Cozen O’Connor: Texas Supreme Court Incorporates Limitations From An “Insured Contract” Into GL Policy [Global Insurance Alert]

Texas Supreme Court Incorporates Limitations From An “Insured Contract” Into GL Policy

Global Insurance Alert

February 27, 2015

In In re Deepwater Horizon, Cause No. 13-0670, Slip Op., Feb. 13, 2015, the Texas Supreme Court held that an allocation of liability found in an “insured contract” would determine the coverage provided to an additional insured in a general liability policy. Specifically, the court held that the additional insured had coverage under the general liability policy of the named insured only to the extent the named insured was required to obtain coverage for the additional insured.

The Agreement Between Transocean and BP

Transocean and BP were operating under a drilling contract that allocated risk and indemnity between the two companies. Under this drilling contract, Transocean agreed to indemnify BP for all above-surface pollution, regardless of fault, and BP agreed to indemnify Transocean for all subsurface pollution. The drilling contract also required that Transocean name BP as “additional insureds in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of the Drilling Contract.” (Emphasis in opinion).

Transocean held a $50 million general liability policy with Ranger Insurance, Ltd. and $700 million in excess insurance coverage with other insurers. The policies extended “additional insured” status to “any person or entity to whom the ‘Insured’ is obligated by oral or written ‘Insured Contract’ … to provide insurance such as afforded by [the] Policy.” Transocean did not obtain an endorsement naming BP as an insured under these policies and did not obtain a certificate of insurance in favor of BP. None of the policies referenced the drilling contract specifically.

The Controversy and Lawsuit

In April 2010, the Deepwater Horizon oil-drilling rig exploded and sank, resulting in the subsurface discharge of oil into the Gulf of Mexico. BP made a claim under Transocean’s policy with Ranger as an “additional insured.” Ranger contended that BP was an additional insured under that policy only to the extent that Transocean expressly assumed liability for the subsurface pollution under the drilling contract. As subsurface pollution was not a risk assumed by Transocean in the drilling contract, Ranger denied BP’s request for indemnity as to incurred cleanup costs. BP responded, claiming that the Texas Supreme Court decision in Evanston Insurance Co. v. ATOFINA, Inc., 256 S.W.3d 660 (Tex.2008) precluded Ranger from looking beyond the four corners of the policy in order to limit BP’s coverage as an “additional insured.” The federal district court agreed with Ranger and granted summary judgment on that basis. Initially, the 5th Circuit Court of Appeals reversed, but then submitted the matter to the Texas Supreme Court on certified questions.

Rules of Policy Construction

The Texas Supreme Court began by reiterating that coverage begins with an analysis of the four corners of the applicable policy. Here, the court noted that the Ranger policy contained no language explicitly limiting the scope of additional insured coverage. However, the court stated that an insurance policy could incorporate other documents restricting coverage when the insurance policy made reference to those documents. The court stated that “unless obligated to do so by the terms of the policy, we do not consider coverage limitations in underlying transactional documents.” The court also noted that a named insured was free to gratuitously secure more coverage for an additional insured than required, a situation that could occur whenever the language of the policy did not link coverage to the terms of contract requiring additional insured coverage. In such an instance, only coverage limitations found in the policy itself would restrict coverage afforded to the additional insured.

Distinguishing ATOF​INA

In the certified questions presented, the 5th Circuit asked “whether Evanston Insurance Co. v. ATOFINA compels a finding that BP is covered for the damages at issue …” (Emphasis added). In ATOFINA, a duty to defend case, ATOFINA hired Triple S Industrial Corporation to perform maintenance at ATOFINA’s Port Arthur, Texas refinery. As part of the maintenance agreement, Triple S agreed to indemnify ATOFINA for all losses relating to its maintenance services, unless those losses were attributable to the concurrent or sole negligence of ATOFINA. Evanston provided excess coverage to Triple S and Triple S provided a certificate of insurance to ATOFINA. When a Triple S employee fell through a corroded storage tank roof and drowned, the survivors sued both Triple S and ATOFINA. When presented with the claim, Evanston denied coverage, arguing that the additional insured coverage provided to ATOFINA did not extend to this situation, as Triple S did not agree to assume risks for losses partially or wholly resulting from ATOFINA’s negligence. Therefore, argued Evanston, ATOFINA was not entitled to additional insured coverage under the terms of the policy.

The Texas Supreme Court rejected Evanston’s position, holding that coverage was determined by the four corners of Evanston policy. Essentially, the court ruled that Triple S acquired for ATOFINA more coverage than the maintenance contract required. The court rejected Evanston’s argument that the limitations of the indemnity agreement between ATOFINA and Triple S modified the coverage provided by the Evanston policy, stating “had the parties intended to insure ATOFINA for vicarious liability only, ‘language clearly embodying that intention was available.’” The court noted that the Evanston policy contained no language incorporating any limitations on coverage relating to the negligence of the additional insured.

In Transocean, unlike ATOFINA, the Texas Supreme Court concluded that the terms of the drilling contract between Transocean and BP were incorporated into the Ranger policy. The court noted that BP was not named as an additional insured under the Ranger policy by virtue of an endorsement and that, unlike the ATOFINA case, no certificate of insurance existed. As a result, the court held that it had to refer to documents outside the four corners of the Ranger insurance policy (the drilling contract) in order to determine whether or not BP had additional insured status at all; i.e. whether that agreement qualified as an “insured contract” under the terms of the policy. As the definition of insured contract stated that additional insureds received coverage “where required by written contract, bid or work order,” the court concluded that consideration of the limitations of the drilling contract’s allocation of liability would also act as exclusions from coverage under the Ranger policy. Stated differently, Transocean never had an obligation to procure insurance covering BP for subsurface pollution under the terms of the drilling contract, a document incorporated by reference into the Ranger policy. Therefore, BP was never an additional insured for such risks under the Ranger policy.

Dissent by Justice Johnson

In re Deepwater Horizon was an 8-1 decision, with only Justice Johnson dissenting. Justice Johnson agreed with the majority description of the rules of construction for policies. However, Justice Johnson argued that the Ranger policy did not explicitly require incorporation of the drilling contract allocation of liability into the afforded coverage. According to Justice Johnson, once BP was accorded additional insured status, the Ranger policy contained no further exclusions that would remove BP’s claim from coverage. Justice Johnson pointed to several examples where polices contained language explicitly incorporating limits or exclusions found in documents outside the policy, noting that the Ranger policy contained no such language.

Implications for “Additional Insured” Status

After Transocean, the rule remains that a party can over-provide coverage to an additional insured by securing policy coverage broader than required by the insured contract. Because the Texas Supreme Court imported the terms of the drilling contract into the Ranger policy, coverage provided became co-extensive with the allocation of risk between Transocean and BP. However, because coverage is not necessarily co-extensive with the terms of the insured contract, all sides must take care when reviewing the terms of a policy to ensure that the intentions of the parties are met.

Determining whether and when additional insured coverage is impacted by the limitations found in other documents depends on a careful reading of the policy and whether or not the policy requires reference to another document. If no endorsement or certificate exists, then any limitations, such as the allocation of risk and responsibility, found within the insured contract may also limit the coverage afforded by the policy.


Authors

Gregory S. Hudson

Member

ghudson@cozen.com

(832) 214-3909

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To discuss any questions you may have regarding the issues discussed in this Alert, or how they may apply to your particular circumstances, please contact Gregory S. Hudson at (832) 214-3909 or ghudson@cozen.com