Hold On To Your Insurance … Federal Court Certifies Deepwater Horizon Questions To Texas Supreme Court

by Gray Reed & McGraw

BP’s woes from the Deepwater Horizon disaster in the Gulf continue. The federal Fifth Circuit in In re: Deepwater Horizon, withdrew an opinion of a three-judge panel and certified questions for consideration by the Supreme Court of Texas. Resolution of this dispute could significantly impact insurance law in Texas, which would demand energy companies to immediately and carefully review their insurance programs.

Transocean paid substantial premiums to insure its worldwide drilling program. It is these insurance policies that BP—a self-insured corporation by its own design—would like to exhaust in order to offset its massive losses arising from the Deepwater Horizon disaster.

The BP and Transocean Drilling Contract

BP executed a drilling contract with Transocean for activities on the Macondo well in the Gulf of Mexico. The drilling contract required, among other things, that (i) Transocean maintain certain minimum insurance coverage for the benefit of BP and (ii) BP be named as an additional insured in each of Transocean’s insurance policies.

Transocean’s Insurance Policies

Transocean contracted with its insurers to obtain at least $700 million of additional general liability coverage related to its drilling activities. The policies broadly define an “Insured” to not only include Transocean, but also any entity with whom Transocean entered into an agreement to assume tort liability.

The Disaster

Following the Deepwater Horizon explosion in April 2010, BP sought coverage from Transocean’s insurers as an additional insured under Transocean’s policies. Transocean and its insurers disagreed and filed suit against BP in the U. S. District Court for the Eastern District of Louisiana seeking a declaration that BP did not qualify as an additional insured. The district court ruled that BP could not access Transocean’s policies because Transocean was only required to name BP as an additional insured as to the risks Transocean assumed in the indemnities provisions of the drilling contract which did not include oil pollution risks.

Fifth Circuit Punts

On BP’s appeal, a panel of the Fifth Circuit issued an opinion reversing the trial court, holding that Transocean’s policies covered BP as an additional insured.

Questions for the Texas Court

The Fifth Circuit’s en banc decision withdrew the panel’s opinion and certified two questions to the Supreme Court of Texas.

First: Which document governs the scope of BP’s coverage as an additional insured: Transocean’s umbrella insurance policies or the indemnity clauses in the drilling contract? This question will likely trigger an examination of the Supreme Court of Texas’ seminal decision in Evanston Ins. Co. v. ATOFINA Petrochems., Inc., which held that in determining the scope of an additional insured’s rights under a liability policy procured by its contractor, the court must look not to the indemnity agreement in the service contract but rather to the umbrella insurance policy itself.

Second: If the indemnity clauses govern the scope of BP’s coverage as an additional insured, the Texas court must then address a question related to the additional insured provision of the drilling contract. Resolution of this question would bring into play the sophisticated insured exception and the doctrine of contra proferentem (ambiguities in an insurance policy are strictly interpreted against the insurer).

The answers to these questions could significantly impact insurance law in Texas. Stay tuned.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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