There is a new case you should know about…
In Re Deep Water Horizon
…only because everyone else is talking about it.
Let’s break it down here, Dear Readers!
The Texas Supreme Court last week decided In Re Deepwater Horizon , No. 13-0670 (Tex. Sup. Ct. Feb. 13, 2015). (Hover and click on the link above in order to access the court’s decision). The court there rejected additional insured coverage for BP’s losses due to a horrific oil platform explosion and subsequent crude oil leak into the Gulf waters in 2010.
Many commentators see this as a seminal change in additional insured coverage law. But you, my Dear Readers, will not! You will remember what you have learned before in this blog about additional insured endorsements, contractual liability clauses, and how these two different types of coverage are seen as separate and distinct in a CGL policy.
For a little fun, and to refresh your memory, check out these prior blog posts: http://www.midwestinsurancelawguide.com/contractual-liability-coverage-v-additional-insured-endorsement/ and http://www.midwestinsurancelawguide.com/insurance-policy-risk-transerence-2-ways/ and http://www.midwestinsurancelawguide.com/belt-braces-risk-transference/ and http://www.midwestinsurancelawguide.com/additional-insured-endorsement-coverage-is-not-dependent-upon-indemnity-clause-in-underlying-contract/ and http://www.midwestinsurancelawguide.com/2-ways-to-get-cgl-insurance-coverage-without-buying-a-policy/ .
You will also remember that, unless you are an additional insured by endorsement, you can only recover in a derivative fashion from the named insured through the underlying contract. And that was the situation here with Horizon.
Let’s dive in deeper – what happened on this policy to sway the court’s opinion against coverage for BP? A brief review of the facts is necessary. BP and Transocean entered into a drilling contract. Under the terms of that contract, BP agreed to assume liability for underwater pollution losses regardless of fault. Transocean agreed to assume liability for losses above the water, regardless of fault. The drilling contract also required Transocean to obtain a CGL policy and to add BP as an additional insured. The drilling contract did not specify how BP was to be added to the policy, only that it was to be added as an additional insured “…for liabilities assumed by Transocean under the drilling contract.” If we think more about it, this would be the above-water pollution losses which Transocean assumed.
After the Deepwater Horizon rig blew up, 11 men died. The drilling platform was also destroyed, and millions of gallons of oil leaked into the Gulf resulting in significant water pollution. BP sought coverage from Transocean and its insurer for the underwater pollution losses. BP claimed it was an additional insured by contract under the CGL policy. The insurer denied the claim. The ensuing lawsuit wound it way through a variety of appellate courts before landing back at the Texas Supreme Court for its definitive analylis and ruling: no coverage.
The Texas Supremes properly looked at the policy terms. The policy itself did not have a separate additional insured endorsement naming BP as a separate and distinct insured. Rather it had a contractual liability clause that allowed coverage to Transocean for tort liability losses that Transocean had assumed in the underlying drilling contract. The clause stated specifically that the insurance company would cover losses “assumed by the Insured in an insured contract.” Notice the capital “I” on the noun “Insured.” Remember our last blog post about Insured Birds? That means the NAMED INSURED Dear Readers, not BP.
Insured contract was defined in the policy to include those contracts where the Insured assumes the tort liability of another. This is standard ISO form language folks; there is no magic rule of policy interpretation at play here. The Texas Court had to look then to the underlying drilling contract. Did Transocean assume liability for underwater losses in the drilling contract? The court had to conclude no. BP, instead, had assumed those underwater losses – but the coverage flowed only to and through the Named Insured which was Transocean. Coverage denied.
Why do some commenters in the industry think this case is seminal and transformative? I am not sure. The Texas Supreme Court called BP an “additional insured” – but it really was not. Additional insureds are added by endorsement – which was not the case here. Instead, BP was really only a contractual insured, one who can collect only through the Named Insured’s indemnity obligation in the underlying contract. The use of the noun “additional insured” to describe BP is not only inaccurate, but it also makes it appear, at a cursory glance, that this decision could affect ALL additional insureds who are added by endorsement – which is clearly not the case. The Texas Supreme Court explicitly clarified this very point in its Horizon opinion. It went to great lengths (and pages of opinion) to distinguish its Horizon ruling from its prior ATOFINA case – where it upheld a very broad interpretation of additional insured coverage by endorsement. See, Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008).
In the end, Deepwater Horizon is just a run of the mill coverage decision based upon the clear terms of the policy as it relates to contractual liability coverage. Enough said.