The litigation that seeped to the surface after the sinking of the Deepwater Horizon has not yet entered its cleanup phase, but today, the Texas Supreme Court issued a ruling that addresses one important part of it.

Transocean and BP had a “knock-for-knock” contract, where Transocean agreed to defend and indemnify BP for injuries to Transocean personnel and BP agreed to defend and indemnify Transocean for injuries to BP personnel. Transocean was responsible for pollution above the water line; BP was responsible for pollution below the water line. BP was self insured, but the contract required Transocean to carry insurance. Transocean was required to name BP:

as additional insureds in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of [the Drilling] Contract.

Transocean has taken the position that BP is only an additional insured when and if Transocean has to defend and indemnify BP – thus the “for liabilities assumed by Transocean under the Drilling Contract” language. BP, citing a string of Texas cases, says that once BP is an additional insured, the only further limits on BP’s additional insured status can come from the insurance policy, not from the contract. Therefore, BP is an additional insured for all purposes, not just for liabilities assumed by Transocean under the drilling contract.

Transocean filed a declaratory judgment action in the Eastern District of Louisiana. The district judge, Barbier, decided the contract meant what it said and ruled in favor of Transocean: BP is only an additional insured for liabilities assumed by Transocean. In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, MDL No. 2179, 2011 WL 5547259, at *2 (E.D. La. Nov. 15, 2011).

The Fifth Circuit initially reversed. Under a string of Texas cases, most significantly Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), the Fifth Circuit ruled that Texas law only allows a contract to grant additional insured status, not to limit it. Once granted, the only further limitations can come from the policy, not from the contract. The Fifth Circuit found BP was an additional insured for all purposes. On rehearing, the Fifth Circuit withdrew its opinion and certified the important question of Texas law to the Texas Supreme Court. 710 F.3d 338, 344-49 (5th Cir. 2013), withdrawn by 728 F.3d 491, 493 (5th Cir. 2013).

The Texas Supreme Court ruled BP’s additional insured status is limited by the contract, but the ruling is a careful one. BP’s additional insured status is limited because the Transocean policy gives Transocean the right to name people and companies as additional insureds by contract. Therefore, the Court reasons, the insurance policy incorporates the contractual language by reference. The Texas Supreme Court draws a distinction between additional insured named by contract (with the policy giving the insured the right to do so), versus companies named as additional insured by endorsement or certificate of insurance. The Court holds that where a company is named as additional insured by endorsement or certificate, then the contract cannot further limit additional insured status. However, where the additional insured is named by contract only, the contract can limit additional insured status.

Consequences

This opinion has significant consequences for anyone writing policies or contracts that may be subject to Texas law. The typical knock-for-knock contract requires Company A to defend and indemnify Company B for injury to Company A’s personnel or loss of Company A’s property, regardless of Company B’s fault. Company B is required to defend and indemnify Company A for injury to Company B’s personnel or loss of Company B’s property, regardless of Company A’s fault. Not trusting the companies to be solvent up to the limits of a loss, one or both companies will be required to name the other as an additional insured, but only to the extent of the defense and indemnity obligations.

Under the Fifth Circuit’s first opinion, “but only to the extent of the defense and indemnity obligations” ceased to have any meaning and the carefully-worded contracts were rendered limitless. The Texas Supreme Court opinion walks that conclusion back, but not all the way. Now, if it is only the contracts granting additional insured status and the policy allows the insured to name others as additional insureds, the contract’s limits are still valid. However, if the insured takes an additional step and sends a certificate of insurance or gets an endorsement to the policy, the contractual limits are probably still valid.

One solution is in underwriting: in the policy language allowing the insured to name others as additional insureds, the policy could include language to the effect of “those named as additional insureds are limited by the narrower of (a) the language in this policy or (b) the language in the contract. Another solution is to apply general maritime law, or the law of a jurisdiction other than Texas.