In In re Deepwater Horizon, (Case No. 13-0670), the Supreme Court of Texas ruled that BP was not covered under Transocean insurance policies for damages arising from subsurface pollution because under the parties drilling contract, BP assumed liability for such claims.

Transocean owned the Deepwater Horizon, a semi-submersible, mobile offshore drilling unit. In April 2010, the Deepwater Horizon sank in the Gulf of Mexico after burning for two (2) days following an onboard explosion.  At the time of the incident, the Deepwater Horizon was engaged in exploratory drilling activities under a drilling contract between BP and Transocean. The drilling contract required Transocean to maintain certain minimum insurance coverage for the benefit of BP.  Ranger Insurance Ltd. (“Ranger”) was the primary liability insurer, providing at least $50 million of general liability coverage.  Transocean also had several excess liability insurers providing four layers of excess coverage of at least $700 million above the Ranger policy coverage.

The United States Court of Appeals for the Fifth Circuit certified two (2) questions to the Supreme Court of Texas for their analysis relating to the extent of the insurance coverage afforded to BP as an “additional insured” under the primary and excess policies procured by Transocean.   Transocean and its insurers disputed that BP was entitled to coverage for liabilities it expressly assumed in the drilling contract, because the terms of the contract limited the additional-insured’s obligation to liabilities assumed by Transocean.  In analyzing the questions presented, the Texas Court analyzed the terms of the drilling contract between the parties.  Additionally, in the drilling contract, Transocean agreed to indemnify BP for above-surface pollution regardless of fault and BP agreed to indemnify Transocean for all pollution risk Transocean did not assume (i.e. – subsurface pollution).

The Supreme Court of Texas stated that BP’s status as an “additional insured” was inextricably intertwined with the limitations on the extent of coverage that was afforded under the Transocean policies.  The Court, in applying the only reasonable construction of the drilling contract’s “additional insured” provision, found that BP’s status was limited to the liabilities Transocean assumed under the contract.   Because Transocean did not assume liability for subsurface pollution in the drilling contract, Transocean was not obligated to name BP as an additional insured for that particular risk.  Since there was no obligation to provide insurance for that risk, BP lacked the status as an “insured” for any damages arising from subsurface pollution and was not entitled to coverage under the Transocean insurance policies for damages arising from subsurface pollution because BP, not Transocean, assumed liability for such claims.

To read a copy of the Supreme Court of Texas’s Decision, click here.

For more information about the Court’s decision and how it may apply to specific facts and circumstances, please do not hesitate to contact us at info@chaloslaw.com.