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In Texas, many master service agreements (MSAs) related to the oil and gas industry typically contain provisions related to mandatory minimum insurance coverage and indemnity obligations. The Texas Supreme Court recently held the terms of an MSA may not be read into an insurance policy unless there is a “clear-manifestation” in the insurance policy the underlying contract is incorporated by reference.

In ExxonMobil Corporation vs. National Union Fire Insurance Company, ExxonMobil and Savage Refinery Services entered into a service agreement, which mandated Savage carry and maintain commercial general liability (CGL) insurance coverage for at least $2 million and include Exxon under “additional insureds.” Savage procured a CGL and umbrella policy underwritten by National Union Fire Insurance Company, as well as a bumbershoot policy (a marine insurance policy similar to a land-based commercial general liability) underwritten by Starr Indemnity & Liability Insurance Company and listed Exxon as an additional insured.

Following a hot water and steam incident at Exxon’s facility involving two Savage employees, Exxon settled with the two severely burned employees for $24 million. About $5 million of the settlement amount was covered by Savage’s primary insurance policies. The rest of the settlement amount was paid out of pocket by Exxon. Subsequently, Exxon sued National Union and Starr for breach of contract for wrongful denial of coverage, as well as declaratory judgment.

The trial court ruled in favor of Exxon and held that National Union, but not Starr, owed Exxon approximately $20 million as reimbursement for its out-of-pocket costs. National Union appealed. The appellate court reversed and held that the National Union umbrella policy incorporated the limits of the underlying service agreement between Exxon and Savage and Exxon’s status as an additional insured was limited to primary coverage. The Texas Supreme Court disagreed with the appellate court and reversed and remanded in favor of Exxon.

The Supreme Court clarified that it uses three principles for insurance contract interpretation: (1) Begin with the text; (2) refer to extrinsic documents only if the examined policy clearly requires doing so (“clear-manifestation” requirement); (3) and refer to extrinsic documents only to the extent of incorporation (incorporation-by-reference doctrine). The court used these three principles to analyze the two central questions in the case regarding the text of the umbrella policy: (1) Who was insured, and (2) for what coverage?

Who was insured?

The court looked to the underlying contract and found Exxon was insured. It noted the National Union umbrella policy expressly covered any additional insured under scheduled underlying insurance and looked to National Union’s primary CGL policy to determine who was an additional insured. The primary CGL policy, in turn, covered any person or organization Savage was obligated by any contract or agreement to provide insurance. The court held the underlying service agreement between Savage and Exxon was relevant for the narrow purpose of identifying Exxon as an additional insured under the National Union umbrella policy.

For what coverage?

The coverage referenced in the umbrella policy referred to coverage for the same types of risks and liabilities as the CGL policy. The court reasoned the National Union umbrella policy’s disclaimer of “broader coverage” than the primary policy prevents Exxon from demanding National Union pay for losses that the primary policy would not cover. In other words, Exxon may (and did) demand the same coverage as the primary CGL policy but at the umbrella policy’s higher limits because umbrella policies provide greater limits for the risks already covered by primary polices. The court further explained, to the extent a payout limit could be read into the umbrella policy, the underlying service agreement provides for a minimum amount of insurance — not a maximum. Lastly, the court noted the primary policy has its own payout limits and interpreting “broader coverage” in favor of National Union would defeat the purpose of an umbrella policy — to provide coverage once the primary policy is exhausted.

This Texas Supreme Court opinion highlights the importance of specificity when incorporating a separate contract into an insurance policy. When drafting insurance coverage limits in underlying contracts, such as MSAs, parties should incorporate such terms into all insurance policies in the company’s “tower” of insurance or risk a finding that the MSA coverage limits may not apply to any policy beyond the first layer of CGL coverage.