The dangerous intersection of indemnity provisions and insurance requirements: Is your company at risk?

The Texas Supreme Court recently handed down a decision, In re Deepwater Horizon, which illustrated dangerous holes that companies should actively seek to avoid regarding indemnity and insurance provisions.

In the Deepwater decision, BP was left with a lot of unintended liability for a rig explosion in the Gulf of Mexico. BP was an additional insured under a company’s insurance policy, Transocean, who BP contracted with to perform drilling in the Gulf. Under the contract, Transocean’s indemnity obligations to BP included above-surface pollution releases, but BP remained liable for subsurface releases. Under the contract’s insurance provisions, BP was to be named as an additional insured on Transocean’s policy only for liabilities assumed by the company in the contract. The companies’ contract, however, was not constructed favorably. While BP was listed as an additional insured under Transocean’s insurance policy, BP was not covered by the contract.

The court viewed Transocean’s insurance policy and Transocean’s contract with BP holistically and did not restrict its analysis to the four corners of the documents. Transocean’s policy connected the additional insured coverage to the indemnities assumed by Transocean in the contract with BP. The contract with BP’s wording restricted the scope of BP’s additional insured status under the insurance policy to above-surface releases.  BP sought coverage for a subsurface release that was not included in the liabilities assumed section of Transocean’s indemnity obligations to BP in the drilling contract. Therefore, Transocean was not obligated to provide coverage for BP because it was a subsurface release. Because Transocean was not obligated to provide coverage for BP, under Transocean’s insurance policy, BP was not an additional insured for this event.

The decision in Deepwater shows the potential pitfalls for companies. A company can take several steps to avoid these pitfalls. Companies must be mindful of their insurance policies’ and contracts’ construction, and it may need to seek counsel and not take an insurance broker’s word on what policies mean. Companies must remain vigilant in their search for unequal obligations in service contracts and insurance policies. Insurance policies and contracts should be read carefully in conjunction to avoid differences so that companies are not left unprotected.