Fundamental questions about the reach of commercial-liability policies in massive pollution cases are headed to the Texas Supreme Court, after the 5th U.S. Circuit Court of Appeals sent an appeal involving the Deepwater Horizon explosion to the state's highest civil court for consideration.
The certified questions the 5th Circuit forwarded to the Supreme Court arise out of the 2010 explosion of the Deepwater Horizon, an offshore drilling platform that sank in the Gulf of Mexico and caused the largest oil spill in U.S. history.
At the time of the disaster, the Deepwater Horizon was engaged in exploratory drilling under a contract with BP American Production Co. (BP), which later sought indemnity for the pollution-related liabilities under an insurance policy purchased by the Deepwater Horizon's owner, Transocean Offshore Deepwater Drilling Inc. (Transocean). The question the Texas Supreme Court ultimately will have to consider is whether to look at the insurance contract, the drilling contract or both in determining whether Transocean's insurance policy covers BP's pollution liabilities, according to the 5th Circuit's Aug. 29 decision in In Re: Deepwater Horizon.
"It's a very, very important issue to the industry," says John Elsley, of counsel at Royston Rayzor in Houston, who represents Transocean in the case. He notes that it's common for oil companies to assume greater insurance risks for well blow-outs than drilling contractors do.
To answer the questions, the Supreme Court will have to revisit its 2008 opinion Evanston Insurance Co. v. ATOFINA Petrochemicals Inc. ATOFINA examined whether a commercial umbrella policy — which the insured purchased to secure its indemnity obligations as part of a service contract with a third party — also provides direct liability coverage for the third party, according to the 5th Circuit's decision in In Re: Deepwater Horizon.
In ATOFINA, the Supreme Court found that ATOFINA was covered for a wrongful-death claim that occurred at its oil refinery as an additional insured under an umbrella policy purchased by one of its contractors. To arrive at its conclusion, the Supreme Court noted that, instead of looking at the "service agreement" between ATOFINA and its contractor to determine coverage, it based its decision "on the terms of the umbrella insurance policy itself," writes the 5th Circuit.
The 5th Circuit notes in its decision that Transocean, BP and the insurer parties in the case agree that ATOFINA is instructive, but they offer different applications of how its holdings should apply to their coverage dispute.
The 5th Circuit also suggests that the doctrine of contra proferentem — which holds that, if an insurance-coverage provision is susceptible of more than one reasonable interpretation, a court must interpret that provision in favor of the insured — may apply to the case.
The questions the Supreme Court will have to answer, if it accepts In Re: Deepwater Horizon for review, include:
1. Whether ATOFINA 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"; and
2. 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?
David Goodwin, a partner in the San Francisco office of Covington & Burling who represents BP, did not return a call for comment. Neither did Richard Dicharry, a partner in New Orleans' Phelps Dunbar who argued the case on behalf of insurers Lloyd's of London and Ranger Insurance at the 5th Circuit.
Elsley believes the Supreme Court will have to look at the drilling contract between BP and Transocean that required the liability coverage — and not the insurance policy alone — to determine whether BP is covered for the pollution claims.
"The drilling contractors like Transocean only take responsibility for the drilling rig itself. And that's what the drilling contract explicitly says," Elsley says. "And there's no dispute about that. And because the policy incorporates the drilling contract, they have to be read together."