1. Marcus R. Tucker Royston, Rayzor, Vickery & Williams, L.L.P. Houston Marine Insurance Seminar R OYSTON R AYZOR Est. 1892 1

2. Deepwater Horizon incident results in largest oil spill in history BP and Transocean entered into a Drilling Contract that allocates risks Under the Drilling Contract, Transocean asserts BP as well owner and operator, owes Transocean contractual indemnity for damage caused by sub-surface originating pollution Well owners assume greater risk for pollution 2 R OYSTON R AYZOR Est. 1892

3. BP assumes greater risk because BP controls well operations and receives the economic reward from the oil production Transocean like all drilling contractors or service contractors are hired to complete a specific job Transocean receives no economic reward for oil extracted from the well Transocean assumed risk of pollution from the drilling rig 3 R OYSTON R AYZOR Est. 1892

4. Article 24.1: Contractor Responsibility [Transocean] shall assume full responsibility for and shall protect, release, defend, Indemnify and hold [BP] and its joint owners harmless from and against any loss, damage, expense, claim, fine, penalty, demand, or liability for pollution or contamination, including control and removal thereof, originating on or above the surface of the land or water, from spills, leaks, or discharges of fuels, lubricants, motor oils, pipe dope, paints, solvents, ballast, air emissions, bilge sludge, garbage, or any other liquid or solid whatsoever in possession and control of [Transocean] and without regard to negligence of any party or parties.... 4 R OYSTON R AYZOR Est. 1892

5. Article 24.2: Company Responsibility [BP] shall assume full responsibility for an shall protect, release, defend, indemnify, and hold [Transocean] harmless from and against any loss, damage, expense, claim, fine, penalty, demand, or liability for pollution or contamination, including control and removal thereof, arising out of or connected with operations under this contract hereunder and not assumed by [Transocean] in Article 24.1 above, without regard for negligence of any party or parties…. 5 R OYSTON R AYZOR Est. 1892

6. 6 R OYSTON R AYZOR Est. 1892

7. Custom and Practice in the Oil and Industry for Operator and Service Contractors to allocate pollution risk in this manner However, BP seeks to obtain additional insured coverage pursuant to an additional insured obligation in the Drilling Contract for the pollution loss 7 R OYSTON R AYZOR Est. 1892

8. AI Provision in the Drilling Contract Provides: [BP], its subsidiaries and affiliated companies, co- owners, and joint venturers, if any, and their employees, officers, and agents shall be named as additional insureds in each of [Transoceans] policies, except Workers Compensation for liabilities assumed by [Transocean] under the terms of this Contract. 8 R OYSTON R AYZOR Est. 1892

9. WOULD ALLOW AN OPERATOR AS AN ADDITIONAL INSURED TO FUND ITS POLLUTION INDEMNITY OBLIGATION WITH THE CONTRACTORS INSRUANCE EVEN IF THE PARTIES EXPRESSLY EXTENDED THE ADDITIONAL INSURED OBLIGATION IN A MANNER TO PREVENT SUCH A RESULT 9 R OYSTON R AYZOR Est. 1892

10. Transoceans Policy Defines the term Insured in relevant part as follows: c.any person or entity to whom the Insured is obliged by any oral or written Insured Contract (including contracts which are in agreement but have not been formally concluded in writing) entered into before any relevant Occurrence, to provide insurance such as is afforded by this Policy; 10 R OYSTON R AYZOR Est. 1892

11. Definition of Insured Contract states as follows: The words Insured Contract, whenever used in this Policy, shall mean any written or oral contract or agreement entered into by the Insured (including contracts which are in agreement but have not been formally concluded in writing) and pertaining to business under which the Insured assumes the tort liability of another party to pay for Bodily Injury, Property Damage, Personal Injury or Advertising Injury to a Third Party or organization. Tort Liability means a liability that would be imposed by law in the absence of any contract or agreement. 11 R OYSTON R AYZOR Est. 1892

12. Transocean points to other relevant policy provisions, which provide as follows: ADDITIONAL INSURED/WAIVER OF SUBROGATION Underwriters agree where required by written contract, bid or work order, additional insureds are automatically included hereunder, and/or waiver(s) of subrogation are provided as may be required by contract. 12 R OYSTON R AYZOR Est. 1892

13. BP relies on a Texas Supreme Court opinion, the Atofina decision, to contend that the last clause of the AI Provision in the Drilling Contract should be ignored Transocean says the Atofina decision did not involve the issue of whether a clause in a drilling or service contracts AI provision can determine whether the drilling or service contractor has an additional insured obligation for a particular risk 13 R OYSTON R AYZOR Est. 1892

14. In essence BP says ignore the risk allocation in the Drilling Contract and look only to the policy BP argues that without considering the actual risk at issue, BP is an insured, because Transocean is obliged to assume the tort liability of another party with respect to other risks Transocean argues BP is not an insured with respect to pollution risks, because Transocean is not obliged to assume the tort liability of BP with respect to pollution risks Transocean says BP ignores Endorsement No. 1 requiring additional insured coverage where required by written contract 14 R OYSTON R AYZOR Est. 1892

15. District Court ruled for Transocean, finding that the definition of Insured and Insured Contract required examination of the Drilling Contracts additional insured provision to determine whether the provision obliges Transocean to obtain coverage for BP The District Court found that the only reasonable interpretation of the Drilling Contracts AI provision is that BP is an additional for those liabilities that Transocean assumed under the Drilling Contract 15 R OYSTON R AYZOR Est. 1892

16. District Court held that the only provision of the Drilling Contract that establishes which liabilities Transocean has assumed are the indemnity provisions With regard pollution risks, BP Transocean assumed all liabilities for pollution originating above the surface of the water while BP assumed all other possible pollution liabilities. Therefore, no additional insured coverage was owed to BP, because the AI provision in the Drilling Contract did not require it 16 R OYSTON R AYZOR Est. 1892

17. Reversed and Rendered in favor of BP 5 th Circuit concludes that Atofina and its own decision in Aubris say look at the Transocean Policy, not the AI Provision in conjunction with the indemnity provisions in the Drilling Contract The Definitions of Insured and Insured Contract in Transocean Policy do not contain any limitation on additional insured coverage nor incorporate any limits from the underlying Drilling Contract so long as the insurance provision and the indemnity clauses in the drilling contract are separate and independent 17 R OYSTON R AYZOR Est. 1892

18. Atofina says look to policy alone to determine additional insured coverage Transocean policy does not incorporate terms of AI provision or drilling contract AI provision and CI provision in drilling contract are separate and independent 18 R OYSTON R AYZOR Est. 1892

19. Fifth Circuit misapplied the Texas Supreme Courts Atofina decision – this case is not similar Employee of Triple S, service contractor, died and sued Atofina that hired Triple S to perform work Atofina sought additional insured coverage from Evanston Insurance Co. Atofina does not say you can never look to AI provision of the drilling contract to determine coverage Atofina did not involve the issue of whether an AI provision in a policy provided coverage when the AI provision in the service contract extended coverage based on liabilities assumed in the contract 19 R OYSTON R AYZOR Est. 1892

20. Atofina involved whether the following following additional insured provision provided coverage: A person or organization for whom you have 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. The Atofina court found there was coverage for Atofinas sole negligence There was no issue about whether the service contracts additional insured provision only extended additional insured coverage to liabilities assumed under the contract 20 R OYSTON R AYZOR Est. 1892

21. The service agreements additional insured provision in Atofina did include a clause similar to the AI provision in the Drilling Contract: [ATOFINA], its parents, subsidiaries and affiliated companies, and their respective employees, officers and agents shall be named as additional insured in each of [Triple Ss] policies, except Workers Compensation; however, such extension of coverage shall not apply with respect to any obligations for which [ATOFINA] has specifically agreed to indemnify [Triple S]. 21 R OYSTON R AYZOR Est. 1892

22. So this Clause was not at issue in Atofina 22 R OYSTON R AYZOR Est. 1892

23. Relying on the Texas Supreme Courts Fireman Fund case, Evanston, the insurer, argued that the contractual indemnity provision did not indemnify Atofina for its own negligence, and the insurance provision was only intended to assure performance of the contractual indemnity provision Transocean says issue is not present in the BP/Transocean case – no question there is an additional insured provision; only a question of whether additional insured obligation extends to BP for pollution risks that BP has assumed in the Drilling Contract 23 R OYSTON R AYZOR Est. 1892

24. Aubris was based on Atofina which brings the Aubris decision into question Employee of J&R Valley died working for Aubris, an oil and gas operator Aubris sought additional insured coverage from J&R Valley pursuant to AI provision in service contract 24 R OYSTON R AYZOR Est. 1892

25. J&R Valley AI End. Provided: Transocean Policy Provides: Any person or organization that you agree in a written contract for insurance to add as an additional protected person under this agreement is also a protected person for the following if that written contract for insurance specifically requires such coverages for that person or organization…. AI coverage is to be provided where Transocean is obliged by any oral or written Insured Contract or where required by written contract, bid or work order 25 R OYSTON R AYZOR Est. 1892

26. J&R/Aubris Service Agreement AI Provision: BP/Transocean Drilling Contract Service Provision: UNITED and its subsidiaries, affiliated companies, co-owners, partners and joint venturers (if any), and their respective members, managers, officers, directors, agents, and employees shall be named as additional insureds in each of Contractors policies, except Workers Compensation; however, such extension of coverage shall not apply with respect to any obligations for which UNITED has specifically agreed to indemnify Contractor. [BP], its subsidiaries and affiliated companies, co-owners, and joint venturers, if any, and their employees, officers, and agents shall be named as additional insureds in each of [Transoceans] policies, except Workers Compensation for liabilities assumed by [Transocean] under the terms of this Contract. 26 R OYSTON R AYZOR Est. 1892

27. Aubris held that word specifically in AI provision in service agreement referred to a separate and extra-contractual agreement whereby Aubris agreed to contractually indemnify J&R The under the terms of this Contract language in the BP/Transocean AI Provision can only be reasonably construed to refer to the contractual indemnity provisions in the Drilling Contract 27 R OYSTON R AYZOR Est. 1892

28. Fifth Circuit held that the language of the policy alone determines AI coverage as long as the additional insured and indemnity provisions in the Drilling Contract are separate and independent Transocean argues additional insured and indemnity provisions in the Drilling Contract are not separate and independent: they are tied together by the for liabilities assumed by Contractor under the terms of this Agreement language 28 R OYSTON R AYZOR Est. 1892

29. The Texas Supreme Courts Getty decision addressed this issue when there was two insurance provisions, one supporting the contractual indemnity provision and a separate additional insured provision No Texas case has addressed this issue when the for liabilities assumed by contractor under this Contract is in the additional insured provision tying the additional insured coverage to the risks assumed in the indemnity provisions in the contract 29 R OYSTON R AYZOR Est. 1892

30. Whether Evanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d 660 (Tex. 2008), compels a finding that BP is covered for the damages at issue, because the language of the umbrella policies alone determines the extent of BPs coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the Drilling Contract are separate and independent? Whether the doctrine of contra proferentem applies 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? 30 R OYSTON R AYZOR Est. 1892

31. 5 th Circuit relied on the rule in part that, if an insurance coverage provision is susceptible to more than one reasonable interpretation, the court must interpret that provision in favor of the insured, so long as that interpretation is reasonable. Some courts have recognized a sophisticated insured exception to this rule when the insured shares bargaining position to change the policy terms Texas Supreme Court will decide whether that exception exists under Texas law 31 R OYSTON R AYZOR Est. 1892

32. In Becker, Baker and Tidewater entered into a time-charter Baker and Tidewater indemnified each other pursuant to knock-for-knock contractual indemnity provisions Tidewater was required to name Baker as an additional insured in its PI policy in the time-charter Baker employee was hurt, and Baker wanted additional insured coverage under Tidewaters P&I policy But under the knock-for-knock indemnity provisions, Baker was required to indemnify Tidewater for the Baker employees injuries 32 R OYSTON R AYZOR Est. 1892

33. The AI provision in the Drilling Contract provided as follows: [Tidewater] shall include CHARTERER [Baker], in its capacity as time-charterer of the vessel, as an additional assured, but only with respect to the risks assumed by OWNER [Tidewater] in this Charter. The but only with respect to the risks assumed by [Tidewater] in this Charter. clause is very similar to the clause in the BP/Transocean Drilling Contract 33 R OYSTON R AYZOR Est. 1892

34. The Tidewater P&I Policy AI provision provided as follows: [T]he unqualified word Assured includes…any person, organization, trustee or estate to whom or to which the Named Assured [Tidewater] is obligated by virtue of a contract or agreement to include or name as an assured, co-assured or additional assured. This Policy language is very similar to the Transocean Policy language: where Transocean is obliged by any oral or written Insured Contract or where required by written contract, bid or work order 34 R OYSTON R AYZOR Est. 1892

35. 35 R OYSTON R AYZOR Est. 1892

36. Service Contractors and their Insurers may need to tighten the AI language in their policies Where a party is being made an additional assured under the policy by virtue of a contractual obligation to do so, the insurance provision must limit such coverage to those indemnity obligations specifically assumed under the contract and should state that the provisions in the contact requiring a party to be provided additional assured coverage are incorporated into and made a part of the policy by reference 36 R OYSTON R AYZOR Est. 1892

37. Did Drilling Contract require BP to contractually indemnify Transocean for gross negligence? If so, did the contractual indemnity obligation to indemnify for gross negligence extend to punitive damages? Did Drilling Contract require BP to contractually indemnify Transocean for penalties under the Clean Water Act? 37 R OYSTON R AYZOR Est. 1892

38. Article 25.1 in the Drilling Contract stated as follows: 25.1INDEMNITY OBLIGATION Except to the extent any such obligation is specifically limited to certain causes elsewhere in this contract, the parties intend to and agree that the phrase shall protect, release, defend, and indemnify and hold harmless means that the indemnifying party shall protect, release, defend, indemnify, and hold harmless the indemnified party or parties from and against any and all claims, demands, causes of action, damages, costs, expenses (including reasonable attorneys fees), judgments and awards of any kind or character, without limit and without regard to the cause or causes thereof, including preexisting conditions, whether such conditions be patent or latent, the unseaworthiness of any vessel or vessels (including the drilling unit), breach of representation or warranty, expressed or implied, breach of contract, strict liability, tort, or the negligence of any person or persons, including that of the indemnified party, whether such negligence be sole, joint or concurrent, active, passive or gross or any other theory of legal liability and without regard to whether the claim against the indemnitee is the result of an indemnification agreement with a third party. BP argued that indemnity clause purporting to include gross negligence is void as against public policy 38 R OYSTON R AYZOR Est. 1892

39. DC Distinguished authority invalidating releases between contractual parties that release liability for gross negligence as opposed to contractual indemnity for injuries to third parties DC held that if Transocean committed gross negligence that caused pollution originating below the surface of the water, public policy would not bar its claim for contractual indemnity from BP for compensatory damages 39 R OYSTON R AYZOR Est. 1892

40. DC held that public policy precluded contractual indemnity for punitive damages which might arise if Transocean is found grossly negligent Why? Punitive damages are intended to punish and would not punish if could pass punitive damages to another party 40 R OYSTON R AYZOR Est. 1892

41. DC held that public policy invalidated the Drilling Contracts indemnity clause to the extent it includes civil penalties under the CWA? Why? Penalties under CWA are designed to punish 41 R OYSTON R AYZOR Est. 1892

42. DC found that a breach of contract under the right circumstances might preclude a right to contractual indemnity as would an act on the part of the indemnitee which materially increases the risk or prejudices the right of the indemnitor could discharge the indemnitor to the extent he has been damaged as a result of that act DC deferred ruling on this issue 42 R OYSTON R AYZOR Est. 1892

43. Houston Office Pennzoil Place 711 Louisiana St., Suite 500 (713) 224-8380 Galveston Office The Hunter Building 306 22 nd St, Suite 301 Galveston, Texas 77550 (409) 763-1623 43 Corpus Christi Office Frost Bank Plaza 802 N. Carancahua, Suite 1300 Corpus Christi, Texas 7840 (361) 884-8808 Rio Grande Valley Office 55 Cove Circle Brownsville, Texas 78521 (956) 542-4377 San Antonio Office University of Phoenix Building 8200 I.H. 10 West, Suite 610 San Antonio, Texas 78230 (210) 524-9696 R OYSTON R AYZOR Est. 1892