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1 Wednesday, March 18, 2015 Houston, TX 9:30–10:45 a.m. LESSONS LEARNED FROM THE DEEPWATER HORIZON SPILL Moderated by Speakers David Goodwin Partner Covington & Burling LLP John M. Elsley Of Counsel Royston, Rayzor, Vickery & Williams, L.L.P. George B. “Bart” Hall Partner Phelps Dunbar Allan B. Moore Partner Covington & Burling LLP The Deepwater Horizon insurance litigation before the Texas Supreme Court is one of the most closely watched insurance cases in Texas history. Hear from the same lawyers who have been handling the case about the issues that the Texas Supreme Court is addressing and the arguments for and against coverage for BP’s pollution losses. The panelists will al- so talk about lessons learned from the insurance litigation and then will focus on how a company engaged in deepwater drilling can manage its risks in the current insurance mar- ket. Copyright © 2015 International Risk Management Institute, Inc. www.IRMI.com

Lessons Learned from the Deepwater Horizon Spill

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lessons-learned-from-the-deepwater-horizon-spill.fm9:30–10:45 a.m.
Moderated by Speakers
David Goodwin Partner
Covington & Burling LLP
Phelps Dunbar
Covington & Burling LLP
The Deepwater Horizon insurance litigation before the Texas Supreme Court is one of the most closely watched insurance cases in Texas history. Hear from the same lawyers who have been handling the case about the issues that the Texas Supreme Court is addressing and the arguments for and against coverage for BP’s pollution losses. The panelists will al- so talk about lessons learned from the insurance litigation and then will focus on how a company engaged in deepwater drilling can manage its risks in the current insurance mar- ket.
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Notes
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David Goodwin Partner
Covington & Burling LLP
David Goodwin is partner in Covington & Burling’s San Francisco office and a member of the In- surance Coverage, Arbitration, and Appellate practice groups. Mr. Goodwin is one of the nation’s leading insurance coverage practitioners, ranked in the highest tier by Chambers USA both na- tionally and in California. Law360 has named him one of the country’s top three “most valuable players” in the insurance practice area.
With nearly 30 years of experience representing corporate policyholders in insurance coverage disputes and litigation, Mr. Goodwin has served as a party arbitrator in numerous insurance arbi- trations. He also is a highly experienced appellate advocate who has argued more than 50 ap- peals.
Mr. Goodwin is a vice chair of Covington’s litigation practice. He also has served as an adjunct professor at the University of California at Berkeley Law School, where he taught courses on in- surance law.
Mr. Goodwin’s education includes University of California, Santa Cruz (A.B., 1974); University of Oxford (B.A., 1976); University of Oxford (M.A., 1981); and Stanford Law School (J.D., 1982).
John M. Elsley Of Counsel
Royston, Rayzor, Vickery & Williams, L.L.P.
John M. Elsley has practiced law for 35 years with the Houston office of Royston, Rayzor, Vickery & Williams, L.L.P. He has significant experience in civil litigation, arbitration, and appeals with a specialty in admiralty law matters. Mr. Elsley has represented Transocean in the Deepwater Hori- zon insurance litigation pending before Judge Barbier in the Eastern District of Louisiana, the US Court of Appeals for the Fifth Circuit, and the Texas Supreme Court.
Mr. Elsley received his B.S. with honors and his J.D. with honors from the University of Houston.
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Phelps Dunbar
Bart Hall practices in the area of insurance and reinsurance and concentrates on coverage and re- insurance issues arising out of a wide range of claims, including environmental and latent injury claims, business torts, intellectual property claims, labor and employment-related claims, and construction defect claims, as well as issues involving insured and additional insured status, self- insured retentions, and general claims handling issues under third-party and first-party policies.
Mr. Hall is a resident in the Houston and New Orleans offices. However, he counsels insurers and represents them in litigation throughout the country and has been admitted to practice pro hac vice before state or federal courts in 23 other states.
He has been recognized by The Best Lawyers in America, Louisiana Super Lawyers, and New Or- leans Magazine—Top Lawyers—Insurance Law.
Mr. Hall received his B.A. from Tulane University, his M.S.P. from the University of Tennessee, and his J.D. from Tulane University Law School.
Allan B. Moore Partner
Covington & Burling LLP
Allan B. Moore is a partner in the Washington, DC, office of Covington & Burling LLP, where he has represented policyholders in insurance coverage litigation and arbitration matters for nearly 25 years. Mr. Moore also serves as co-chair of the firm’s Arbitration Practice Group. Currently, Mr. Moore represents BP America, Inc., and its affiliates in the insurance coverage litigation arising out of the explosion and sinking of the Deepwater Horizon and the ensuing oil spill in the Gulf of Mexico and Apache Corporation in connection with the Varanus Island pipeline explosion in Aus- tralia.
Mr. Moore has represented policyholders in pursuing coverage for large-scale environmental loss- es, industrial accidents, product liability torts, storms and natural disasters, and fraud and theft schemes. He regularly appears before federal and state courts throughout the United States, as well as before international and domestic arbitral tribunals.
Mr. Moore received his undergraduate and law degrees from Harvard University. He is recognized and recommended for insurance, energy litigation, and international arbitration in The Legal 500 and other publications.
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Title
Decision and Its Implications Presented by
David B. Goodwin George B. Hall, Jr. Allan B. Moore Phelps Dunbar Covington & Burling LLP Counsel for Underwriters Counsel for BP
John M. Elsley Royston, Rayzor, Vickery & Williams, LLP Counsel for Transocean
Introduction
• The Deepwater Horizon Insurance Litigation – Background to the Dispute – District Court and Fifth Circuit
• The Texas Supreme Court Reference • What Did the Texas Supreme Court Say? • What’s Next? • Implications for Other Cases?
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The Drilling Contract
• Drilling contract negotiated in 1998 between predecessors of Transocean and BP
• Contract amended frequently to cover a variety of operations, including the use of the Deepwater Horizon rig
• Transocean agreed in the drilling contract to procure insurance, and the parties gave each other knock-for-knock indemnities
• In exchange, BP paid day rates to Transocean
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The “Insurance Actions”: A Recap
• After the April 20, 2010, accident, BP tendered its claim to the commercial general liability (CGL) insurers as an additional insured
• The insurers filed two parallel declaratory judgment actions, one filed by the primary insurer (Ranger) and the other by the excess insurers
• Texas law governed the insurance policies • Transferred to New Orleans multi-district litigation • Transocean intervened • All agreed: BP was an “additional insured” • Issue was not existence of BP’s coverage but whether the CGL policies
provided coverage for BP’s subsurface pollution liabilities
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Four Sets of Contractual Provisions
• The insurance policies: “Who is insured?” • The insurance policies: “What coverage is the insured entitled
to receive?” • The drilling contract: “What indemnities has the contractor
promised to the owner/operator?” • The drilling contract: “What insurance must the contractor
provide?”
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BP’s Arguments in a Nutshell
• The scope of coverage depended upon what the insurance policies provided, and the policies did not limit coverage to the scope of the indemnities that Transocean gave BP
• The policies did not incorporate the drilling contract • And if they did, the drilling contract did not limit the scope of
“additional insured” coverage to the indemnities
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The Insurers’ (and Transocean’s) Arguments in a Nutshell
• The sole purpose of BP’s “additional insured” coverage was to “backstop” Transocean’s indemnities
• To the extent the court must look at the contract language, the drilling contract limited the scope of BP’s “additional insured” coverage to the “backstop”
• The policies incorporated the drilling contract
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So What Happened?
• BP asked the District Court to decide on a motion for judgment on the pleadings whether BP or the insurers were right as a matter of law. All parties agreed that the motion presented a pure question of law.
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• Based on the plain language of Transocean’s policies, the scope of BP’s coverage as an additional insured must be determined by the additional insured provision in the drilling contract.
• Because BP and not Transocean assumed liability for subsurface pollution under the drilling contract, and because BP was an additional insured only “for liabilities assumed by [Transocean] under the terms of th[e] [drilling] Contract,” BP was not insured for subsurface pollution.
• Judge Barbier distinguished ATOFINA and AUBRIS, holding that the result in each was compelled by the underlying contract and policy language, rather than a “policies alone” rule, which had been advocated by BP.
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1. The ATOFINA case was “Distinguishable” and Aubris did not apply 2. The additional insured provision was not separate and additional to the indemnity
provisions 3. The policies and the drilling contract were not ambiguous; therefore, contra
proferentem did not apply 4. The drilling contract limited the additional insured’s coverage rights to a backstop
to the indemnities
The Fifth Circuit Decision
• Opinion issued March 2013, ruling in favor of BP • Holding: under Texas law, insurance coverage depends upon what
the insurance policies provide, not on what the drilling contract says, unless the insurance policies expressly limit coverage to the minimums set forth in the drilling contract – The policies imposed no such limitations on coverage – The insurance and indemnity provisions in the drilling contract were separate and
independent promises that Transocean made to BP – The panel ruled that BP was entitled to coverage as a matter of law and remanded the
case to Judge Barbier for entry of judgment in favor of BP – Court did not reach the scope of the indemnities in the drilling contract
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1. Under ATOFINA and Aubris, look only to the policies, not to the drilling contract in determining additional insured coverage.
2. The ATOFINA case was controlling because the language of Transocean’s policies was “very similar” to the policy in ATOFINA, as well as to the policy in Aubris. The BP/Transocean insurance policies contained no limit on BP’s coverage.
3. The drilling contract’s additional insured provision was separate and additional to the indemnity provisions because it was a discrete requirement.
4. Because BP offered a reasonable interpretation, an ambiguity was present; therefore, contra proferentem applied, with the panel adopting BP’s interpretation in favor of coverage.
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• Ranger, Excess Underwriters, and Transocean petitioned for rehearing or rehearing en banc. – Also asked for certification to Texas Supreme Court
• BP opposed rehearing en banc • The Fifth Circuit denied rehearing, withdrew first opinion, found that the law was
unsettled, and certified two questions to the Texas Supreme Court
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The Certified Questions
1. Whether Evanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d 660 (Tex. 2008), compelled a finding that BP was covered for the damages at issue, because the language of the umbrella policies alone determined 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 were “separate and independent”
2. Whether the doctrine of contra proferentem applied 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
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• Opinion issued on February 13, 2015. • Justice Guzman delivered the opinion, and Chief Justice Hecht, Justice Greene,
Justice Willett, Justice Lehrmann, Justice Boyd, Justice Devine, and Justice Brown joined.
• Justice Johnson filed a dissenting opinion. • The court answered the first certified question in the negative and, based on its
analysis of the first certified question, did not reach the second certified question.
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1. The Transocean insurance policies included language that necessitated consulting the drilling contract to determine BP’s status as an “additional insured”;
2. under the terms of the drilling contract, BP’s status as an “additional insured” was inextricably intertwined with limitations on the extent of coverage to be afforded under the Transocean policies;
3. the only reasonable construction of the drilling contract’s additional insured provision was that BP’s status as an “additional insured” was limited to the liabilities Transocean assumed in the drilling contract; and
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Summary of Texas Supreme Court’s Holdings
4. BP was not entitled to coverage under the Transocean insurance policies for damages arising from subsurface pollution because BP, not Transocean, assumed liability for such claims.
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• Four-corners rule: Whether BP’s additional insured coverage was co-extensive with Transocean’s coverage began with the four corners of the policies.
• Policies may incorporate coverage limitations in extrinsic documents: Although the supreme court began with a four-corners review, it also held that “[w]e have long held insurance policies can incorporate limitations on coverage encompassed in extrinsic documents by reference to those documents.”
• Magic words not required: The Texas Supreme Court does not require “magic” words to incorporate a restriction from another contract into an insurance policy; rather, it is enough that the policy clearly manifests an intent to include the contract as part of the policy.
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The Texas Supreme Court’s Policy: Construction Principles
• “Thus, while our inquiry must begin with the language in an insurance policy, it does not necessarily end there. In other words, we determine the scope of coverage from the language employed in the insurance policy, incorporated document to the extent required by the policies. Unless obligated to do so by terms of the policy, however, we do not consider coverage limitations in underlying transactional documents.”
• The court said it was guided by the holdings and the foundational principles set forth in its decisions in Urrutia v. Decker, 992 S.W.2d 440 (Tex. 1999), and Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008).
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• The issue was whether a vehicle rental agreement was effective to limit an additional insured’s liability insurance to $20,000 instead of the $1 million policy limits available under the leasing company’s commercial business automobile policy.
• The policy covered “[b]oth lessees and rentees of covered autos as insured, but only to the extent and for the limits of liability agreed to under contractual agreement with the named insured.”
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Urrutia v. Decker, 992 S.W.2d 440 (Tex. 1999)
• The supreme court held that the customer’s status as an additional insured depended on the existence of a rental agreement, and coverage was expressly limited to the amount specified in such agreement. Thus, coverage was limited to $20,000.
• The supreme court held that the external limit was, in effect, an endorsement to the insurance policy.
• By tying additional insured coverage to the terms of an underlying agreement, the parties procured only the coverage the insured was contractually obligated to provide, thereby minimizing the insurer’s exposure under the policy.
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• In ATOFINA, the supreme court considered two independent coverage provisions in an excess insurance policy.
• The first provision (Section III.B.6) extended 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.”
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Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008)
• Section III.B.6 of the policy in ATOFINA made no reference to the service contract in determining the scope of additional insured coverage; rather, the only restriction on the scope of additional insured coverage under Section III.B.6 was the requirement that claims involved the contractor’s operations or facilities.
• Because the accident was related to the contractor’s operations, the claim for which ATOFINA sought coverage was within the scope of the coverage afforded under Section III.B.6 of the policy.
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Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008)
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• The second insurance provision at issue in ATOFINA (Section III.B.5) defined an insured as “[a]ny other person or organization who is an insured under a policy of ‘underlying insurance’” but stated that “[t]he coverage afforded such insureds under this policy would be no broader than the ‘underlying insurance’ except for this policy’s Liability of Insurance.”
• The Texas Supreme Court enforced Section III.B.5 as written, and because the underlying CGL policy excluded losses caused by ATOFINA’s sole negligence, the Texas Supreme Court held that the limitation also applied to the excess policy.
• Thus, the Texas Supreme Court affirmed the principle from Urrutia that an insurance policy may refer to another document to determine the extent to which an additional insured is covered.
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Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008)
• The question before the court: Did the Transocean insurance policies incorporate any limitations in the drilling contract with respect to the extent of BP’s status as an additional insured?
• Turning to the policy language at issue, BP was not named in any of the insurance policies as an additional insured by the policy language or an endorsement.
• Instead, the policies conferred coverage by reference to the drilling contract in which (1) Transocean assumed some liability for pollution that might otherwise be imposed on BP (making that contract an “insured contract”) and (2) Transocean was “obliged” to procure insurance coverage for BP as an additional insured.
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• Moreover, additional insureds were automatically included under the policy only “where required by written contract, bid or work order.”
• The Texas Supreme Court held that the language in the insurance policies providing additional insured coverage “where required” and as “obliged” required the court to consult the drilling contract’s additional insured clause to determine to what extent BP was an additional insured.
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The Texas Supreme Court’s Incorporation by Reference Analysis
• Subsection 3 of Exhibit C stated that BP was an additional insured but only for “liabilities assumed by [Transocean] under the terms of this contract.”
• The court ruled, “It is immediately apparent from the plain language of this provision that BP’s status as an insured is inexorably linked, at least in some respect, to the extent of Transocean’s indemnity obligations.”
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• BP read the emphasized language as a specific exception to the general obligations to name it as an additional insured, applying only to the workers compensation policies covering Transocean’s employees since that would be the only indemnity obligation implicated under BP’s construction.
• Transocean and the insurers read the language as (1) accepting only workers compensation policies from the general additional insured obligation and (2) imposing a limitation on the general insurance obligation that was coterminous with all of Transocean’s contractual indemnity obligations.
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Subsection 3 of Section 3: The “Missing Comma”
• The Texas Supreme Court held that BP’s construction of the contract was not reasonable because it either was inconsistent with other provisions in the drilling contract or rendered the words “liabilities assumed by [Transocean] under the terms of this contract” meaningless.
• To construe the additional insured provision to require BP to be named as an insured under such policies for its own employees’ work-related losses was in tension with the employee indemnity clause in which BP assumed responsibility for these claims.
• The court held that BP’s construction was also in tension with the provisions in Exhibit C that imposed an obligation on Transocean to obtain workers compensation insurance for “employees”; it did not mention acquiring insurance for workers “employed” by someone other than the contractor, Transocean.
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• Article 20.1 of the drilling contract provided that “[w]ithout limiting the indemnity obligation 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.”
• For two reasons, the Texas Supreme Court rejected BP’s argument that the insurers’ indemnity obligations conferred by the insurance policy were not limited by Exhibit C to the drilling contract.
• First, Transocean’s insurers owed no indemnity obligation to BP except on the terms stated in subsection 3 of Exhibit C; so while Article 20.1 might generally be read as saying that the insurers’ indemnity obligation was not limited by the requirements in Exhibit C, the insurers’ indemnity obligation did not arise in the first instance except on the conditions stated.
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The Insurance Provision of the Drilling Contract: Article 20.1
• Second, simply because the duties to indemnify and maintain insurance may be separate and independent does not prevent them from also being congruent; that is, a contract may reasonably be construed as extending the insured’s additional insured status only to the extent of a risk the insured agreed to assume.
• The Texas Supreme Court held that, while indemnity and insurance clauses can impose separate and independent duties, Article 20.1 did not provide that the scopes of the indemnity and insurance duties were different; instead, the additional insured clause confirmed they were congruent regarding the risk at issue by requiring Transocean to insure BP “for liabilities assumed by [Transocean] under the terms of this Contract.”
• In summary, the scope of Transocean’s duty to indemnify governed the scope of Transocean’s duty to insure BP.
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• The ambiguity rule comes into play only if there is more than one reasonable interpretation of an insurance policy.
• The Texas Supreme Court held that BP’s interpretation was unreasonable. • Because the court concluded there was only one reasonable interpretation of the
insurance policies, it declined to answer the second certified question.
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The Texas Supreme Court’s (Non-) Holding on Contra Proferentem
The Texas Supreme Court Decision: The Dissenting Opinion
• The majority confused “status” as an additional insured with the “scope” of coverage afforded an additional insured. – Court should look to the drilling contract for status, but the policy did
not incorporate any claimed limitations in the drilling contract on “scope.”
– The three words from the policy that the majority invoked for incorporation said no such thing.
• The majority misread Article 20.1 of the drilling contract, which provided expressly that the insurance provisions of that contract did not limit the coverage that the insurers provided.
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The Texas Supreme Court’s Ruling: Implications for Other Cases
• What happens with the next case? When is the service contract incorporated into the insurance policy?
• What are its implications for policyholders and insurers more generally?
• What should insurers/insureds do the next time? • What happens next in the Deepwater Horizon insurance
litigation?
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Questions, Final Comments, and Contact Information
John M. Elsley David B. Goodwin Royston, Rayzor, Vickery & Williams LLP Covington & Burling LLP [email protected] [email protected]
George B. Hall, Jr. Allan B. Moore Phelps Dunbar LLP Covington & Burling LLP [email protected] [email protected]
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