Risk
Environmental Newsletter

Additional Insureds: Keeping and Insuring those Promises


Loading

Aon Environmental Services Group

By M Claire Juliana of Aon Risk Solutions

In commercial transactions, a common contract requirement between parties is "additional insured" status on another's insurance. The purpose is to provide protection where the additional insured could be sued for conduct within another party's scope of risk. Owners routinely require their contractors and other vendors who do work on their behalf to add the owner to the contractor/vendor's policy as an additional insured. And often, once that contract is signed and filed away, the question of the existence and/or scope of that coverage does not arise until some sort of accident or other occurrence happens.

Consider the outcome in the one of the most highly anticipated decisions involving additional insured status – the In re Deepwater Horizon, 2015 Tex. LEXIS 141 (TX February 13, 2015) case. This insurance dispute involved the extent of additional insured coverage for BP in connection with the April 2010 explosion and sinking of the Deepwater Horizon oil-drilling rig which claimed eleven lives and resulted in the subsurface discharge of hundreds of millions of gallons of oil into the Gulf of Mexico for nearly three months. In this specific dispute (the tragic event generated a wave of federal and state litigation), the particular question posed to the Texas Supreme Court was the status of BP's additional insured coverage under the policies of insurance of Transocean (the drilling-rig owner), as contemplated (and/or limited) by the drilling contract executed between the parties.

In the drilling contract between BP and Transocean, both parties agreed to a "knock-for-knock" allocation of risk, which is standard in the oil and gas industry. In particular, 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. Furthermore, per the terms of the drilling contract, Transocean was required to maintain multiple types of insurance at its own expense, including commercial general liability insurance for the indemnity agreement, and was obliged to name BP, its affiliates and other related individuals/entities:

"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 added)

To cover its worldwide drilling operations, including those under the drilling contract with BP, Transocean maintained a $50 million primary general liability policy and four additional layers of excess insurance with various insurers providing an additional $700 million in coverage. Under these policies, the various insurers agreed to pay for loss "on behalf of the 'Insured'" for liability: (a) imposed upon the "Insured" by law; or (b) assumed by the "Insured" under an "Insured Contract".

BP was not specifically named as an insured in these policies, by endorsement, or on any certificates of insurance. However, each of the policies contained language extending "Insured" status to "any person or entity to whom the 'Insured' is obliged by oral or written 'Insured Contract' … to provide insurance such as afforded by [the] Policy." The Texas Supreme Court was called upon to determine whether this language in the insurance policies referred to, and thus incorporated, coverage limitations (i.e., only for above-surface pollution) from the drilling contract under which BP's additional insured status derived.

BP argued that it was an additional insured, with the extent of coverage to be ascertained solely from the "four corners" of the Transocean insurance policies, that is, without any reference to the drilling contract. It contended that its operations were "automatically" covered for "all liability imposed by law" because: (1) the drilling contract was an "Insured Contract"; (2) the drilling contract obligated Transocean to provide additional insured coverage; (3) BP was thereby defined as an "Insured" as that term is specially defined in the insurance policies; and (4) there were no limitations on the scope of coverage as expressly included in the policies. Indeed, this was the holding of the Fifth Circuit Court of Appeals – finding that prior federal and state law mandated that coverage be ascertained solely from the "four corners" of the insurance policy. And the Transocean policies imposed no relevant limitations upon the extent to which BP was covered. (On rehearing, however, the Fifth Circuit unanimously withdrew its prior opinion and certified the question of the extent of BP's additional insured status to the Texas Supreme Court).

In ultimately rejecting BP's argument, the Texas Supreme Court first observed that BP's interpretation of the operation of the analysis above for "Insured" status was "facially suspect" as it would lead to the extension of additional insured status to a potentially infinite number of person's to whom BP, as such an "Insured", was then obliged by oral or written contract to provide insurance. Since each of those other persons or entities would also meet the definition of an "Insured" this would result in an "endless chain of 'Insureds' created by contracts that each in turn has with someone else." Id. The Court noted that BP's analysis "glosses over the inconvenient reality that BP is an 'Insured' only by virtue of the status conferred to it under the Drilling Contract, to which the policies necessarily refer by predicating additional insured status on the existence of [such] contract requiring such coverage." Id.

That said, admittedly, Transocean's policies contained no language explicitly limiting the scope of additional insured coverage. Nevertheless, the Court interpreted the policies' references to "where required" and "as obliged" with respect to additional insured status as requiring the Court to consult the drilling contract's additional insured clause to determine whether the conditions for BP's additional insured status (namely, above-surface pollution conditions) existed. Therefore, because Transocean did not assume liability for subsurface pollution, Transocean was not "obliged" to name BP as an additional insured as to that risk. Because, there was no obligation to provide insurance for that risk, BP lacked status as an "Insured" for the same.

In his lengthy dissent, Justice Johnson disagreed with the Court's application of the principles of insurance contract construction. In particular, Justice Johnson observed that the Transocean policies' definitions of "Insured" and "Insured Contract" did not limit the terms of the scope of the obligation assumed by the insured in a written contract or agreement as it had done in connection with extending additional insured status to insureds of underlying policies. With respect to those insureds, the Transocean policies provided that coverage would be "not broader … than is available to such person or organization under such underlying policies." As such, Justice Johnson argued that Transocean's insurer knew exactly how to restrict coverage of person or entities that were covered because of a collateral agreement, but chose not to. And, so, to his interpretation BP, was covered by the Transocean insurance policy and such coverage was not limited to the liabilities assumed by Transocean in the drilling contract.

Maybe the Texas Supreme Court's conclusion was one you would expect (and certainly with $750 million of insurance coverage at issue, the outcome that both Transocean and its insurers wanted). It will undoubtedly raise additional questions including whether and until what point an insurer in such a situation would owe a duty to defend that "potential" additional insured. At the very least, the In re Deepwater Horizon case should serve as a reminder that although additional insured status is a commonly utilized risk management tool, it is unfortunately not commonly understood. Policyholders and their brokers and other advisors should make sure that the wording of additional insured endorsements and certificates of insurance are reviewed carefully in connection with the underlying contract to which such status is intended to apply so as to assure that such wording satisfies the extent of the parties' contractual obligations.