Deepwater Horizon extent of insurance cover

No 12-30230
March 1, 2013


Ranger Insurance Limited et al v BP et al

The facts
Transocean Holdings, Inc. owned the Deepwater Horizon, a semi-submersible, mobile offshore drilling unit. In April 2010, the Deepwater Horizon sank into the Gulf of Mexico after burning for two days following an onboard explosion. At the time of the Incident, the Deepwater Horizon was engaged in exploratory drilling activities at the Macondo Well under a Drilling Contract between Transocean and BP.

This Drilling Contract required Transocean to maintain certain minimum insurance coverages for the benefit of BP.

The dispute
The question in dispute was whether the insurance policies taken out by Transocean for the benefit of BP only covered the liabilities assumed by Transocean in the Drilling Contract or whether the insurance policies should be read as an independent document.

The relevant clauses in Transocean’s insurance policies were the definitions of “Insured” and “Insured Contract”. The insurance policies define “Insured” as including the Named Insured, other parties, and

“(c) any person or entity to whom the “Insured” is obliged by any oral or written “Insured Contract” (including contracts which are in agreement but have not been formally concluded in writing) entered into before any relevant “Occurrence”, to provide insurance such as is afforded by this Policy . . . .”

The Policies define “Insured Contract” as follows:

“The words “Insured Contract”, whenever used in this Policy, shall mean any written or oral contract or agreement entered into by the “Insured” (including contracts which are in agreement but have not been formally concluded in writing) and pertaining to business under which the “Insured” assumes the tort liability of another party to pay for “Bodily Injury”, “Property Damage”, “Personal Injury” or “Advertising Injury” to a “Third Party” or organization. Tort Liability means a liability that would be imposed by law in the absence of any contract or agreement.”

BP argued that the insurance policies alone—and not the indemnities detailed in the Drilling Contract—govern the scope of BP’s coverage rights as an “additional insured”.

The Insurers denied BP’s interpretation of the insurance policies and argued that the additional insured provision in the Drilling Contract specifically limits BP’s status as an additional insured to circumstances involving those liabilities Transocean specifically assumes under the Contract.

The District court (court of first instance)
The District court found in favour of the insurers. BP appealed.

The Court of Appeal´s decision
In its judgement of March 1, 2013 the Court of Appeal for the Fifth Circuit discusses construction of insurance contracts under Texan law in great detail and holds that the insurer’s argument is simply not persuasive under Texan law. The court of appeal said:

“Applying Texas law, especially as clarified since the district court’s decision, we find that the umbrella insurance policy—not the indemnity provisions of Transocean’s and BP’s contract—controls the extent to which BP is covered for its operations under the Drilling Contract. Because we find this policy imposes no relevant limitations upon the extent to which BP is covered, we REVERSE the judgment of the district court (…)”
It is to be expected that this ruling will lead to a review of the wording of liability insurance policies. It is also to be expected that in future insurers will be reluctant to accept a choice for Texan Law and jurisdiction.

Download the document here.