Contractual Indemnity and Assured Issues After Deep Water Horizon
Published: November 01, 2013
The catastrophic explosion aboard the “Deepwater Horizon” mobile drilling unit (MODU) and its consequences are well documented. The extensive litigation connected with the incident rumbles on and has spawned a particularly noteworthy case which will be of interest to those involved in contracting for services performed in the offshore industry and their insurers alike.
Owners of the MODU, Transocean, insured it through Ranger Insurance Co to a policy limit of US$50 million. Excess insurers in the London market provided a further US$700 million of cover. BP America Production Company (“BP”) had entered a drilling contract with Transocean to employ the unit to exploit the Macondo well. Various BP companies were named as Additional Assureds under Transocean’s policy of insurance.
On 1st March 2013, the Fifth Circuit issued the in re “Deepwater Horizon” opinion holding that BP was afforded extensive additional insured coverage under Transocean’s umbrella insurance policies for pollution liabilities arising from the “Deepwater Horizon” incident. It decided that the insurance policies alone, and not the indemnity obligations defined within the Drilling Contract, governed the scope of BP’s additional insured coverage.
The Fifth Circuit studied Transocean’s primary and excess policy language, these being subject to Texas law. The policies contained materially identical provisions. The court also considered the drilling contract between Transocean and BP. This contained indemnity and insurance provisions. The insurance provisions within the drilling contract required Transocean to name BP and its affiliated companies as an additional assured “… in each of [Transocean’s] policies, except Worker’s Compensation for liabilities assumed by [Transocean] under the terms of this Contract.”
In the Lower Court, the insurance companies argued that their additional insured obligation was limited to liabilities assumed by Transocean under the terms of the drilling contact. They did not dispute that the contract was an insured contract. They also accepted that the policies provided a degree of coverage to BP. The insurers contested however that the policies should provide cover to BP with respect to pollution claims arising from the Macondo well. BP argued that it was an additional insured under the policies at issue and that the language of the policies alone and not that of the drilling contract governed the scope of coverage available to it. The scope of coverage was the issue in the first instance and remains the issue at the time of writing.
The court of first instance (the Deepwater Horizon Multi-District Litigation Court) found in favour of Transocean’s insurers and ruled that Transocean was only obligated to provide BP with additional assured status for liabilities Transocean had assumed under the drilling contract. This did not include subsea pollution.
In reversing the decision on 1st March 2013, the Fifth Circuit interpreted the phraseology in the drilling contract differently, finding that the language restricting the additional insured exclusion referred to Worker’s Compensation liabilities only. Significantly, the Court accepted the arguments that BP had made at the Lower Court which relied upon the Texas Supreme Court opinion of Evanston Ins Co. v ATOFINA Petrochemicals Inc. noting that as long as the indemnity agreement and the insurance provisions constitute separate and independent obligations, the Court will look to the applicable insurance policy rather than the service contract to determine whether additional insured coverage exists. Whether the insurance policies themselves contained any language limiting BP’s coverage formed the second strand of the Fifth Circuit’s consideration. The Fifth Circuit concluded that “only the umbrella [insurance] policy may establish limits upon the extent to which an additional insured is covered in situations such as the one before us now.” It determined that, as the Texas Supreme Court had found in ATOFINA, it is the insurance policy rather than the service contract that determines the extent of the cover available to the additional insured party and there was nothing to prohibit or limit coverage available in Transocean’s insurance policies.
In finding that the indemnity and insurance provisions in the drilling contract were separate and independent provisions, the Fifth Circuit stated that Texas law “only requires that additional insured provision be a discrete requirement” and not necessarily a separate contractual provision. Relying on ATOFINA, the Fifth Circuit held that it was “unmistakeable” that indemnity and additional insured provisions were separate and distinct contractual provisions.
Transocean and its insurers filed Petitions for Rehearing En Banc with the Fifth Circuit seeking reversal of the panel’s decisions and requesting that it find that BP is not an additional assured for pollution liabilities. On 29th August 2013, the Fifth Circuit panel unanimously withdrew its 1st March opinion and substituted its opinion with questions which it posed to the Texas Supreme Court:
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- Whether BP is 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”.
- Whether the doctrine of contra proferentum requiring insurance policies to be interpreted against insurers and in favour of insureds applies to sophisticated parties.
The Texas Supreme Court accepted the questions on 6th September 2013.
The additional insured provision in the ATOFINA contract read:
“[ATOFINA], its parents, subsidiaries and affiliated companies, and their respective employees, officers and agents shall be named as additional insured in each of [Triple S’s] policies, except Workers’ Compensation; however, such extension of coverage shall not apply with respect to any obligations for which [ATOFINA] has specifically agreed to indemnify [Triple S].”
The language within the Transocean/BP drilling contract stated:
“[BP], its subsidiaries and affiliated companies, co-owners, and joint venturers, if any, and their employees, officers and agents shall be named as additional insureds in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of this Contract.”
BP had not sought indemnity from Transocean for pollution liabilities arising from the Macondo casualty.
While the ATOFINA contract provided additional insured coverage that expressly excluded indemnity obligations owed by the additional insured to the named insured, the drilling contract provided additional insured coverage that was expressly intended “for liabilities assumed by the named insured under the drilling contract”.
While all parties agreed that ATOFINA was instructive, Transocean argued that while the ATOFINA indemnity clause broadly required ATOFINA to be named as an additional insured, the indemnity clause in the Transocean drilling contract only required BP to be named as an additional insured to the extent of liabilities assumed by Transocean in the drilling contract and it argued that the indemnity clause and additional insured provisions were therefore not separate and independent.
The Fifth Circuit withdrew its opinion noting a lack of controlling Texas Supreme Court precedent and concluding that “because there are potentially important distinctions between the facts of the instant case and ATOFINA, the outcome is not entirely clear”.
The Fifth Circuit also chose to address whether a “sophisticated insured exception” should apply to the doctrine of contra proferentum, a rule of insurance contract interpretation that construes ambiguities in a contract against the drafter – i.e. the insurer and in favour of the insured, even if the more reasonable interpretation favours the insurer. The Court noted that the Texas Supreme Court has never provided an opinion applying a “sophisticated insured exception” to the rule. If the parties involved in the subject dispute are deemed to be “highly capable contractors” then it may perhaps be that a sophisticated insured exception should apply.
The answers to the questions may well clarify how contractual indemnity and additional insurance clauses in separate contracts will be interpreted in future disputes between sophisticated insureds. The outcome of the case will be of import to both those seeking the benefit of insurance provision and those providing that insurance. Those with an interest in these matters may wish to review both the terms on which they are contracting and the language contained within the policies of insurance they are issuing.
