SCOT Drills BP’s Hopes of Coverage

By Amy Elizabeth Stewart

In February 2015, the Texas Supreme Court issued its much-anticipated opinion in the Deepwater Horizon coverage litigation in response to questions certified by the Fifth Circuit in 2013. In an 8-1 opinion, the Texas high court limited the scope of additional insured coverage to liability assumed by the named insured in a drilling contract.

The named insured, Transocean Holdings, Inc. (“Transocean”), owned the Deepwater Horizon, a semi-submersible, mobile offshore drilling unit operated by the additional insured, BP PLC (“BP”), for the purpose of conducting exploratory drilling activities in the Gulf of Mexico. After an onboard explosion in April 2010, the rig caught fire, burned for more than a day, then fully submerged, killing eleven crew members and spewing millions of gallons of oil into the Gulf of Mexico.

BP’s activities aboard the Deepwater Horizon were conducted pursuant to a drilling contract with Transocean, the rig’s owner. 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 all other liabilities. The contract required Transocean to maintain specified minimum insurance coverages for the benefit of BP. (As a supermajor oil company, BP self-insured its risks, since liability insurance for an operation of such magnitude would be cost prohibitive.) The extent to which these policies, with combined limits of $750M, covered BP’s pollution-related liabilities arising from the Deepwater Horizon explosion is the subject of the case.

The Holding

In the opinion, the Texas Supreme Court focused on “the interplay between the subject insurance policies and provisions in [the] drilling contract giving rise to Transocean’s obligation to name BP as an additional insured,” ruling Transocean’s policies effectively limited the scope of additional insured coverage afforded BP to only those liabilities assumed by Transocean in the drilling contract. Since Transocean had no liability for subsurface pollution, the court concluded, it had no obligation to name BP as an additional insured for purposes of those exposures. In the absence of such an obligation, the policies did not extend additional insured coverage to BP for its liability in connection with the Deepwater Horizon explosion.

Implications for Policyholders

The key takeaway from the original Deepwater Horizon decision arguably remains unchanged by Friday’s opinion. If the named insured intends to limit additional insured coverage to the scope of its indemnity and insurance obligations in an underlying contract, the policy should provide clear direction to that effect. While Deepwater Horizon permits consideration of contracts extrinsic to the policy if the policy so much as mentions an outside contract, tying coverage to an analysis of extrinsic contracts opens the door to significant uncertainty. To eliminate the risk of an unintended outcome, named insureds should have no difficulty negotiating restrictive additional insured provisions with their insurers, since the interests of both are served by limiting the scope of additional insured coverage.