Contracts, Contractors, and Additional Insureds

In a recent opinion, the Texas Supreme Court clarified Texas law as to what coverage an insured may expect when it has additional insured status under an insurance policy.  The importance of this opinion cannot be overstated for those who enter into contracts with others and expect the luxury of insurance coverage as a benefit of that contract.  For example, many contractors are required to add the owner or the general contractor as an additional insured to the contractor’s policy.  When this is written properly, the owner or General Contractor of a project can receive additional coverage from the policy of a subcontractor.

In the case of In Re Deepwater Horizon, No. 13-0670 (Tex. Feb. 13, 2015) the court was faced with the issue of whether the owner of an offshore well, British Petroleum (BP), had coverage from the drilling contractor’s  (Transocean) insurance policy for subsurface pollution arising out of the 2010 Deepwater Horizon oil spill  in the Gulf of Mexico.  Transocean and BP had entered into a Drilling Contract which required Transocean to indemnify BP for a certain set of liabilities (above-surface pollution), and required BP to indemnify Transocean for all other pollution risks, i.e., subsurface pollution.  The Drilling Contract also required Transocean to obtain insurance and to name BP as an additional insured “for liabilities assumed by [Transocean] under the terms of [the Drilling Contract].”  The policies purchased by Transocean extended additional-insured status to any person or entity to whom the insured was obliged by way of an “insured contract” to provide such insurance.

One of the parties to the suit, BP, took the position that the scope of it’s additional insured coverage must be determined solely from the insurance policy.   Transocean and it’s insurers disgreed, stating that the contract between BP and Transocean must be  included in the coverage question before the Court. Therefore, the Court examined whether it could look to the contract between the two parties in assisting it’s determination of coverage or whether it was restricted to looking as just the policy.

The Court agreed with Transocean and it’s insurers stating that the contract must be included in the coverage analysis.  The Court then read the contract to mean that coverage was not owed to BP due to the pollution being subsurface, thereby depriving BP of it’s request for $750,000,000 in policy proceeds.

Insurance policies presently contain clauses limiting the protection and coverage afforded the additional insureds.  An example of this is shown in the Transocean Drilling contract which defined the type of coverage required for BP (above surface pollution).  As it turned out, BP owed Transocean coverage due to the damages being subsurface pollution.

Other examples of controversy arise when a subcontractor is required to obtain additional insured coverage for the Owner, but either does not have its agent obtain the coverage, or the coverage is limited more than the contract requires.   A comprehensive review of the policy and the contract is always recommended to make sure the policy provides the protection desired by the parties.  This is a critical aspect of contract negotiation and drafting.

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