The Texas Supreme Court, applying Texas law, held that BP does not have any coverage as an additional insured for subsurface pollution stemming from the April 2010 Deepwater Horizon oil spill under Transocean Ltd.’s (“Transocean”) insurance policies. In making this finding, the court referred to the drilling contract between BP and Transocean. The court concluded that the only reasonable construction of the drilling contract and the insurance policies was that BP’s coverage as an additional insured was limited to the liabilities Transocean assumed under the contract.

The particular issue before the court was the extent of insurance coverage afforded to BP as an additional insured under $750 million worth of insurance policies procured by the drilling-rig owner, Transocean. In deciding this issue, the court had to determine the interplay between the insurance policies and the provisions of a drilling contract between the parties.

Ruling on a question certified from the Fifth Circuit, the Texas Supreme Court found that the insurance policies contained language requiring the court to consult the drilling contract to determine any coverage obligation to BP. Under Texas law, “a separate contract can be incorporated into an insurance policy by any explicit reference clearly indicating the parties’ intention to include that contract as part of their agreement.” BP was not named in any of the insurance policies, endorsements or certificates of insurance. Instead, BP’s coverage claims stem from the drilling contract in which Transocean was obligated to procure insurance coverage for BP as an additional insured. 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. Therefore, the court held that “Transocean had separate duties to indemnify and insure BP for certain risk, but the scope of that risk for either indemnity or insurance purposes extends only to above-surface pollution.”

The court noted that Transocean’s insurance policies contained no language explicitly limiting the scope of additional insured coverage, but under Texas law, insurance policies can incorporate limitations on coverage encompassed in extrinsic documents by reference to those documents. According to the court, “We do not require ‘magic’ words to incorporate a restriction from another contract into an insurance policy; rather, it is enough that the policy clearly manifests an intent to include the contract as part of the policy.” Under the express terms of the policies, additional insured status hinges on (1) the existence of an oral or written contract (2) pertaining to the business of an “Insured”, and (3) under which an “Insured” assumes the tort-liability of another party and is “obliged” to provide insurance to such other party. Moreover, additional insured’s are automatically included under the policy “where required by written contract, bid or work order.” The Texas Supreme Court found that the policies provided additional insured coverage automatically as obligated by the written drilling contract, in which Transocean agreed to assume the tort liability for BP.

Justice Johnson wrote a dissent, stating that he would hold that BP was not limited to liabilities assumed by Transocean in the drilling contract and was covered by the policy for subsurface pollution because the policy explicitly covered BP as an additional insured, as it covered parties “where required by written contract … and/or waiver(s) of subrogation are provided as required by contract.” The dissent disagreed with the majority’s position that the policy language required the drilling contract to be consulted in order to interpret the coverage afforded under the policy. Moreover, he did not agree with the majority that the drilling contract was either explicitly incorporated into the policy or “deemed” incorporated. Justice Johnson also found that BP qualified as an “Insured” as well as an “additional insured” under the policy definitions of “Insured” and “Insured Contract” and was therefore entitled to all coverages under the policy and not limited coverage based on the liability assumed by Transocean in the drilling contract.  In Re Deepwater Horizon No.13-0670 (Tex. Feb. 13, 2015).