ATLANTA AUSTIN GENEVA HOUSTON LONDON NEW YORK SACRAMENTO WASHINGTON, DC

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1 By Stephany Olsen LeGrand Institute of Energy Law, 5th Oilfield Services Conference - October, 2015 Unsurprisingly, serious incidents in the oil and gas industry, specifically those resulting in harm to health, safety, and the environment, frequently trigger insurance claims and, in some instances, coverage disputes. The April 20, 2010, blowout and ensuing spill from the Macondo Well in the Gulf of Mexico is no exception. Indeed, the Macondo incident prompted an approximately $750 million coverage dispute that squarely implicated questions involving the application of contra proferentem and the method of determining the scope of insurance coverage for an additional insured under Texas law. In particular, federal and state courts volleyed the issue of whether BP s scope as an additional insured under Transocean s policies was limited to the scope of indemnities Transocean assumed under the drilling contract between the parties or defined, instead, solely by the terms of the insurance policy. The Ranger Insurance, Limited et al. v. BP P.L.C. et al. case garnered much attention throughout the oil and gas industry and has been analyzed frequently throughout its course of resolution. Having reached final conclusion as a result of the Texas Supreme Court s opinion and settlement between Transocean and BP, the Texas Supreme Court s opinion merits consideration as does a Fifth Circuit decision in its wake. Background and Procedural History The path to resolution in Ranger was a circuitous one: a decision of the multi-district litigation trial court in the Eastern District of Louisiana, 1 two decisions of the Fifth Circuit 2, the latter certifying questions to the Texas Supreme Court; acceptance of the certified questions by the Texas Supreme Court; and a ruling by that Court 3. A brief review of the nature of the dispute and its procedural history follow. BP and Transocean were successor parties of Vastar and R&B Falcon, respectively, to a drilling contract (the Drilling Contract ) that contained an obligation for BP to be named as [an] additional insured[ ] in each of [Transocean s] policies, except Workers Compensation[,] for liabilities assumed by [Transocean] under the terms of this Contract. With regard to the liabilities assumed, the Drilling Contract contained traditional knock-for-knock indemnities, whereby each party assumes responsibility for its employees and property, and BP specifically assumed liability for subsea pollution originating from the well. Transocean held insurance policies with a primary liability insurer, Ranger Insurance Ltd. ( Ranger ) and several excess liability insurers (the Excess Policies ). Ranger offered $50 million of coverage, and the Excess Policies formed four layers of coverage totaling $700 million above the Ranger policy. Each policy contained materially identical provisions such that an Insured was defined as the Named Insured and any... entity to whom the Insured is obliged by any oral or written Insured Contract... entered into before any relevant Occurrence, to provide insurance such as is afforded by this Policy.... In turn, an Insured Contract is defined as any written or oral contract or agreement entered into by the Insured... 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. 1 In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico, on April 20, 2010, 2011 WL (E.D. La. Nov. 15, 2011). 2 Ranger Insurance, Limited et al. v. BP P.L.C., et al., 710 F.3d 338 (5th Cir. 2013); Ranger Insurance, Limited et al. v. BP P.L.C., et al., 728 F.3d 491 (5th Cir. 2013). 3 In re Deepwater Horizon, --- S.W.3d ----, 2015 WL (Tex. Feb. 13, 2015).

2 Page 2 Tort liability means a liability that would be imposed by law in the absence of any contract or agreement. Moreover, the policies provided that additional insureds are automatically added where required by written contract. Upon receiving notice of a potential claim from BP, Transocean s insurers filed declaratory judgment, in which Transocean intervened, seeking determinations that BP was not entitled to coverage for subsurface pollution liabilities. BP, in turn, sought a contrary declaration and moved for judgment on the pleadings, contending that only the terms of the Ranger and Excess Policies determined the scope of additional insured coverage for BP and that the policies did not sufficiently reference and incorporate the limitations imposed by the indemnity obligations of the Drilling Contract. On November 15, 2011, the District Court denied BP s motion for judgment on the pleadings and, after further submissions, entered a partial final judgment in favor of Transocean s insurers on March 1, The District Court concluded that the plain language of the policies limited coverage to that outlined in the additional insured provision of the Drilling Contract, which it concluded only obligated Transocean to provide coverage for liabilities that Transocean assumed. Because BP assumed responsibility for subsea pollution, there was no additional insured coverage for such liabilities. Ultimately, the District Court found BP s proposed interpretation unreasonable as it effectively ignored the parties detailed allocation of exposure via indemnity obligations, but imposed unlimited additional insured coverage. BP appealed, and on March 1, 2013, the Fifth Circuit reversed the District Court and found that the policies alone were determinative in determining the scope of coverage from an insurer. The Fifth Circuit further found that the policies [did] not impose any relevant limitation upon the extent to which BP is an additional insured, and because the additional insured provision in the Drilling Contract [was] separate from and additional to the indemnity provisions therein,... BP [was] entitled to coverage under each of Transocean s policies as an additional insured as a matter of law. In essence, the Fifth Circuit s March 2013 opinion emphasized two concepts: (1) incorporation and (2) limitation. Transocean petitioned for rehearing en banc and, alternatively or additionally, certification of questions to the Texas Supreme Court, as Texas law governed the policies. On August 29, 2013, the Fifth Circuit withdrew its March 2013 opinion. Recognizing the magnitude and wide ramifications, both throughout the oil and gas industry and for insurance law, the Fifth Circuit certified two questions to the Supreme Court: (1) Whether Evanston Ins. Co. v. ATOFINA Petrochems., 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? (2) Whether the doctrine of contra proferentem applies to the interpretation of the insurance coverage provision of the Drilling Contract under the ATOFINA case, 256 S.W.3d at 668, given the facts of this case? The Texas Supreme Court The Texas Supreme Court accepted certification of the questions and heard oral argument on September 16, BP again argued that the scope depended only upon the policy language, unless the contract was expressly incorporated, and contended that the definition of Insured Contract was intended only to identify who is an additional insured and not the scope of coverage. In effect, BP sought coverage akin to that under a blanket additional insured endorsement rather than as required by contract, contending that the indemnity obligations and insurance obligations are separate and independent. In support of this position, BP relied upon language in the Drilling Contract providing that: [w]ithout limiting the indemnity obligation or liabilities of [Transocean] or its insurer, at all times during the term of

3 Page 3 this CONTRACT, [Transocean] shall maintain insurance covering the operations to be performed under this CONTRACT as set forth in Exhibit C. Finally, BP asserted that, to the extent an ambiguity in interpreting the scope of coverage existed, the Court should apply contra proferentem and allow the insured s, i.e., BP s, interpretation to prevail over that of the insurers. In contrast, Transocean and its insurers contended that the language in the policies was sufficient to both incorporate and limit the scope of additional insured coverage to the liabilities assumed by Transocean in the Drilling Contract. In support of its position, Transocean and its insurers highlighted the definition of Insured Contract, whereby BP is an Insured if Transocean is obliged... to provide [BP] insurance in an Insured Contract under which Transocean assumes the tort liability of another and the language automatically adding additional insureds where required by written contract. Turning, consequently, to the Drilling Contract, Transocean was obligated to name BP as an additional insured for liabilities assumed by Transocean under the terms of this Contract, and such terms did not include subsea pollution liabilities. In effect, Transocean and its underwriters distinguished other case law because the policies (1) contained different language, which compels a different finding, and (2) did not require an assumption of liabilities as a prerequisite to coverage. Further, Transocean maintained that the determination whether indemnity and insurance provisions are separate and independent, as BP suggested, can only be ascertained by a review of the Drilling Contract. Thus, review of the Drilling Contract provisions is appropriate. Finally, Transocean contended that application of contra proferentem is inappropriate absent ambiguity and, for the reasons articulated by the District Court, no ambiguity existed. On February 13, 2015, the Texas Supreme Court issued its ruling. In sum, the Court concluded that the only reasonable interpretation of the policies was that BP s status as an additional insured was limited to the liabilities Transocean assumed in the Drilling Contract. In reaching this conclusion, the Court found the policies included sufficient language to necessitate consultation of the Drilling Contract to determine BP s status as an additional insured and that the scope of additional insured coverage was inextricably intertwined with limitations on the extent of coverage to be afforded. Having answered the first certified question in the affirmative, the Court declined to address the second question. The Court s analysis necessarily began with the four corners of the policies; however, it quickly acknowledged the long-standing rule that policies can incorporate coverage limitations by referencing and incorporating documents containing such limitations. Rather than requiring specific wording, the Court suggested that a clear manifestation of intent to include the Drilling Contract was sufficient to incorporate its limitations into the policies. In effect, the external documents are akin to an endorsement to the policy that defines limits of coverage. The Court distinguished ATOFINA on two primary grounds. First, the only restriction in the coverage provision in ATOFINA was that the claim pertain to the insured s facilities or operations. Specifically, the provision at issue offered coverage to [a] person or organization for whom [the insured has] agreed to provide insurance as is afforded by this policy; but that person or organization is an insured only with respect to operations performed by you or on your behalf, or facilities owned or used by you. Second, the existence of a certificate of insurance naming ATOFINA as an additional insured eliminated the need to consult an extrinsic agreement to determine whether ATOFINA was, indeed, to be named an additional insured. In contrast, Transocean s policies required review of the Drilling Contract to determine the threshold issue of whether BP was, in fact, an additional insured. The Drilling Contract must require that Transocean provide insurance to BP in order to constitute an Insured Contract, for which additional insured coverage is available, under the policies. In fact, analysis of a separate coverage provision in ATOFINA supported Transocean s position that external limitations can be incorporated by reference, as the Court adopted the limitations in underlying insurance, which were expressly

4 Page 4 incorporated into the policy. The Court noted that BP was not named in the Transocean policies, endorsements or in a certificate of insurance, and, further, if the coverage inquiry were constrained to the language in the insurance policy, BP would have no coverage at all. BP only becomes an Insured if there is an Insured Contract, in which Transocean assumes some liabilities that may be those of BP and where Transocean is obliged to provide insurance coverage for BP. One must then look to the Drilling Contract. The plain language of the additional insured provision in the Drilling Contract links the additional insured coverage to the liabilities assumed by [Transocean] under the terms of [the Drilling Contract]. Because Transocean did not assume subsea pollution liabilities, it was not obliged to provide coverage to BP for such risks. The following chart depicts the differing language between the policies implicated in ATOFINA and those in Ranger. ATOFINA Contractor Policy & Contract POLICY: Insured is [a] person or organization for whom you have agreed to provide insurance as is afforded by this policy. CONTRACT: [ATOFINA] shall be named as additional insured in each of Contractor s policies, except Workers Compensation; however, such extension of coverage shall not apply with respect to any obligations for which [ATOFINA] has specifically agreed to indemnify Contractor. Transocean Policy & Contract POLICY: Additional Insured coverage where Transocean is obliged by any oral or written Insured Contract or where required by written contract, bid or work order. Insured Contract, whenever used in this Policy, shall mean any written or oral contract or agreement entered into by the Insured... and pertaining to business under which the Insured assumes the tort liability of another party. Tort Liability means a liability that would be imposed by law in the absence of any contract or agreement. CONTRACT: [BP] 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. The Court also addressed BP s position that the indemnity and insurance provisions were separate and independent. In support of such position, BP relied upon on a provision of the Drilling Contract providing that [w]ithout limiting the indemnity obligations or liabilities of [Transocean] or its insurer, at all times during the term of this CONTRACT, [Transocean] shall maintain insurance covering the operations to be performed under this CONTRACT as set forth in Exhibit C. BP s position was rejected for two reasons. First, it s not that the insurers obligation to BP is limited by Exhibit C; rather, it s that the insurers obligation to BP only arises in the first instance based on the terms of Exhibit C.

5 Page 5 Secondly, the cited language speaks to duty as opposed to scope. To wit, Transocean s duty to maintain insurance does not alleviate its duty to indemnify BP. In short, courts must consider the terms of an underlying contract to the extent the policy language directs [courts] to do so. The primary distinctions between the policies in the cases BP cited in support of its position and the language in the Transocean policies were two-fold: (1) the Transocean policies required an Insured Contract as a prerequisite to additional insured coverage, which necessarily required resort to the Drilling Contract, and (2) the Transocean policies included language that sufficiently referenced, incorporated, and limited the additional insured coverage to the terms of such Insured Contract via the phrases as obliged and where required therein. Dissent Notably, Justice Johnson dissented from the opinion. Although he did not materially disagree with the Court s explication of principles applicable to construing insurance contracts, he disagreed with their application under the facts of Ranger. In the dissent, Justice Johnson disagreed that the phrase where required was sufficient to impose limitations on coverage based on the terms of the external contract. Rather, the dissent concluded that the phrase merely served to identify the additional insured, but failed to sufficiently incorporate the Drilling Contract language. In support of his conclusion, Justice Johnson highlighted phraseology in other policy provisions that he believed more directly incorporated documents external to the policy and limited coverage accordingly. Additionally, Justice Johnson found that because BP is an Insured as defined under the policies, and also an additional insured, it was entitled to all coverages the policy affords. Assuming that the aforementioned language was sufficient to incorporate the Drilling Contract limitations, he found no language in the policy or drilling contract precluding BP from being insured under the policy for greater coverage than what Transocean agreed to provide. Notably, such conclusion could necessarily result in the conclusion that additional insureds of BP, in effect, would become Insureds, and so on and so forth. Also, without limits, BP s contention that it is covered for operations worldwide, regardless of whether Transocean was involved, might also hold true. The majority had rejected such arguments as unreasonable and untenable interpretations. Finally, assuming that the limitations of the Drilling Contract were to apply, Justice Johnson relied upon BP s status as an Insured and a policy provision governing conflicting clauses in the policies, which required the broadest interpretation [to] inure to the benefit of the Insured. Ranger Rides Again Following the ruling, BP petitioned the Texas Supreme Court for rehearing; however, as a result of the settlement between BP and Transocean, the request for rehearing was withdrawn, and the Fifth Circuit appeal dismissed. As a result, the Texas Supreme Court ruling stands, and other courts now begin to consider and apply it. Specifically, the Fifth Circuit addressed a similar issue regarding incorporation of an external agreement and limitations to the scope of additional insured coverage based on the terms of such agreement involving nearly identical language to that in the policies in Ranger. In Ironshore Specialty Ins. Co. v. Aspen Underwriting, Ltd., 788 F.3d 456 (5th Cir. 2015), a fire at an oil well owned by Endeavor Energy Resources ( Endeavor ) resulted in the death of two individuals employed by its contractor, Basic Energy Services ( Basic ). Endeavor and Basic were parties to a master services agreement ( MSA ) that contained knock-for-knock indemnity obligations, through which each party accepted

6 Page 6 responsibility for claims of its employees, and the obligation to provide $5 million of insurance to cover the claims asserted by their employees against the other party. The policies did not expressly limit additional insured coverage to $5 million. Endeavor s excess insurer brought suit against Basic s excess insurers, seeking a declaratory judgment that Basic s insurers were obligated to provide coverage up to their full limits. Like Transocean in Ranger, Basic s insurers contended that the policies incorporated the $5 million limit by reference to the MSA. The MSA obligated the parties to obtain insurance [t]o support the indemnification provisions in this [MSA] but as a separate and independent obligation, each party shall... maintain certain coverages totaling $5 million. Notably, Basic procured insurance significantly in excess of this threshold. Similar to the policies implicated in Ranger, the policy at issue defined Insured as any person or entity to whom [Basic] is obliged by written Insured Contract entered into before any relevant Occurrence and / or Claim to provide insurance such as is afforded by this Policy but only with respect to... liability arising out of operations conducted by [Basic] or on its behalf.... Insured Contract was defined as any written contract or agreement entered into by [Basic] and pertaining to business under which [Basic assumes] the tort liability of another party to pay for Bodily Injury, Property Damage, Personal Injury or Advertising Injury to a Third Party or organisation. As in Ranger, the parties disputed whether the limitation on coverage in the MSA was incorporated into the policy. Like the Texas Supreme Court, the Fifth Circuit commenced its analysis with a four-corners review of the policy. Basic contended that, as in Ranger, a written Insured Contract was prerequisite to coverage and thus incorporated the MSA. With some skepticism, the Fifth Circuit questioned whether the mere reference would be sufficient, particularly in comparison to language in Endeavor s policies, which directly limited coverage to that required by external agreements. The Fifth Circuit reviewed the Texas Supreme Court s analysis, noting that the definition of Insured Contract was nearly identical, but the provision affording coverage where required by written contract, bid or work order was not present in the Basic policies. Accordingly, the Fifth Circuit weighed only the sufficiency of the definition of Insured Contract. Ultimately, it concluded that each provision relied upon by the Texas Supreme Court was a separate and sufficient basis for the Court s decision, thereby further reducing the coupling necessary to incorporate limitations in extrinsic agreements. Practical Considerations With the Ranger scope of additional insured coverage question resolved, companies can take from the ruling (and subsequent Fifth Circuit ruling) that hyper technical and formalistic language will not be required in order to incorporate and limit the scope of additional insured coverage to the limitations of an extrinsic document or agreement under Texas law. That said, a prudent practice would be a review of both existing policies and any agreements under which a company is obligated to provide additional insured coverage. Such review should include an analysis of the key concepts gleaned from each of the courts involved in the ultimate resolution of Ranger, as succinctly expressed by the Texas Supreme Court. Consider whether the insurance procured exceeds that required by the agreement at issue. If so, carefully review any indemnity obligations to determine whether they are congruent or differ from the additional insured coverage obligations in the agreement. Finally, review the policies for two key principles: express incorporation of or, at an absolute minimum, clear manifestation of the intent to (1) incorporate the agreement and (2) limit the scope of additional insured coverage in the policy to the scope of the indemnity obligations assumed by and additional insured coverage obligations of the named insured in the incorporated agreement.