The In Re Deepwater Horizon judgment by the Supreme Court of Texas highlights the importance of clear drafting and the common sense approach taken by courts to the interpretation of contracts. This case was an insurance coverage dispute which arose from the April 2010 explosion and sinking of the Deepwater Horizon oil-drilling rig. As is well known, this catastrophic incident claimed 11 lives and caused three consecutive months of subsurface discharge of oil into the Gulf of Mexico, leading to thousands of lawsuits against BP and its contractors.
The issue in this case was the extent of the insurance coverage allowed to BP, the oil field developer, as an additional insured under the primary and excess insurance policies procured by Transocean, the drilling rig owner. BP lost at first instance but was successful upon appeal, though that success was short-lived since the Court of Appeal withdrew its opinion and referred the matter to the Supreme Court of Texas.
The referral to the Supreme Court was essentially a matter of policy interpretation and involved a consideration of the interplay between Transocean’s insurance policies and the contract between BP and Transocean (the drilling contract). The Supreme Court had the following two questions to consider:
- Whether Evanston Insurance Co v ATOFINA Petrochemicals, Inc 256 S.W.3d 660 (Tex. 2008), compels a finding that BP is covered for the damages at issue, because the language of the umbrella policies alone determines the extent of BP’s coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the drilling contract are “separate and independent”?
- Whether the doctrine of contra proferentem applies to the interpretation of the insurance coverage provision of the drilling contract under the ATOFINA case, given the facts of this case?
The first question
The Supreme Court held that the answer to the first question was “no”.
a. BP argued that the ATOFINA case required the existence and extent of its coverage to be ascertained exclusively from the four corners of the Transocean insurance policies. This was rejected by the Supreme Court which made clear that it would determine the scope of coverage from the language employed in the insurance policy and, if the insurance policy directed it elsewhere, it would refer to an incorporated document to the extent required by the policy. The Transocean insurance policies included language that necessitated a consultation of the drilling contract to determine BP’s status as an additional insured.
b. The Supreme Court therefore considered the contractual limitations to BP’s additional insured status. Under the terms of the drilling contract, BP’s status as an additional insured was inextricably intertwined with limitations on the extent of coverage to be afforded under the Transocean policies. The additional insured provision in the drilling contract read:
“[BP], its subsidiaries and affiliated companies, co-owners, and joint venturers, if any, and their employees, officers, and agents 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.”
BP read the last part of this clause as a narrow and specific exception to the general obligation to name it as an additional insured. Transocean and its insurers read the language as excepting only workers’ compensation policies from the general additional insured obligation and imposing a limitation on the general insurance obligation that was coterminous with all of Transocean’s contractual indemnity obligations. BP disagreed due to the fact that there was a comma before but not after the phrase “except Workers’ Compensation” and argued that a comma could not be inserted where it did not exist when it would alter the plain meaning of the contract.
The Supreme Court held that the only reasonable construction of the drilling contract’s additional insured provision was that BP’s status as an additional insured was limited to the liabilities Transocean assumed in the drilling contract.
c. Consideration was also given to the liabilities assumed by Transocean under the drilling contract. BP argued that the additional insured clause could not limit BP’s additional insured status to the extent of Transocean’s indemnity obligations because the drilling contract’s indemnity and insurance provisions were separate and independent. However the Supreme Court considered that the drilling contract required Transocean to name BP as an additional insured only for the liability Transocean assumed under the contract and accordingly Transocean had separate duties to indemnify and insure BP for certain risk, but the scope of that risk for either indemnity or insurance purposes extended only to above-surface pollution. BP was therefore not entitled to coverage under the Transocean insurance policies for damages arising from subsurface pollution because BP, not Transocean, assumed liability for such claims.
The second question
In relation to the second question, the Supreme Court held that the contra proferentem rule only comes into play if there is more than one reasonable interpretation of an insurance policy. Since this was not the case here, the Supreme Court did not need to consider the second question.
In line with the approach taken by English courts, the Supreme Court of Texas took a common sense approach to the resolution of the coverage issue. It looked to the language of the policy to determine the scope of coverage and aimed to give effect to the parties’ intent as expressed by the words they chose. The Supreme Court noted that if a policy contains unambiguous language then it will be construed as a matter of law and will be enforced as it was written. This case once again shows that the use of words and punctuation in drafting must be watertight to clearly give effect to the parties’ intentions and to ensure that there is no ambiguity. In this way, it will not be open to courts to apply the contra proferentem rule.