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Marine & Energy News Alert: Supreme Court of Texas Holds BP Not Entitled to Transocean's Insurance for BP's Macondo Well Pollution Liability

February 13, 2015

On February 13, 2015, the Supreme Court of Texas answered the certified question from the United States Court of Appeals for the Fifth Circuit and held that BP was an additional insured under Transocean’s liability policies but only to the extent of the liabilities that Transocean assumed in the drilling contract, which did not include the sub-surface well pollution that resulted in a spill of 3.19 million barrels of oil from its deepwater well.

The case involves an insurance coverage dispute arising from the April 2010 explosion and sinking of the Transocean drilling rig Deepwater Horizon that contracted with BP for the development of its Macondo well located in the Gulf of Mexico.

Following the casualty, BP notified Transocean and its liability insurers that it sought coverage under Transocean’s policies not only for those liabilities Transocean assumed in the parties’ drilling contract, but also for BP’s own sub-surface well pollution liabilities, which BP had agreed to indemnify Transocean against. Beginning in 1991, BP had made the business decision to self-insure its operations, while Transocean secured its liability policies through the London, U.S., and Bermuda insurance markets. In response, Transocean’s insurers filed a declaratory judgment action in federal court to limit BP’s coverage to that which the parties agreed in the drilling contract.

At the district court, Judge Carl Barbier held that BP was not an additional insured for those liabilities that Transocean had not assumed in the drilling contract, including pollution below the surface of the water. On appeal, a panel (three judges) of the United States Fifth Circuit Court of Appeals, in a decision written by Judge Stephen Higginson who was appointed by President Barack Obama, reversed the district court. Thereafter, Transocean’s insurers and Transocean appealed that decision to the en banc panel (all judges) of the Fifth Circuit. The Fifth Circuit withdrew its prior panel decision written by Judge Higginson and certified two questions to the Supreme Court of Texas:

(1) Whether Evanston Insurance Co. v. ATOFINA v Petrochemicals, Inc., 256 S.W. 3d 660 (Tex. 2008) compelled 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 indemnity and indemnity provisions of the Drilling Contract are “separate and independent?”

(2) Whether the doctrine of contra proferentem applied to the interpretation of the insurance coverage provision of the Drilling Contract under the ATOFINA case, 256 S.W. 3d at 668, given the facts of the case?

As to the first question, in an opinion written by Justice Eva Guzman, the Supreme Court of Texas held that (1) Transocean issued insurance policies that included language that necessitated consulting the drilling contract to determine BP’s status as an additional insured; (2) under the terms of the drilling contract, BP’s status as an additional insured was inextricably intertwined with limitations on the extent of coverage to be afforded under the Transocean policies; (3) the only reasonable construction of the drilling contract’s additional insured provision is that BP’s status as an additional insured is limited to the liability Transocean assumed under the drilling contract; and (4) BP is not entitled to coverage under Transocean’s insurance policies for damages arising from sub-surface pollution because BP, not Transocean, assumed liability for such claims. Based upon its answer to the first certified question, the Supreme Court of Texas did not reach the second question.

Justice Phil Johnson filed the sole dissenting opinion that essentially agreed with BP’s arguments and focused on the policy language as opposed to the parties’ true intent and the drilling contract.

This Supreme Court of Texas decision is a landmark affirmation of and support for the mutual understanding and expressed intent for all involved in the marine and energy industry. For decades, marine and energy companies have negotiated contracts and allocated risk, indemnities, and insurance coverage between themselves on the basis that their contracts governed the parties’ relationships. As in this case, “knock-for-knock” allocation of risk is standard: on the one hand, operators accept responsibility for losses related to the well, including control of the well, damage to the hole, pollution clean-up removal, pollution damage to third parties, and reservoir loss; on the other hand, the drilling contractors and their subcontractors accept responsibility for pollution that emanates from above the surface of the water and/or drilling rig, personal injury and death claims of their employees, and their own property damage.

Transocean’s insurers, who on May 21, 2010, instituted the initial declaratory judgment action in response to BP’s demand, are represented by firm partners Richard Dicharry, Kyle Moran, and Marty McLeod.

The case is In Re Deepwater Horizon, No. 13-0670, Supreme Court of Texas, February 13, 2006. A link to a copy of the case is here.

A link to a copy of our prior alert on this matter is here.