Deepwater Horizon - Update

March 2015

contractual indemnity

The  implications of a Fifth Circuit ruling of March 2013 arising from the “Deepwater Horizon” litigation involving issues of contractual indemnity and additional assured status were discussed in an earlier article - 'Contractual Indemnity and Assured Issues After Deep Water Horizon' .

BP America Production Company (“BP”) had entered a drilling contract with Transocean to employ the Deepwater Horizon and various BP companies were named as Additional Assureds under Transocean’s policy of insurance. The Fifth Circuit had decided that it was the insurance policy rather than the service contract that determined the extent of the cover available to the additional insured party, and there was nothing to prohibit or limit the cover available to BP under Transocean’s insurance policies.

However, in its decision published in February 2015, the Supreme Court of Texas disagreed and held that while BP was an additional insured under Transocean’s liability policies this was only to the extent of the liabilities that Transocean assumed via its drilling contract with BP.  These did not include the sub-surface well pollution that resulted in the spill from BP’s deepwater well.

The Supreme Court had been asked to consider two questions posed by the Fifth Circuit:

  • Whether BP was covered as an additional assured based solely on the language of the insurance policies if, and so long as, the additional insured and indemnity provisions of the drilling contract are ‘separate and independent’; and
  • Whether the doctrine of contra proferentem requiring words in contracts (in this case the insurance policies) to be construed against the person who put those words forward (in this case the insurer) applies to sophisticated parties.

With regards to the first question, the court ruled (8-1) that:

  1. Transocean issued insurance policies that included language that necessitated consulting the drilling contractor to determine BP’s status as an additional assured.
  2. Under the terms of the drilling contract, BP’s status as an additional assured was inextricably intertwined with limitations on the extent of coverage afforded by the Transocean insurance policy.
  3. The only reasonable construction of the additional assured provision was that BP’s status as an additional assured is limited to the extent of the liability assumed by Transocean under the drilling contract.
  4. BP and not Transocean assumed liability for damages resulting from sub-sea pollution claims and BP was not therefore entitled to coverage under Transocean’s policies for such liabilities.

The court declined to respond to the second question concerning the interpretation of coverage under the policies in question.

While the decision is a welcome one for those in the marine industry, the case highlights the need for those with an interest in these matters to ensure that the terms upon which they contract and the language within their policies of insurance are carefully reviewed and understood. When Texas law applies, the language of an assured’s insurance policy should be carefully considered to determine the extent to which a court may look to the underlying service contract to determine the scope of additional assured coverage.

The Club is available to discuss any concerns the Member may have regarding specific contract terms, the extent of coverage provided by the Club and the interaction between the two.

Article by Richard Allen, Syndicate Manager.