in Re Deepwater Horizon
58 Tex. Sup. Ct. J. 330, 470 S.W. 3d 452, 2015 A.M.C. 1491 (2015)
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Rule of Law:
When an insurance policy's language confers 'additional insured' status based on an obligation in an underlying contract, the terms and limitations of that underlying contract are incorporated by reference to determine the scope of coverage.
Facts:
- BP entered into a Drilling Contract with Transocean for the operation of the Deepwater Horizon, an offshore drilling rig.
- The Drilling Contract established a 'knock-for-knock' risk allocation, where Transocean assumed liability for above-surface pollution and BP assumed liability for subsurface pollution.
- The Drilling Contract required Transocean to name BP as an 'additional insured' on its insurance policies specifically 'for liabilities assumed by [Transocean] under the terms of this contract.'
- Transocean procured a primary and several excess insurance policies to cover its operations.
- In April 2010, the Deepwater Horizon rig exploded and sank, causing a catastrophic subsurface oil spill in the Gulf of Mexico.
- BP sought coverage under Transocean's insurance policies for liabilities arising from the subsurface pollution.
Procedural Posture:
- Transocean's insurers filed a declaratory judgment action against BP in the U.S. District Court for the Eastern District of Louisiana.
- Transocean intervened in the case, aligning its interests with its insurers against BP.
- The district court (trial court) granted summary judgment for the insurers, ruling that the Drilling Contract limited BP's coverage to preclude subsurface pollution claims.
- BP, as appellant, appealed the summary judgment to the U.S. Court of Appeals for the Fifth Circuit.
- A panel of the Fifth Circuit initially reversed the district court's decision in favor of BP.
- On rehearing, the Fifth Circuit withdrew its initial opinion and certified two questions of state law to the Supreme Court of Texas.
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Issue:
Does an insurance policy that confers 'additional insured' status 'as obliged' or 'where required' by an underlying contract also incorporate the limitations on the scope of coverage contained within that underlying contract?
Opinions:
Majority - Justice Guzman
Yes. An insurance policy that grants 'additional insured' status 'as obliged' or 'where required' by an underlying contract incorporates the limitations on the scope of that coverage from the underlying contract. The court's analysis begins with the four corners of the insurance policy, but Texas law permits policies to incorporate extrinsic documents by reference. Here, the Transocean policies do not name BP as an insured; BP's status is conferred only by reference to the Drilling Contract, using language such as 'where required' and as 'obliged.' This language compels the court to consult the Drilling Contract not only to confirm BP's status as an additional insured but also to determine the scope of that status. The Drilling Contract unambiguously limits BP's additional-insured coverage to 'liabilities assumed by [Transocean],' which were for above-surface pollution only. Because BP, not Transocean, assumed liability for subsurface pollution, BP is not entitled to coverage for those claims under Transocean's policies.
Dissenting - Justice Johnson
No. The insurance policies' language does not incorporate the Drilling Contract's limitations, and BP should be covered for liabilities imposed by law. The policy language 'where required by written contract' serves only to identify who qualifies as an additional insured, not to limit the scope of their coverage once that status is established. After qualifying as an 'Insured' under the policy's plain terms, BP is entitled to the policy's broad grant of coverage, which includes 'liability imposed upon the ‘Insured’ by law.' The insurer knew how to explicitly restrict coverage by reference to an underlying agreement but failed to use such language here. The duty to insure is separate from the duty to indemnify, and Transocean procured broader insurance coverage for BP than the Drilling Contract minimally required.
Analysis:
This decision clarifies the doctrine of incorporation by reference in Texas insurance law, particularly concerning additional insureds. It establishes that general policy language like 'as required by contract' is sufficient to incorporate not just the requirement to name an additional insured, but also any limitations on the scope of that coverage from the underlying service agreement. This holding tempers broader interpretations of Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., giving named insureds and their insurers greater ability to align insurance coverage with the specific risks allocated in their contracts. The ruling prevents additional insureds from receiving windfall coverage beyond what was contractually bargained for in the underlying commercial transaction.
