Texas Supreme Court Restores Status Quo and Rejects BP’s Claim to Transocean’s Insurance

Case:In re Horizon
Supreme Court of Texas
2015 Tex. LEXIS 141 (2/13/2015)

The Texas Supreme Court responded to certified questions from the United States Fifth Circuit Court of Appeals in determining to what extent BP was entitled to coverage as an additional insured under Transocean’s first $750 million in insurance. BP had argued, initially successfully in the Fifth Circuit before the opinion was withdrawn and the questions certified, that only the wording of the policies (and not the terms of the Drilling Contract) could be considered in determining the scope of coverage afforded to them as an additional insured, and that as the policies had no express limitations on the coverage afforded, BP was entitled to full coverage, even for the obligations it assumed through the indemnity provisions of the Drilling Contract between the parties. Specifically, BP sought coverage for its subsurface pollution exposure. This position was rejected by the Texas Supreme Court upon its finding that the policies in question included sufficient language to require consultation of the Drilling Contract to ascertain the extent of additional insured coverage to be afforded.

The Court answered only the first of the certified questions, noting the second concerning application of contra proferentem in the case of ambiguities in a contract was moot as there was only one reasonable interpretation of the policies here, that advocated by underwriters and Transocean.

The Court noted BP was not an additional insured through specific endorsement, nor through issuance of a certificate of insurance, such that in the absence of reference to the Drilling Contract, BP would have no rights whatsoever under the policy. The Court then found the policy terms extending coverage to, “Policy,” and stating that “where required by written contract, bid or work order, additional insureds are automatically included hereunder. . . ” were sufficient to incorporate by reference the terms of the Drilling Contract.

In turn, the Drilling Contract required Transocean to obtain comprehensive general liability insurance, among others, and to name BP “as additional insureds in each of Contract.”

The Court reaffirmed long standing Texas law that “insurance policies can incorporate limitations on coverage encompassed in extrinsic documents by reference to those documents.” Urrutia v. Decker, 992 S.W. 2d 440, 441 and 443 (Tex. 1999). They held the policy’s language determines the extent to which an underlying contract must be consulted to determine the existence and scope of additional insured coverage. They then found the above language of the policies did effectively incorporate the Drilling Contract into the policies, holding “the Transocean policies 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.” When considering the above Drilling Contract wording, they reached the conclusion 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.”

In addition to sanctioning the practice of incorporating the terms and limitations of drilling contracts into additional insured requirements of policies, the decision is also significant in emphasizing the importance of closely proofreading contracts, as the omission of a single comma gave rise to much of BP’s argument. The Texas Supreme Court appropriately concluded the requirements that the contract be read as a whole and in a fashion to give effect to all terms and render none meaningless required them to interpret the phrase in question as though the missing comma was present.

In the critical phrase from the Drilling Contract, there should have been a comma after the word “Compensation.” Read the following with and without a comma there and the difference is apparent: Contract” modifies the entirety of the additional insured provision, thereby restricting the coverage to be obtained to be the same as the indemnities assumed by Transocean.

BP tried to take advantage of the missing comma by formulating a contorted reading of this wording in an attempt to remove this restriction from application to the general liability policies. They argued Transocean was to name them additional insured on all policies, including on Transocean’s Workers’ Compensation policy, but that the coverage afforded to them in that policy would exclude coverage for liabilities assumed by Transocean under the contract, but would extend coverage to BP for exposure to BP’s own employees. Aside from not being possible to obtain (which rendered the provision “functionally inoperative”), this reading was entirely inconsistent with the allocation of risk in the indemnity provisions of the contract, as Transocean had assumed liabilities to its own employees, as had BP. The Court considered this to be an unreasonable construction and rejected it in favor of inserting the comma, as doing so allowed the insurance requirements to be read in harmony with the general allocation of risks in the contract, gave meaning to all language, and was consistent with the standard use of such language and such clauses in the industry.

Thus, the Court held the only reasonable interpretation of the additional insured provision is 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 for that risk. Because there is no obligation to provide insurance for that risk, BP lacks standing as an ‘Insured’ for the same.”