Marine & Energy News Alert: Fifth Circuit Limits Oilfield Contractor's Additional Insured Coverage to $5M Down from $51M Based on Policies' Incorporation of MSA

June 16, 2015

A coverage dispute arose between the insurers of two oilfield contractors as a result of an August, 2010, fire that killed two Basic Energy Services (“Basic”) employees. Ironshore Specialty Insurance Co. v. Aspen Underwriting Ltd. et al., No. 13-51027, (5th Cir. June 10, 2015). The families of the employees brought wrongful death suits in Texas state court against the well owner and operator, Endeavor Energy Resources (“Endeavor”), and made settlement demands in excess of $11 million.

Prior to the incident, Endeavor and Basic entered into a master services agreement (“MSA”) that contained valid reciprocal indemnity provisions and insurance obligations, requiring each party to obtain “at least” $5 million in insurance coverage ($1 million primary with $4 million excess). The MSA further stated that the insurance obligations were “to support the indemnification provisions,” but were “separate and independent obligation[s].”

The insurance policies actually obtained by Basic, containing limits of up to $51 million, did not expressly limit additional insured coverage to the terms of the MSA. In fact, the policies’ sole reference to the MSA was contained in an “Insured Contract” clause that defined an “Insured” as “any person or entity to whom [Basic] is obligated by a written ‘Insured Contract. . . .’” Because Basic’s policies did not expressly limit Endeavor’s additional insured coverage to the $5 million agreed to in the MSA, Endeavor’s insurer, Ironshore Specialty Insurance Corporation, sued Basic’s excess insurers, Aspen Underwriting Ltd., for a declaratory judgment that it was entitled to Basic’s entire $51 million in coverage. The trial court granted summary judgment in favor of Aspen, and limited Endeavor’s additional insured coverage to $5 million. Ironshore appealed the ruling to the Fifth Circuit.

The Fifth Circuit affirmed the trial court’s ruling, and held that the $5 million insurance limit in the MSA was incorporated into Basic’s insurance policies based upon the “Insured Contract” clause. The court of appeals looked to the recent Texas Supreme Court decision in In re Deepwater Horizon, --- S.W.3d ----, 2015 WL 674744 (Tex. Feb. 13, 2015), to determine whether Basic’s policies sufficiently referenced and incorporated the limitations on coverage contained in the MSA. The court of appeals determined that the policy in In re Deepwater Horizon contained two clauses referencing the underlying drilling contract between Transocean and BP, and that Basic’s policies contained an “almost identical” clause–the “Insured Contract” clause. Accordingly, the Fifth Circuit was forced to decide whether the Texas Supreme Court relied on both clauses in incorporating the underlying contract into the policy, or whether each clause standing alone was an independent basis for incorporation. The Fifth Circuit determined that the Supreme Court “appeared to treat [the two] provisions as functionally identical,” and that the “best reading” of In re Deepwater Horizon was that each clause was an independent basis for incorporating the underlying contract into the insurance policy.

As a practical matter, though Basic’s excess insurers were saved by the “Insured Contract” clause, the Fifth Circuit’s holding in Ironshore v. Aspen, et al., should highlight the importance of reviewing and updating insurance policies to conform with current developments in the law. Diligence in knowing the law and revising policies to conform to the law are best practices, which will serve to avoid costly disputes in the future.