Fifth Circuit Withdraws Deepwater Horizon Opinion, Certifying Questions Regarding Scope of “Additional Insured” Coverage to Texas Supreme Court

Fifth Circuit Withdraws Deepwater Horizon Opinion, Certifying Questions Regarding Scope of “Additional Insured” Coverage to Texas Supreme Court

By Amy Elizabeth Stewart

In a unanimous decision on rehearing, the Fifth Circuit on Thursday withdrew its March 1, 2013 opinion in the Deepwater Horizon coverage litigation, which held that BP PLC (“BP”) had unlimited access to coverage as an additional insured on policies issued to the company that owned the offshore drilling unit. In re Deepwater Horizon, 710 F.3d 338 (5th Cir. 2013).

Transocean Holdings, Inc. (“Transocean”) owned the Deepwater Horizon, a semi-submersible, mobile offshore drilling unit. In April 2010, the unit sank into the Gulf of Mexico after burning for two days following an onboard explosion. At the time, the Deepwater Horizon was engaged in exploratory drilling activities pursuant to a drilling contract with BP. The contract required Transocean to maintain specified minimum insurance coverages for the benefit of BP. The extent to which these policies covered BP’s pollution-related liabilities arising from the Deepwater Horizon explosion is the subject of the case.  

Transocean’s liability insurance program was comprised of a $50 million primary policy and excess policies providing an additional $700 million in general liability coverage.  

Pertinent to the question certified by the Fifth Circuit, the drilling contract obligated Transocean to “maintain insurance coverage covering the operations to be performed under [the contract].”  Pursuant to the drilling contract, Transocean assumed responsibility for and indemnified BP against all liability “for pollution or contamination, including control and removal thereof, originating on or above the surface of the land or water, from spills, leaks, or discharges of” various pollutants. BP assumed responsibility for and indemnified Transocean against liability for “pollution or contamination arising out of or connected with operations” under the contract and not assumed by Transocean.

The district court determined that the drilling contract required Transocean to name BP as an additional insured for those liabilities explicitly assumed by Transocean under the contract.  Because Transocean had not assumed responsibility for or undertaken to indemnify BP against the Deepwater Horizon incident (the spill originated below the surface of the water), the district court concluded that the policies did not extend coverage to BP for the Deepwater Horizon spill.  

In its original opinion, the Fifth Circuit reversed the district court’s decision, concluding that the insurance policy, not the indemnity agreement in the drilling contract, controlled the scope of coverage for an additional insured—where the insurance procurement and indemnity provisions are “separate and independent.” Id., citing Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008). The Transocean policies did not incorporate the limitations set forth in the drilling contract or otherwise limit the additional insured coverage to the scope of contractual liability in the drilling contract. As such, the Fifth Circuit initially concluded that BP was directly entitled to full coverage as an additional insured under the Transocean policies, not the more limited coverage Transocean was obligated to provide.

On rehearing, the panel withdrew this initial determination, concluding that it could not determine with certainty how the Texas Supreme Court would decide the case under ATOFINA given particular factual distinctions. Accordingly, the court certified the following questions:

  1. Whether ATOFINA compels a finding that BP is covered for the damages at issue because the language of the umbrella policies alone determines the extent of BP’s coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the [drilling contract] are “separate and independent”?
  2. Whether the doctrine of contra proferentum applies to the interpretation of the insurance coverage provision of the [drilling contract] under ATOFINA given the facts of the case?

For a copy of the opinion, download the PDF below.

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