Additional Insured Coverage May Be Limited By Terms of Underlying Contracts, Extrinsic to the Insurance Policy
Insurance Coverage Litigation Law Update 02/16/15 By Jeffrey O. Davis, Patrick J. Murphy
On Friday, the Texas Supreme Court issued its much anticipated decision in In re Deepwater Horizon, Case No. 13-0670, paving the way to resolving a high stakes coverage dispute between BP, Transocean, and Transocean's insurers over the extent of BP's coverage as an additional insured under Transocean's CGL policies for liability resulting from the notorious April 2010 explosion and sinking of the Deepwater Horizon oil-drilling rig in the Gulf of Mexico. Though decided as a matter of Texas law following certification from the Fifth Circuit on discrete questions of law, given the publicity the case has drawn, and the dearth of decisions on the key issues, the decision likely represents a significant development in the law generally regarding the extent of "additional insured" coverage. The key take-away is that the scope of coverage for an additional insured may be limited not only by the terms of the policy but also by the terms of the underlying contract between the additional insured and named insured. The court indicated that this won't always be the case, but will where the existence of additional insured status can be determined only by reference to the underlying contract, such that the underlying contract can be considered "incorporated" into the insurance policy.
The material facts in Deepwater Horizon were few. BP (oil-field developer) and Transocean (drilling-rig owner) were parties to a contract (the "Drilling Contract") pursuant to which Transocean assumed liability for above-surface pollution, BP assumed liability for all other pollution risks (i.e., subsurface pollution), and each party agreed to indemnify the other for liabilities it had assumed. The Drilling Contract required Transocean to purchase CGL insurance and name BP and its affiliates "as additional insureds in each of [Transocean's] policies, except Workers' Compensation for liabilities assumed by [Transocean] under the terms of [the Drilling Contract]."
The Transocean policies contained standard language requiring the insurers to pay for loss assumed by the "Insured" under an "Insured Contract." The policies did not specifically name BP as an additional insured, but simply contained a blanket additional insured endorsement defining "Insured" to include "[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." The policies also contained standard language defining "Insured Contract" 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 party to pay for 'Bodily Injury' [or] 'Property Damage.'
Following the explosion, the subsequent oil leak occurred far below the surface of the ocean, meaning that, as between BP and Transocean, BP was contractually liable. BP nonetheless sought coverage under Transocean's policies as an additional insured.
Transocean, its insurers and BP all agreed that the Drilling Contract constituted an "Insured Contract," and BP was an additional insured. The only question was whether BP was entitled to the full scope of coverage available to an "Insured," or whether coverage was limited to the scope of Transocean's indemnity obligation, i.e., above-surface pollution.
BP argued that the existence and scope of coverage must be determined by reviewing only the four corners of the policies; the insurers (and Transocean, who was aligned in interest with its insurers to preserve the coverage limits for its own use) argued that the scope of coverage available to BP can only be ascertained by considering limitations set forth in the Drilling Contract.
Applying Texas law, the court agreed with Transocean—the policies were not "separate and independent" of the Drilling Contract but rather "incorporated" that contract. Key to this determination was that BP's status as an "Insured" could not be known at all unless one referred to the Drilling Contract, e.g., there was no schedule of additional insureds or insurance certificate from which the existence of coverage could be ascertained without reference to the Drilling Contract.
The "not separate and independent" analysis was the key holding of the case (and arguably was all that was necessary to address the question the Fifth Circuit asked the Texas Supreme Court to answer); the court nonetheless went on to analyze the language of the Drilling Contract to determine whether in fact it was intended that the scope of coverage afforded to BP was limited to above-surface pollution. Under the express terms of the Drilling Contract, Transocean was obligated to purchase CGL insurance and name BP "as additional insureds in each of [Transocean's] policies, except Workers' Compensation for liabilities assumed by [Transocean] under the terms of [the Drilling Contract]."
BP argued this provision must be read narrowly to only limit the coverage available to BP under Workers' Compensation policies—essentially that the absence of a comma following "Workers' Compensation" meant that the subsequent clause—"for liabilities assumed by [Transocean] under the terms of [the Drilling Contract]"—simply modified "Workers' Compensation" and not BP's status as an additional insured." (That argument has led to the case being characterized in news stories as "the case of the $750 million missing comma").
The court rejected BP's argument and supplied the missing comma. Among other things, the court concluded that "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." (emphasis added). Consistent with this purpose, the only reasonable construction of the provision at issue is that "BP is an additional insured only as to liabilities assumed by Transocean under the Drilling Contract and no others."
What the Decision Means for Policyholders
For BP, the decision likely means a $750 million uninsured loss (on top of billions of dollars it has already spent on the Deepwater Horizon disaster). For the rest of us, it adds a bit of clarity to the murky body of law surrounding the scope of additional insured protection, as well as some valuable practical reminders. Legally, where the only basis for ascertaining status as an additional insured is some other contract then Deepwater Horizon says that contract may be deemed incorporated into the policy, and therefore control on the scope of coverage. As for the practical lesson, consider that the result in this case might well have been different had, as is often the case in additional insured situations, BP been added in a scheduled endorsement or received a certificate of insurance. Indeed, parties in that situation who are the subject of claims should not hesitate to seek additional insured protection per whatever the policy says, unfettered by any limitations in the underlying contract as to the scope of coverage to be afforded. As for what to do at the insurance procurement stage, a contracting party who agrees to procure insurance, or add its contracting partner as an additional insured, particularly when done through a scheduled endorsement, should take care that the scope of protection in the endorsement is consistent with the intent of the underlying agreement. Typically this means additional insured protection should be no broader than the scope of that party's indemnification obligations. Otherwise, that party may unwittingly be offering up its insurance limits to parties with whom it contracts to a far greater degree than intended.