Louisiana, which had held that BP was not an additional insured under the Transocean liability policies, and ruled that under applicable Texas law, BP was an additional insured under those policies. However, in August, 2013, the Fifth Circuit withdrew its initial decision and certified questions relevant to the determination of additional insured coverage to the Texas Supreme Court. Our articles on these two recent decisions by the Fifth Circuit are set forth below

FIRST - IN RE: DEEPWATER HORIZON INSURANCE LITIGATION – FIFTH CIRCUIT REVERSES IN FAVOR OF BP'S ADDITIONAL INSURED CLAIM

During the very same week in which the trial of the multibillion dollar claims by the U.S. Government and private parties against BP and the other parties involved with the Deepwater Horizon drilling rig was just getting under way in Federal Court in New Orleans, the Fifth Circuit Court of Appeals was putting the finishing touches on its decision in the declaratory judgment case brought by Transocean's primary and excess insurers against BP, involving BP's claim for coverage as an additional insured under Transocean's policies. In a decision issued on Friday, March 1, 2013, the Fifth Circuit unanimously reversed the decision of the E.D.La., which had previously granted judgment in the insurers' favor denying coverage to BP. In a major victory for BP, the Fifth Circuit ruled that BP was entitled to coverage as an additional insured under the Transocean policies. In Re: Deepwater Horizon, Ranger Ins., Ltd., Transocean Offshore Deepwater Drilling., Inc., et al. and Certain Underwriters at Lloyd's London, v. BP P.L.C. et al., No. 12-30230.

Transocean maintained primary and excess liability coverage in the amount of $750 million covering the period during which the explosion of the Deepwater Horizon drilling rig took place. Transocean was a contractor to BP, and BP and its affiliated entities were named as additional insureds under the policies. The dispute with the insurers arose because, under the Drilling Contract between BP and Transocean, Transocean was only obligated to indemnify BP and to name BP as an additional insured for surface pollution, and the major pollution claims resulted from subsurface pollution from the well blowout. However, there was a question as to whether the insurance policies were similarly limited.

In its decision issued on November 15, 2011, the District Court, applying Texas Law, held that the additional insured coverage was only as broad as the indemnity requirements in the underlying contract and, therefore, denied coverage to BP and issued judgment on the pleadings in favor of the insurers. 2011 WL 5547259 at 75.

The Fifth Circuit ruled to the contrary:

"Applying Texas law, especially as clarified since the district court's decision, we find that the umbrella insurance policy [and the primary insurance policy as well] – not the indemnity provisions of Transocean's and BP's contract – controls the extent to which BP is covered for its operations under the Drilling Contract. Because we find the policy imposes no relevant limitations upon the extent to which BP is covered, we REVERSE the judgment of the district court and REMAND the case for entry of an appropriate judgment in accordance with this opinion." 710 F.3d 338, 2013 WL 776354, at *1.

The Fifth Circuit reached this conclusion for the following reasons.

Initially, the Court of Appeals noted that the $50 million primary policy issued by Ranger Insurance Ltd., and the $700 million excess policies had materially identical provisions, so it treated all insurers as one for purposes of its decision. Id. The Drilling Contract between Transocean and BP required that Transocean maintain insurance covering its operations, and that BP be named as an additional insured under Transocean's policies. Id. at *2. The parties agreed that the Drilling Contract was an "insured contract" under the policies. The issue in contention was the scope of BP's insurance coverage. Id. at *2.

Under Article 24 of the Drilling Contract, Transocean was responsible for, and indemnified BP with respect to, pollution or contamination originating on or above the surface of the water, whereas BP was responsible for, and indemnified Transocean with respect to, pollution or contamination not assumed by Transocean, i.e. originating from sub surface conditions (such as the well blow out). Id. at *2. The District Court had found that the Drilling Contract only required Transocean to carry insurance and name BP as an additional insured for above surface pollution, and that the policies that were obtained by Transocean only provided coverage to the extent of Transocean's contractual liabilities. The Court of Appeals disagreed.

The Court of Appeals conducted a de novo review of the District Court's decision granting judgment on the pleadings to the insurers and of the contract and the policies. Id. at *3 It applied standard principles under Texas law, holding that if there are ambiguities in or more than one reasonable interpretation of a policy, coverage will be interpreted in favor of the insured. Id. at *3. As applied to this case, the Court was guided by the following principle:

"Under Texas law, to discern whether a commercial umbrella insurance policy [or the primary 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, we look to the terms of the umbrella policy itself, instead of looking to the indemnity agreement in the underlying contract. We apply this analysis so long as the indemnity agreement and the insurance coverage provision are separate and independent." Id. at *4 (internal citations omitted).

Applying this analysis, the Court of Appeals looked first to the policy language, and applied Texas law as set forth in Evanston Ins. Co. v. ATOFINA Petrochems, Inc., 256 S.W.3d 660 (Tex. 2008) and Aubris Resources LP v. St. Paul Fire & Marine Ins. Co., 566 F. 3d 483 (5th Cir. 2009), which the District Court had distinguished, and Pasadena Refining System, Inc. v. MCraven, Nos. 14-10-00837-CV, 14-10-00860-CV, 2012 WL 1693697 (Tex. App. May 15, 2012), which came down after the District Court's opinion, in concluding that even if the indemnity obligations of Transocean were limited under the Drilling Contract, only the policy itself may establish limits upon the extent to which an additional insured is covered. Id. at *6. The Court found that, as in ATOFINA, Aubris and Pasadena Refining, the fact that the policy referred to the underlying contract in the definition of additional insured was not sufficient, without more, to impose any limitations of liability in the underlying contract, on the policy obligations. Id. at *7. The Court of Appeals concluded that "there is no relevant limitation to BP's coverage under the policy as an additional insured, that is so long as the insurance provision and the indemnities clauses in the Drilling Contract are separate and independent." Id. (internal citations omitted). The Court of Appeals then went on to hold that it is "unmistakable" that the provision in the Drilling Contract extending direct insured status to BP was separate and independent from BP's agreement to forego contractual indemnity in various circumstances. Id. at *8 (internal citations omitted).

The Court of Appeals' final conclusion was as follows:

"Because we find that the umbrella policies [and the underlying policy] between the Insurers and Transocean do not impose any relevant limitation upon the extent to which BP is an additional insured, and because the additional insured provision in the Drilling Contract is separate from and additional to the indemnity provisions therein, we find BP is entitled to coverage under each of Transocean's policies as an additional insured as a matter of law." Id. at *9.

Thus, the bottom line of the Court's decision was quite simple. Even if the obligations of an additional insured are limited in an underlying contract, if the insurance policy is broader than those obligations, unless the policy provides specific limitations on coverage to the additional insured – by specific reference to the limitations in the underlying contract, or otherwise, at least under Texas law, the policy will provide the full extent of coverage to the additional insured.

At the time it was decided, this case represented an important development in additional insureds law, one that undoubtedly caused carriers to more carefully tailor their policies to limit coverage to additional insureds if there are limits in the underlying contracts. The decision also represented a major win for BP, to the tune of $750 million. (Of course, compared to the billions BP has already spent as a result of the Gulf Oil spill, and the billions still at issue in underlying claims, $750 million may not seem like so much, but as they say, every little bit helps.)

SECOND - IN RE: DEEPWATER HORIZON INSURANCE LITIGATION – FIFTH CIRCUIT WITHDRAWS MARCH 2013 DECISION IN FAVOR OF BP'S ADDITIONAL INSURED CLAIM AND CERTIFIES THE ISSUE TO TX SUPREME COURT

The Fifth Circuit has now withdrawn that decision in an order dated August 29, 2013, in response to Transocean's underwriters' motion for reconsideration, and certified the issue to the Texas Supreme Court. The Texas Supreme Court has accepted certification. It will now decide, under Texas law, two certified questions:

(1) whether BP is entitled to coverage based solely on the language of the insurance policies, because the additional insured and indemnity provisions in the drilling contract were "separate and independent"; and

(2) whether contra proferentum applies to interpretation of the insurance provisions in the drilling contract.

With respect to the first issue certified, the Fifth Circuit noted that while the parties agreed that the ATOFINA case was instructive, they had differing views of the application of the holding in the that case. The Court also noted that "there are potentially important distinctions between the facts of the instant case and ATOFINA." The Fifth Circuit noted "the wide ramifications, both throughout the oil and gas industry and for insurance law, of this case."

With respect to the second issue certified, the Court noted that Texas law has consistently applied the doctrine of contra proferentum to interpret ambiguous policy provisions in favor of the insured, but it suggested that in this case, there may be a basis for a sophisticated insured exception to the doctrine, because Texas law had derived from the assumption that the insurer and insured had unequal bargaining power in the transaction. Here, the Court noted that "where all the parties involved are highly capable contractors," the exception may be appropriate.

We will continue to monitor the case and report further when there is additional activity in this dispute.