Fifth Circuit Seeks Texas Supreme Court Input in Deepwater Horizon Insurance Coverage Dispute
On August 29, 2013, the United States Court of Appeals for the Fifth Circuit withdrew its opinion of earlier this year that had awarded “additional insured” coverage to BP American Production Company and affiliates (“BP”) under Transocean Holding, Inc.’s (“Transocean”) umbrella insurance policies. In re Deepwater Horizon, Case No. 12-30230, Slip Op. (5th Cir. Aug. 29, 2013) ( “Slip Op.”). In its place, the Fifth Circuit certified two questions to the Supreme Court of Texas: (1) whether BP is covered as an additional insured, based solely on the language of the insurance policies; and (2) whether the contra proferentem doctrine of requiring insurance policies to be interpreted against insurers and in favor of insureds applies to sophisticated parties. Id. at 14. The Supreme Court of Texas accepted the certified questions for review on September 6, 2013. See http://www.supreme.courts.state.tx.us/historical/2013/sep/090613.htm.
This latest development is part of an ongoing insurance coverage dispute that followed the sinking of a Transocean offshore drilling unit in the Gulf of Mexico in 2010. See Slip Op. at 4. Under a drilling contract between BP and Transocean, Transocean assumed responsibility for spills on or above the surface of the water, while BP assumed responsibility for subsurface spills. See In re Deepwater Horizon, 710 F.3d 338, 343 n. 5 (5th Cir. Mar. 2013), withdrawn by 2013 U.S. App. LEXIS 18087. However, under a separate part of the drilling contract, Transocean was required to maintain insurance coverage for its liability, and name BP as an additional insured. Id. at 342.
In its earlier opinion in March 2013, the Fifth Circuit considered the scope of the insurance policies that Transocean obtained to comply with the drilling contract, as well as the impact of the drilling contract on those policies. Id. at 344-50. Transocean and the insurers argued that coverage under the insurance policies was limited to the liabilities Transocean had assumed under the drilling contract, while BP argued that only the insurance policies—and not the drilling contract—controlled the issue of coverage. 710 F.3d at 342-43.
Applying Texas law, the Fifth Circuit initially concluded that only the policy language should be considered. See id. at 348. In an earlier case, the Texas Supreme Court had held that an oil refinery owner was an additional insured under a contractor’s insurance policy, declining to look outside the policy to the underlying service contract to define the scope of coverage. See id. at 344-45 (citingEvanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d 660, 665 (Tex. 2008)). The Fifth Circuit found the contractual provisions from the earlier Texas case “materially identical” to those in the drilling contract and therefore looked solely to the language of the Transocean policies, finding that they provided coverage to BP. Id. at 349-50.
Upon reconsideration, the Fifth Circuit decided to withdraw its earlier opinion. Slip Op. at 2. The court noted that the language of the contract in the earlier Texas case was arguably broader than that in the drilling contract, and therefore potentially distinguishable. Slip Op., at 11-12. Under this narrow reading of the drilling contract, the additional insured and indemnity provisions could be said to be “inextricable,” dictating that the insurance policies be read in conjunction with the drilling contract. Id. at 12.
The Fifth Circuit acknowledged that if the insurance policies must be read in light of the drilling contract, then a second question arises regarding the impact of the contra proferentem doctrine. Id.at 12-14. Contra proferentem is a common rule used by courts for interpreting insurance policies, requiring that they be construed against the insurer and liberally in favor of the insured. Id. at 12-13. This doctrine rests on the fact that most insurance policies are drafted by the insurers without any negotiation by the insured. See id. at 13. However, some jurisdictions allow an exception for sophisticated insureds, which presumably have elevated bargaining power. Id. Although Texas has never previously recognized such an exception to the contra proferentem rule, the Fifth Circuit believed that this was an ideal circumstance for consideration. Id. at 13-14. It therefore referred both issues to the Texas Supreme Court.
The outcome of the Texas Supreme Court’s decision could have impacts beyond the Deepwater Horizon matter. Contracts providing for indemnification and requiring insurance coverage are common not only in the oil and gas industry, but in the business world generally. Whether and under what circumstances an indemnification agreement might affect the scope of additional insured coverage are therefore important questions. Permitting consideration of underlying contracts could also impact related coverage issues, such as which insurance policy will provide coverage first when the additional insured has a separate policy in its own name. Further, the doctrine of contra proferentem is often influential in determining coverage disputes. Commercial insurance coverage disputes invariably involve substantial sums; if the Texas Supreme Court recognizes a “sophisticated insured” exception, it could shift the balance between corporate policyholders and their insurers in those disputes.