“Additional insured” provisions are one of the most prevalent risk shifting techniques used in the insurance field today. Yet surprisingly, they remain one of the least understood for insurers, courts, and insureds. While debate in Oregon case law over the legal status of additional insured provisions has quieted down since the Oregon Supreme Court’s decision in Walsh Construction Co., v. Mutual of Enumclaw and the U.S. District Court’s decision in Hoffman Construction Co. of Oregon. v. Travelers Indemnity Ins. Co., dispute over the role of these provisions is alive and well. Continuing litigation and decisions in other jurisdictions illustrate why parties to insurance policies and other indemnification agreements should remain alert to additional insured provisions.
Additional insured provisions generally come in two types. The insurance policy may specifically name the additional insured, but common practice for larger policies is to define “insured” to include, for example, “any person or organization that the named insured is obligated by virtue of a written contract or agreement to provide insurance such as is afforded by this policy.” This type of language is attractive to many insureds and is of particular utility when insurance needs to be spread among numerous participants to risk-creating activity. Additional insured provisions such as this are particularly common in policies covering construction projects, the energy industry, and complex service agreements.
While linking the insurance policy to a third-party contractual indemnity agreement can be effective, if done improperly it can increase the risk associated with a policy. An interesting example of this is developing out of the fallout from the Deepwater Horizon Gulf Oil Spill off the coast of Louisiana.
Transocean Holdings, Inc. (“Transocean”) owned the Deepwater Horizon offshore drilling unit which sank in April 2010. At the time, the Deepwater Horizon was operating under a drilling contract with BP America (BP), which obligated Transocean to maintain certain minimum insurance coverage for the benefit of BP. Specifically, the drilling contract required that Transocean name BP as an additional insured. In re Deepwater Horizon, 710 F.3d 338, 314 (2013). Between its primary and excess insurers, Transocean held in excess of $700 million in general liability coverage. Id. The various insurance policies included materially identical provisions, including in the definition of “Insured”:
Any person or entity to whom the "Insured" is obligated by any oral or written "Insured Contract"… entered into before any relevant "Occurrence," to provide insurance such as is afforded by this policy.
Id., at 345.
In addition to the insurance provisions, the drilling contract provided indemnity to BP “for pollution or contamination, including control and removal thereof” originating “on or above the surface of the water.” Id., at 343 n.5. The contract provided indemnity in favor of Transocean “for pollution or contamination, including control and removal thereof” originating below the surface. See Id. However, as is typical, Transocean’s insurance policies did not include any such risk allocation language.
After the sinking of the Deepwater Horizon, Transocean’s insurers filed for declaratory judgment requesting a declaration that the insurers had no additional-insured obligation to BP with respect to pollution claims emanating below the surface from BP’s well. Id., at 342. In response, BP argued that it was entitled to the full benefit of Transocean’s policies as an additional insured and that the insurance policies alone—not the indemnities detailed in the drilling contract—governed the scope of BP’s coverage rights. Id.
Ultimately, the court ruled in favor of BP, stating that the law compelled the interpretation of the insurance coverage provisions in favor of the insured “so long as that interpretation is reasonable—and even if the insurer’s proffered interpretation [of the indemnity contract] denying coverage is more reasonable.” Id., at 349-50. The significance of this decision for Transocean was that its insurance policy would likely be exhausted by BP’s subsurface liabilities, potentially leaving nothing left for Transocean’s own liabilities.
Interestingly, On August 29th the Fifth Circuit unanimously withdrew its opinion on rehearing. In re Deepwater Horizon, 728 F.3d 491 (2013). The case is currently certified before the Texas Supreme Court to determine, among other aspects, whether Texas law “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'.
While seemingly far away, the lessons being learned from this tragic event are relevant to insurers and businesses in the Pacific Northwest. The case illustrates the importance of provisions which track between insurance policies and related indemnity agreements.