BP Plc, which has paid more than $28 billion for the 2010 Gulf of Mexico oil spill, asked a Texas court to let it tap into $750 million in Transocean Ltd.’s insurance policies on the doomed Deepwater Horizon rig.

BP filed claims with Transocean’s carriers in 2010, seeking to tap a $50 million primary policy issued by Ranger Insurance and $700 million in excess coverage from Lloyd’s of London and other underwriters. The carriers asked the court overseeing the spill litigation to rule that BP wasn’t entitled to unlimited access to Transocean’s insurance.

BP lost its battle for coverage at a lower court, won reversal on appeal, then saw that victory erased last year as the U.S. Court of Appeals in New Orleans withdrew its original opinion. The panel sent the case to the Texas Supreme Court, which held oral arguments today in Austin, to determine whether the reversal conflicts with state law.

“Transocean promised BP very broad coverage in the drilling contract,” Allan B. Moore, BP’s lawyer, told the court. BP paid Transocean a daily rate of $533,000 and expected part of that to pay for insurance coverage, he said.

“All parties agree that BP is an insured,” he said. “The sole issue in dispute is the scope of BP’s coverage.”

Blanket Coverage

Reagan W. Simpson, Transocean’s attorney, countered that BP is trying to expand a limited policy to blanket coverage, “What BP wants to argue is that if there is a sliver of assumed liability, it makes them covered for all liabilities,” he told the court.

Under BP’s interpretation, the policy wouldn’t be limited to the Macondo well project where the spill happened, leading to an “absurd” result — “worldwide liability coverage,” Simpson said.

Justice Eva Guzman asked BP’s lawyer whether the company’s view of the policy would result in Transocean’s providing global coverage beyond the limits of the Deepwater Horizon incident. Guzman said that the insurance coverage needed to be “reasonable.”
‘Unambiguous Language’
“If they want to limit coverage, they need to do it by clear and unambiguous language in the insurance policy,” replied BP’s attorney, David B. Goodwin.

The Texas justices didn’t indicate when they will rule on the dispute.

The maneuvering over insurance coverage comes as a watershed ruling by a federal judge may push the final cost to London-based BP for the catastrophe to more than $50 billion, wiping out years of profits and highlighting the risks of drilling as the industry pushes into deeper waters and ice-bound Arctic fields.

Energy industry associations representing owners of most of the world’s drilling rigs and insurance syndicates covering global exploration are watching the case intently. They weighed in with legal arguments of their own, supporting Transocean, according to court filings.

At issue is whether BP can claim that insurance policies bought by Transocean covered the oil company for the disaster, or if the Macondo well drilling contract limited coverage.

Missing Comma

BP argues the drilling contract skipped a needed comma, and that the omission either granted access to coverage or created ambiguity that triggered an exception. Under Texas law, an ambiguous insurance contract would be interpreted in its favor, BP contends.

The clause in the drilling agreement reads that BP, its subsidiaries and workers would be “named as additional insureds” in Transocean’s polices “except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of this contract.”

BP contends that because there isn’t a comma after the words “workers’ compensation,” this leaves open coverage liability for oil discharged from the well. Insurers could have inserted “standard language” to restrict coverage and “cannot rewrite the policies to add those restrictions now,” BP said.

Transocean’s Insurance

BP also argues that the drilling contract has no bearing on Transocean’s insurance policies and those policies don’t bar BP from coverage. There was “no language in the policy to limit the scope of indemnity coverage,” Moore, BP’s lawyer, told the panel today.

BP’s pollution liability isn’t covered by Transocean’s insurance policies and is excluded from the drilling contract, Transocean says, because the rig owner agreed to cover BP as “an additional insured only for liabilities assumed by Transocean.”

The contract was clear and, under Texas law, “BP may not demonstrate an ambiguity by relying on missing punctuation,” Transocean’s lawyers said in court papers in January.

The disputed language with the missing comma is standard workers’ compensation coverage in Texas, Simpson, Transocean’s lawyer, told the court today. “You cannot have a workers’ compensation policy that pays benefits to somebody who is not your employee.”

The clause didn’t grant blanket coverage to BP, he said.

Drilling Contract

The policies and the drilling contract aren’t ambiguous, Lloyd’s told the Texas Supreme Court in February.

“Here, the parties did not intend and did not negotiate unlimited additional insured coverage for BP,” the insurer said. Agreeing with BP may mean that the company can access all $750 million of Transocean’s insurance, the carrier said.

The decisions in the courts have been mixed.

U.S. District Judge Carl Barbier in November 2011 ruled that BP wasn’t entitled to Transocean’s insurance for below- surface pollution liabilities, finding the drilling contract precluded it. “The mere absence of a comma does not create an ambiguity,” Barbier wrote.

Pollution Liabilities

“The court finds that BP, under the drilling contract, assumed responsibility for Macondo well oil release pollution liabilities,” Barbier said. “Because Transocean did not assume these liabilities, there is no additional insurance obligation in favor of BP for these liabilities.”

The New Orleans appeals court in March 2013 reversed Barbier. “BP is entitled to coverage under each of Transocean’s policies as an additional insured as a matter of law,” the three-judge appeals panel said in its unanimous decision, which considered only the insurance policies, not the drilling contract.

Five months later, the appeals court withdrew the opinion and bounced the matter to the Texas Supreme Court to interpret how ambiguities in insurance provisions should be considered under state law and whether the drilling contract should also be factored into the insurance coverage.

The appellate court noted that the insurers weren’t involved in drafting the drilling contract.

“Thus construing ambiguities in that contract against them might be inappropriate,” the court said.

The appeals court sent the question to the Texas Supreme Court because it involves a matter of that state’s contract law, said Anthony Sabino, a law professor at St. John’s University in New York who specializes in complex litigation. A state’s high court is in charge of interpretations of the state’s contract law, he said.

‘An Ambiguity’

“An ambiguity doesn’t exist just because one party says it does,” Sabino said. The court will look at the contract to determine whether BP can be covered by Transocean’s policies. “Whatever the Supreme Court of Texas decides, that’s what the contract will be read to mean,” he said. “Then it goes back to Barbier to apply” the law.

The U.S. Supreme Court isn’t likely to overturn what the Texas judges decide, he said.

The Macondo blowout and the explosion that followed killed 11 workers and set off the worst offshore oil spill in U.S. history. The accident and spill led to thousands of lawsuits against BP and its partners and contractors. The lawsuits over economic losses and personal injuries have been combined before Barbier.

The company had set aside $43 billion to cover all the costs of the spill, and so far has paid out more than $28 billion for response, cleanup and claims. The ultimate cost is “subject to significant uncertainty,” BP said in a July 29 regulatory filing.

Barbier this month found BP acted with gross negligence in setting off the spill. He apportioned fault for the disaster at 67 percent for BP, 30 percent for Transocean and 3 percent for Halliburton Co., which provided cementing services for the project.

The case is In Re Deepwater Horizon, 13-0670, Supreme Court of Texas (Austin). The appeal is In Re-Deepwater Horizon, 12-30230, U.S. Circuit Court of Appeals for the Fifth Circuit (New Orleans). The lower court case is In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).
–With assistance from Laurel Calkins in Houston.