Appeals Court: BP entitled to Transocean’s insurance coverage for pollution liability

NEW ORLEANS – The U.S. 5th Circuit Court of Appeals overturned the ruling of a lower court in a case regarding Transocean’s insurers and the Deepwater Horizon oil spill.

The case addresses the responsibility of Transocean’s primary and excess-liability insurers, Ranger Insurance Ltd. and certain underwriters at Lloyd’s London respectively, to cover BP’s pollution related liabilities that resulted from the oil spill.

All parties agreed that BP was an “additional insured” in the terms of Transocean’s insurance policies, and was thus at least partly covered by the policies. The issue in contention was the scope of the coverage.

The case is one of hundreds that stem from the April 2010 oil spill. The Deepwater Horizon offshore drilling unit was owned by Transocean and was drilling under a contract between Transocean and BP.  The drilling contract obligated Transocean to maintain liability insurance at it’s own expense and stipulated that BP be named as “additional insureds” in each of Transocean’s policies.

BP filed the claims with the insurers in 2010, seeking payouts from the $50 million primary policy and the $700 million in excess coverage. The insurers claimed that they had “no additional-insured obligation to BP with respect to pollution claims against BP for oil emanating from BP’s well”.

BP argued that it was an “additional insured” under the insurance policies and that as such the insurance polices alone, not the drilling contract, detail the scope of BP’s coverage rights.

In a November 2011 ruling, District Court Judge Carl Barbier, the federal judge handling the lion’s share of the Deepwater Horizon litigation, found that Transocean was only required to name BP as an insured for liabilities that it (Transocean) explicitly assumed under the drilling contract. The drilling contract specified that Transocean would be liable for any pollution originating on or above the surface of the land or water but that any other pollution arising out of the operations of the contract would be the responsibility of BP.

Judge Barbier, as quoted by Bloomberg.com, said, in part “The Deepwater Horizon Incident entailed a subsurface release; thus, Transocean did not assume pollution liabilities arising from the incident.”  His ruling found in favor of the insurers and BP appealed the decision.

In an opinion filed March 1, 5th Circuit Judge E. Grady Jolly, writing on behalf of himself and Circuit Judges Fortunato Benavides and Stephen Higginson, states that the umbrella insurance policy, as opposed to the indemnity provisions of the drilling contract, control the coverage to which BP is entitled.

The opinion further states that “where an additional insured provision is separate from and additional to an indemnity provision, the scope of the insurance requirement is not limited by the indemnity claims.” The additional insured provision in the drilling contract is separate from the indemnity provisions in the contract, so BP can claim coverage under both of Transocean’s policies.

The panel reversed the district court’s decision and remanded the case with instructions to enter an appropriate judgement.

Case No. 12-30230, originally part of In Re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, 2:10-md-02179.