5th Circuit Holds Additional Insured Coverage Not Limited by Contract

In its March 1, 2013 decision in In re Deepwater Horizon, 2013 U.S. App. LEXIS 4512 (5th Cir. Mar. 1, 2013), the Fifth Circuit had occasion to consider the extent to which an insurer’s coverage obligations to an additional insured are tied to the contractual indemnity owed by its named insured to that additional insured.  Transocean owned the Deepwater Horizon, a semi-submersible, mobile offshore drilling unit located in the Gulf of Mexico.  The Deepwater Horizon sank into the Gulf after an onboard explosion.  At the time of the explosion, the Deepwater Horizon was engaged in drilling activities pursuant to a Drilling Contract between Transocean and BP.  BP subsequently faced certain pollution-related liabilities arising out of the sinking of the drilling unit, and BP tendered those liabilities to Transocean’s insurers.  The insurers denied coverage arguing that BP did not qualify as an additional insured under the policies’ language, spawning litigation between BP and the insurers in the U.S. District Court for the Eastern District of Louisiana.

Transocean’s insurers successfully argued in the lower court that its additional insured obligations to BP were limited by the terms of a Drilling Contract between Transocean and BP.  The Contract required that BP “shall be named as additional insureds in each of [Transocean's] policies, except Workers' Compensation for liabilities assumed by [Transocean] under the terms of this Contract.”  With respect to pollution-related liabilities, the Contract contained a separate indemnity provision which required BP to assume full responsibility for any pollution or contamination originating below the surface of the water, whereas Transocean agreed to indemnify BP for pollution or contamination originating on or above the surface of water.  The lower court concluded that because the Drilling Contract did not require Transocean to assume BP’s pollution liabilities pertaining to spills originating beneath the surface of the water, Transocean owed no indemnity to BP for the claim and, correspondingly, BP was not an additional insured with respect to those specific pollution liabilities.

The Fifth Circuit reversed, noting that under Texas law, which governed the interpretation of the policies, “where an additional insured provision is separate from and additional to an indemnity provision, the scope of the insurance requirement is not limited by the indemnity claims.”  The Fifth Circuit found that the insurance provision in the Drilling Contract was separate and discrete from the indemnity provisions in the Contract.  As such, BP’s rights as an additional insured were not limited by the contractual liabilities actually assumed by Transocean.  In other words, even though Transocean may not have an indemnity obligation to BP for underwater pollution events, this contractual indemnity obligation cannot be read into the insurance policies in order to limit the scope of coverage afforded to BP by the insurers.  Rather, only the insurance policies can impose limitations on coverage.  Thus, because the policies issued to Transocean did not restrict the scope of additional insured coverage to the indemnity assumed by Transocean, the court concluded that BP was entitled to coverage for subsurface pollution liabilities, notwithstanding the indemnity provisions in the Drilling Contract.