In a rare turn of events, the Fifth Circuit has vacated its own decision granting BP access to Transocean's entire $750 million insurance stack, and has certified the issue to the Texas Supreme Court to decide. In re Horizon, No. 12-30230, 2013 U.S. App. LEXIS 18087 (5th Cir. August 29, 2013). This decision highlights the traditional difficulty courts have in dealing with common, but poorly understood, additional insured provisions.
In its original decision issued last March, the Fifth Circuit reversed the district court's ruling that BP was not entitled to coverage under Transocean's policies. The Fifth Circuit reasoned that the provisions in the Transocean policies making BP an additional insured did not incorporate the limitations on the scope of coverage, if any, contained in the underlying drilling contract between Transocean and BP. Ranger Insurance, Ltd v. BP P.L.C., 710 F.3d 338 (5th Cir. March 1, 2013). As a result, the court held that BP was entitled to full coverage for the Gulf Oil Spill under Transocean's $750 million insurance stack. A more in depth discussion of the original decision and the core cases underlying that decision is available in an article we published shortly after the Fifth Circuit rendered its original decision: " What Happened to Transocean's Insurance and How to Prevent it from Happending to You."
On August 29, however, the Fifth Circuit panel unanimously vacated its March holding. In doing so, the court reexamined its interpretation of the Texas Supreme Court's seminal decision in Evanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d 660 (Tex. 2008), on which it had relied heavily in its original decision. It noted that both parties "proffer different applications of [the ATOFINA case] holding to the facts of the case at issue," and said that "Uncertainty regarding the outcome under ATOFINA ultimately triggered this certification."
In particular, the court pointed to distinctions advanced by Transocean between the contract at issue in ATOFINA and the drilling contract between Transocean and BP. Unlike the ATOFINA contract, the drilling contract, at least under Transocean's interpretation, required that BP be made an additional insured only for liabilities Transocean itself expressly assumed. This arguably tied the additional insured requirement to Transocean's contractual indemnity obligations. Transocean also argued that the additional insured provision in the policy was different than in ATOFINA, in that it applied only to an "Insured Contract;" a reference to Transocean's limited indemnity obligation.
In light of these distinctionsthe court felt it was unclear under Texas law whether the insurance policies alone should determine the scope of BP's coverage, or if the insurance policies and drilling contract should be interpreted together to resolve the scope of coverage issue. In the latter event, the court felt it was also unclear whether any ambiguities in the underlying drilling contract, like ambiguities in an insurance policy, should be construed in favor of coverage. The court certified both questions to the Texas Supreme Court.
While the outcome of the future Texas Supreme Court opinion remains to be seen, one thing seems certain: the ruling will have far-reaching effects on insurance law and businesses, including those in the transportation and oil and gas industries. This is a case everyone in business should follow closely. In the meantime, businesses should be careful to make sure that their insurance policies and contractual additional insured provisions track each other closely.
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