The Texas Supreme Court handed down its much anticipated judgment in the Deepwater Horizon case on 13th February 2015.

The catastrophic explosion on board the Deepwater Horizon oil-drilling rig in the Gulf of Mexico during April 2010 caused tragic loss of life and extensive sub-surface oil pollution. This led to various claims and liabilities arising against the oil-field developer, BP, and its drilling contractor, Transocean.

BP and Transocean turned to insurers for coverage. Indeed the relevant drilling contract between BP and Transocean (the "Drilling Contract") provided an obligation on Transocean to obtain insurance cover naming BP as a co-assured. That obligation had apparently been fulfilled and BP were so named. The key issue in dispute however was whether BP could claim indemnity from Transocean's insurers for this particular damage under the relevant insurance policy.

Transocean and its insurers argued that under the Drilling Contract, the risk of sub-surface pollution had been allocated to BP. Transocean assumed the risk of above-surface pollution. BP was obliged to indemnify Transocean for any sub-surface pollution. This contractual risk allocation was said to be consistent with the standard approach in the oil and gas industry.

The Supreme Court agreed with Transocean/its insurers' position and decided against BP. The Drilling Contract terms had been "incorporated" into the insurance policy. BP's status as an "additional insured" was found by the Court to be "inexorably linked . to the extent of Transocean's indemnity obligations". The Court emphasised that BP, as a named additional insured, was only covered for "liabilities assumed by [Transocean] under the terms of this contract". BP's interpretation of the policy did not give any meaning to that underlined phrase, which proved its downfall.

As such, BP was only covered by insurers for the liability that Transocean assumed under the Drilling Contract. Since Transocean did not bear the risk for sub-surface oil pollution, BP was not covered as an additional insured for this particular damage.

This case raises some related issues for members to consider:

1. Members should exercise caution in agreeing to open-ended indemnity/liability clauses in their service/transportation/other contracts and consider whether their own insurance arrangements are adequate to cover all possible contractual liabilities and indemnities.
2. Members are encouraged to consult with and obtain Club managers' express approval on the availability of P&I cover for any potential claims and liabilities arising under contractual liability/indemnity clauses, unless such contracts/clauses are specifically listed as covered by the Club's Rules providing for usual P&I cover.
3. Where service or other transportation contracts contain an obligation on members to obtain P&I cover, the existence and nature of that obligation will not affect the extent of P&I cover.  Such cover remains subject to the Club's rules.
4. P&I cover can, under special terms, name the Member's contractor as a co-assured only if the contract involved is based on a "knock for knock" indemnity, while preserving the Member's right of limitation.

This decision has proven a cautionary tale for parties assuming potentially huge contractual liabilities (in this instance, for oil pollution) to put in place their own insurance arrangements, and not rely upon cover by way of contractual incorporation into a counter-party's insurance policy. That practice is fraught with risk, and as we have seen, co-assured extension under normal P&I insurance is not intended to allow the contracting partner to avoid its own insurance, it is only meant to protect the co-assured from liabilities which are properly those of the P&I Member.

If you have any enquiries regarding the issues covered in this briefing, please contact Luke Zadkovich (luke.zadkovich@thomasmiller.com or +1 201 557 7335) or Dr Chao Wu (chao.wu@thomasmiller.com or +442072042157) or your usual contact at the UK Club.