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Presenting a live 90-minute webinar with interactive Q&A
Oil & Gas Contracts:
Structuring Indemnification and
Additional Insured Provisions Navigating Anti-Indemnity Statutes and Negotiating Risk Allocation
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, MAY 10, 2016
John H. Denton, Managing Director, Marsh USA, New York
Harold J. Flanagan, Partner, Flanagan Partners LLP, New Orleans
C. Brannon Robertson, Partner, Fernelius Alvarez Simon, Houston
Marcus R. Tucker, Partner, Phelps Dunbar, Houston
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Oil & Gas Contracts: Structuring Indemnification and Additional Insured Provisions
Risk Allocation Terms and Choice of Law
May 10, 2016
Harold J. Flanagan FLANAGAN PARTNERS LLP
Risk Allocation Terms
6
Terms such as “indemnity” and “arising from” are used casually
But there are important differences among risk allocation terms
Using the wrong term creates risk Learn the vocabulary and the nuance of each term
7
Common risk shifting terms: ◦ Indemnify ◦ Release ◦ Hold harmless ◦ Defend
Scope terms: ◦ “For” ◦ “Arising from” ◦ “Related to”
8
“For” “Arising
from”
“Related
to”
Narrow Broad
9
Broad reciprocal – includes contractors and subcontractors
Narrow – each party responsible for its own employees and property
Variations – modified reciprocal; fault-based reciprocal; hybrid
Fault-based or “at law” – not really risk allocation Type I, II, III – based on the degree of fault to be
considered
10
Pass through indemnity Carve-outs “Catastrophic” or “special” events
11
Know the terms Use the right term to meet the common intent
“Chalk talk” or whiteboard the provision Will it work the way you expect?
12
Choice of Law
13
Basic considerations Restatement approach OCSLA Maritime Special issues
14
Selection of applicable law should not be made mechanically, i.e., the law of the parent company’s headquarters
Serious consideration must be given to the effect of the chosen state’s law: ◦ anti-indemnity acts ◦ implied warranty law ◦ the location of the majority of work or contacts ◦ whether that selection of law will be enforceable under state law
Applicable law can easily mean success or failure
15
Parties are generally free to insert a choice of law provision in a contract, however choice of law provisions are not absolute
Most states follow the Restatement (Second) of Conflicts of Law Restatement 187:
1. The law of the chosen state will be applied if the parties could have inserted a specific and valid provision in the contract (instead of selecting a certain state’s law)
16
If there is a conflict between the chosen law and the forum, the chosen law will be upheld unless:
1. Lack of substantial relationship, or 2. Contrary to a fundamental public policy of a state
which has a materially greater interest
17
State with most signification relationship to the parties and the transaction using Section 188 factors
State with most significant relationship to the issue has a “materially greater interest”
than chosen state If state with most significant relationship does not have a materially greater interest
than the chosen state: ◦ choice of law provision is upheld
If state with the most significant relationship has materially greater interest: ◦ court decides whether law of chosen state would be contrary to a “fundamental
policy” of state with most significant relationship
18
OCSLA “situs” ◦ Focus-of-the-contract test ◦ Where most of the work is to be performed ◦ Location of underlying tort unimportant
Federal maritime law does not apply State law not inconsistent with federal law Super choice of law clause
State law applies as surrogate federal law if each of the following is satisfied:
19
Consider: ◦ Geographic proximity ◦ Federal agency determinations ◦ Extension of traditional boundaries ◦ Prior court decisions
Do not consider: ◦ Evidence of the parties’ intent
20
Must be a link between the contract services and the operation of a vessel ◦Contractor need not provide a vessel ◦ Involvement of a vessel is not determinative
21
Personal Injury ◦ Davis & Sons
Part 1 – historical treatment Part 2 1. What does the specific work order in effect at the time of the injury
provide? 2. What work did the crew assigned under the work order actually do? 3. Was the crew assigned to work aboard a vessel in navigable waters?
22
4. To what extent did the work being done relate to the mission of that vessel?
5. What was the principal work of the injured worker? 6. What work was the injured worker actually doing at the time of the
injury? Property Damage
◦ Principal obligation of the contract?
23
Lewis, Theriot, Dupre, Dupont – contract to provide drilling services aboard a special purpose vessel is maritime
Corbitt, Campbell, Demette – contract to provide casing services aboard a vessel provided by another party is maritime
Lefler – contract to provide catering services on a fixed platform and cleaning services on a vessel adjacent to the platform is maritime where claim arises out of latter obligation
Hoda - torquing down BOP stacks from jack-up drilling rig used as a work platform
24
Thurmond – contract to provide wireline services on fixed structures using a transportation barge is non-maritime
Laredo – contract to construct a stationary platform is non-maritime Union Texas Petroleum – contract to construct an offshore pipeline is
non-maritime Alleman – contract to provide helicopter services is non-maritime
25
Product liability claim Damage caused when defective crane dropped platform module
in GOM All parties assume maritime law applies Fifth Circuit concludes there is OCSLA jurisdiction Maritime law held not to apply – not related to maritime
commerce
26
Maritime Choice of Law Clause OCSLA – unenforceable Non-OCSLA – depends State Choice of Law Clause Maritime – enforceable OCSLA – unenforceable State – apply conflicts of laws rules
27
Multi-state; wet and dry operations ◦ Alternate provisions?
New Mexico ◦ No relief ◦ Plan for indemnity not to work ◦ Forum
Wyoming - Seems to allow application of Texas law Louisiana – Cannot contract out of LOIA
28
Belt and suspenders approach ◦Savings/severability clause ◦Alternative provisions ◦Specify that the law chosen is the “substantive law of the state, exclusive of its conflicts of law principals.”
29
Identify the potentially applicable law Apply law for all circumstances Have a back-up plan
30
“Everybody has a plan until they get punched in the face.”
- Mike Tyson
31
Harold J. Flanagan FLANAGAN PARTNERS LLP
504/569-0062 [email protected]
http://flanaganpartners.com/harold_flanagan.html
32
OILFIELD ANTI-INDEMNITY ACTS
A restriction on the freedom to contract
The acts prohibit or limit agreements that require indemnity for a party’s own negligence
Rationale: perceived disparity in bargaining power; “an inequity is foisted on certain contractors”
Four states have such acts: Texas, Louisiana, New Mexico, and Wyoming
34
TEXAS
Tex. Civ. Prac. & Rem. Code § 127.001 et seq.
Applies to indemnity for personal injury and property damage.
35
TEXAS
Applies to agreements “pertaining to a well for oil,
gas, or water or to a mine for a mineral.” Tex. Civ. Prac. & Rem. Code § 127.003.
Extends past the well-head to encompass collateral services such as salt-water disposal. Tex. Civ. Prac. & Rem. Code § 127.001(4).
Does not apply to pipelines, radioactive injuries, pollution property damage, reservoir damage, wild well control, and other specific events. Tex. Civ. Prac. & Rem. Code §§ 127.001(4)(B), 127.004.
36
TEXAS Parties can insure around the restrictions in the Texas
Act. Tex. Civ. Prac. & Rem. Code § 127.005.
If the contract calls for mutual indemnity (reciprocal), then the provision is valid up to the lowest amount of obtained coverage. The parties do not have to agree on the amount of coverage in the contract. Further, the amounts of coverage obtained by the parties can differ, but the lower amount of coverage will set the limit. Ken Petroleum Corp v. Questor Drilling Corp., 24 S.W.3d 344, 346 (Tex. 2000).
If there is a unilateral indemnity obligation in the parties’ contract, then the amount of required insurance cannot exceed $500,000.
37
TEXAS Other Issues:
Additional insured provisions, while similar in some ways to indemnity provisions, are not barred by the Texas Act. Getty Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d 794, 804 (Tex. 1992).
Waiver of subrogation provisions are also not void under the Texas Act. Tesoro Petro. Corp. v. Nabors Drilling USA, Inc., 106 S.W.3d 118, 131 (Tex. App.—Houston [1st Dist.] 2002).
38
LOUISIANA La. R.S. 9:2780
Applies to personal injury or death claims; no application to indemnity provisions for property damage.
Two-part test for determining whether indemnity provision is barred: (1) must be an agreement that pertains to a well, and (2) related to the exploration, development, production or transportation of oil, gas, or water. Transcontinental Gas Pipe Line Corp. v. Transportation. Ins. Co., 953 F.2d 985, 991 (5th Cir. 1992).
39
LOUISIANA In practice, not always easy to determine when the
Louisiana act applies.
Lanclos v. Crown DBL Inc., 08-813 (La. App. 3 Cir. 12/10/08) 1 So.3d 685, 688-89 (Louisiana Act did not apply to incident at saltwater disposal well).
Verdin v. Ensco Offshore Co., 104 F. Supp.2d 682, 688-90 (W.D. La. 2000), aff’d, 255 F.3d 246 (5th Cir. 2001) (act did apply to a personal injury case involving a worker performing services on a rig laid up in a yard).
40
LOUISIANA Louisiana Act invalidates additional insureds and
subrogation waivers. Babineaux v. McBroom Rig Bldg. Serv., Inc., 806 F.2d 1282, 1284 (5th Cir. 1987).
Exception: if the indemnitee pays the insurance premiums associated with the additional insured coverage. Marcel v. Placid Oil Co., 11 F.3d 563, 569-70 (5th Cir. 1994).
41
NEW MEXICO N.M. Stat. Ann. § 56-7-2.
Statute does not limit the types of damages covered by the act, and therefore applies to both property and personal injury claims.
Limited in that it applies only to production activities at the well-head. Holduin v. Fulco Oil Servs., LLC, 245 P.3d 42, 47-48 (N.M. App. 2010).
New Mexico Act also prohibits naming of parties as additional insureds and waiver of subrogation rights to wire around the act. N.M. Stat. Ann. § 56-7-2(C).
42
WYOMING Wyo. Stat. Ann. § 30-1-131 et seq.
Act applies to indemnity for both property damage and bodily injury.
Restricted to work closely related to well drilling: Reliance Ins. Co. v. Chevron U.S.A. Inc., 713 P.2d 766, 770
(Wyo. 1986) (environmental clean-up at oil and gas separation facility not covered).
Union Pac. Res. Co. v. Dolenc Welding Servs., 86 P.3d 1287, 1293 (Wyo. 2004) (welding services at oil field raw water plant not covered).
43
WYOMING
Wyoming statute does not directly address additional insureds or waivers of subrogation.
44
DRAFTING CONSIDERATIONS Choice of law may not be enforceable
Pina v Gruy Petroleum Mgmt. Co., 139 P.3d 1029 (N.M. App. 2006) (ignoring Texas choice of law provision).
Roberts v. Energy Dev. Corp., 235 F.3d 935 (5th Cir. 2000) (ignoring Texas choice of law provision).
Express and conspicuous. Dresser Indus. Inc. v. Page Petroleum Inc., 853 S.W.2d 505 (Tex. 1993).
Role of Construction Anti-Indemnity Acts 45
Brannon Robertson Fernelius Alvarez PLLC
1221 McKinney Street
Suite 3200
Houston, Texas 77010-2011
T: 713.654.5176
Oil & Gas Contracts: Structuring Indemnification and Additional Insured Provisions
May 10, 2016
John Denton
Managing Director
National Casualty Claims Leader and Counsel to
Excess Casualty Practice
New York, NY
• Additional Insured Status and Endorsements • Interplay Between Additional Insured Status and Anti-Indemnity
Statutes
MARSH 48
“Insured Contract” v. Additional Insured
1. “Insured Contract” Coverage
– Coverage for Indemnitee’ s obligation to indemnify the Indemnitor
2. Additional Insured Provisions in Contracts
– Indemnitor’s agreement to add indemnitee as an additional insured
(AI)
3. Additional Insured Provisions in Policies
– Provisions in insurance policy adding indemnitee as an insured and
setting forth the scope of coverage
For party seeking to transfer risk (indemnitee), having both forms of risk
transfer – indemnification and additional insured coverage – in a
contract is preferable to one or the other. For party providing
indemnification and AI coverage, it is important to limit the scope of
indemnity as well as the indemnitee’s status as an AI.
MARSH 49
“Insured Contract” Coverage
“Insured Contract” Coverage
– Coverage for Indemnitee’ s obligation to indemnify the Indemnitor
– Coverage no broader than indemnification obligation
– Coverage provided if an “Insured Contract”
oCoverage grant may provide coverage for “Bodily Injury or
Property Damage … assumed by the Insured under an Insured
Contract.”
oCoverage may be evidenced by an exception to contractual
liability exclusion: “This exclusion does not apply to: …Liability …
assumed in an ‘Insured Contract….’”
oDefinition of “Insured Contract:” “That part of any other contract
or agreement pertaining to your business … under which you
assume the tort liability of another party….”
oDefense costs may be deemed damages and not supplementary
payments
MARSH 50
Additional Insured Provisions in Contracts
– Define (1) scope of coverage provided & (2) limit of liability
– Potential benefits to indemnitee of AI coverage:
oScope of coverage may be broader than indemnification
oAnti-indemnity statutes may not apply.
o Interpreted broadly unlike indemnification provisions.
oDefense Costs may not erode the limits
– Potential downsides of AI coverage
oPotential loss to indemnitee of right to select defense counsel
oFor indemnitor, the indemnitee’s right to coverage may be broader than
intended.
oCoverage may not extend to employee of indemnitor
oDeductibles/Self insured retentions
oOther insurance clause/subrogation
Insurance Provisions in Contracts
MARSH 51
Additional Insured Provisions in Policies
Additional Insured Provisions in Policies
– If intent is to limit indemnitee’s right to coverage (by scope or amount), policy provision or endorsement should specifically say that
– AI rights may be enforced even if contractual indemnity not applicable.
– Types of Endorsements:
General (class of indemnitees) v. Specific (specific indemnitee scheduled)
2013 ISO additional insured endorsements limit additional insured’s coverage
Manuscript endorsements
– Certificates of Insurance – Maybe insufficient to confer AI status
– Oral promises to add a vendor as an additional insured may not be effective
– Failure to procure AI coverage exposes indemnitor to breach of contract claim
MARSH 52
Anti-indemnity Statutes
Types of indemnity provisions
• Type I (Broad): Indemnitor indemnifies the indemnitee for the negligence of the indemnitee, even if the indemnitee is solely negligent.
• Type II (Intermediate): Indemnitor indemnifies the indemnitee except to the extent the liability arises from the indemnitee’s sole negligence.
• Type III (Limited): Indemnitor is only obligated to indemnify the indemnitee for the Indemnitor's negligence.
Anti-indemnity statutes
Statutes that invalidate certain types of indemnification agreements
• Some states invalidate Type I agreements to the extent the indemnitee is required to indemnify the indemnitee for the indemnitee’s sole negligence.
• Other states prohibit Type II agreements to the extent the indemnitee is required to indemnify the indemnitee for the indemnitee’s negligence, even if it is not the sole negligence.
• A minority of states have no anti-indemnity statute.
MARSH 53
Additional Insured Provisions and Anti-indemnity Statutes
• Additional insured provisions may be enforced where indemnification provisions would not
– Example: Claredon America Ins. Co. v. Prime Group Realty Services, Inc., 907 N.E.2d 6 (Ill. App.Ct. 2009) – Court upheld additional insured provision that required that a party to be an additional insured for its sole negligence notwithstanding Illinois statute prohibiting an agreement to indemnify another for the indemnitee’s negligence.
– Wyoming Anti-Indemnity Statute applicable to any well for oil, gas, or water, or mine for any mineral, does not invalidate an agreement to provide additional insured coverage for the additional insured’s negligence. Thunder Basin Coal Co., LLC v. Zurich American Ins. Co., 943 F.Supp.2d 1010 (E.D. Mo. 2013)
• Some states have extended prohibitions of anti-indemnity statutes to additional insured provisions by either statute or case law.
– Tex. Ins. Ann. §151.104 (Vernon 2013) (Invalidates additional insured provisions that requires coverage the scope of which is prohibited by the Texas anti-indemnity statute) (Does not apply to Oilfield Anti-Indemnity Act)
– Louisiana Oilfield Indemnity Act (La.Rev.Stat. § 9:2780) precludes additional insured coverage for losses caused by the negligence of the additional insured.
– Peeples v. City of Detroit, 297 N.W. 2d 839 (Mich. Ct. App. 1980) (Anti-indemnity prohibits enforcement of contractual provision requiring an indemnitor to procure insurance for the indemnitee’s negligence)
• 2013 ISO Additional Insured Endorsements
John Denton Managing Director
National Casualty Claims Leader and Counsel to Excess Casualty
Practice (212) 948-2036
New York, NY
54
Shifting Risk in a Shifting
Environment:
Impact of DEEPWATER HORIZON
55
Marcus R. Tucker
Phelps Dunbar LLP
500 Dallas Street, Suite 1300
Houston, Texas 77002
(713)225-7250
• Company A hires Company B to perform services
• Company A requires Company B to provide additional
insured coverage to Company A in all of Company B’s
insurance policies
• Company A agrees to contractually indemnify Company B
for certain risks
• When the loss occurs is the scope of recovery determined
by the indemnity agreement, the insurance policy or both
working together?
56
How Do Contractual Indemnity and
Additional Provisions Interrelate?
56
• 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
57 57
• 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. . . .
58
Transocean’s Contractual Indemnity
Obligation Regarding Pollution
58
• 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….
59
BP Contractual Indemnity
Obligation Regarding Pollution
59
60
DWH Exposes BP To Significant
Pollution Liability
60
• Custom and Practice in the Oil and Industry for
Operator and Service Contractors to allocate pollution
risk in this manner
• However, BP sought to obtain additional insured
coverage pursuant to an additional insured obligation
in the Drilling Contract for the pollution loss
61
Custom and Practice in Industry
61
• 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
[Transocean’s] policies, except Workers’ Compensation for
liabilities assumed by [Transocean] under the terms of
this Contract.
62
AI Provision In Drilling Contract Drafted
To Prevent This Says Transocean
62
• Would allow an operator as an additional insured to
fund its pollution liabilities with the contractor’s
insurance even if the parties expressly extended the
additional insured obligation in a manner to prevent
such a result.
63
Transocean Argued BP Is Attempting To
Turn Oil And Gas Risk Transfer
On Its Head
63
• Transocean’s 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;
64
BP Argued: Look At Transocean’s
Policy Only
64
• 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.
65
Transocean’s Insurance Policy
(cont’d)
65
• Transocean points to another relevant policy
provision, which provides 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.
66
Transocean’s Insurance Policy
(cont’d)
66
• In essence BP said ignore the risk allocation in the Drilling
Contract and look only to the policy
• BP argued 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 argued 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 said BP ignores Endorsement No. 1 requiring
additional insured coverage “where required by written
contract”
67
BP/Transocean Arguments
67
• Transocean wins in district court but reversed and rendered in
favor of BP by 5th Circuit
• 5th Circuit concluded that Atofina and its own decision in Aubris
say look at the Transocean Policies, not the additional insured
Provision in conjunction with the contractual indemnity provisions
in the 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
when the contractual indemnity and additional insurance
provisions in the drilling contract are separate and independent
68
What happened at the 5th Circuit?
68
• 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
69
One Other Issue:
Separate and Independent Issue
69
• 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 BP’s 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?
70
5th Circuit Withdrew Opinion and
Certified Two Questions to the Texas
Supreme Court
70
• There is no dispute that (1) BP is an additional insured under
the Transocean policies for some purposes, (2) the Drilling
Contract is an Insured Contract as defined by the insurance
policies, and (3) the Insurers are not parties to the Drilling
Contract. The parties, however, join issue regarding
whether and to what extent the policies incorporate
provisions in the Drilling Contract that may limit BP’s
status as an additional insured.
71
TSC summarizes dispute
as follows:
71
• We have long held insurance policies can incorporate
limitations on coverage encompassed in extrinsic documents
by reference to those documents.
• We do 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.
72
Key Statements by TSC:
72
• 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, and if the policy directs us
elsewhere, we will refer to an incorporated document to the
extent required by the policy. Unless obligated to do so by the
terms of the policy, however, we do not consider coverage
limitations in underlying transactional documents.
73
TSC holds:
73
• TSC relied on Urrutia v. Decker, 992 S.W.2d 440 (Tex. 1999).
• 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
insureds, but only to the extent and for the limits of liability agreed to
under contractual agreement with the named insured.”
• Given the language in the policy, a 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.
• We therefore held that the insurance policy incorporated the rental agreement
and that the rental agreement, in turn, limited the customer’s liability
protection to $20,000.00.
74
Important to look at cases relied upon
by TSC
74
• As Urrutia demonstrates, an insurance policy may incorporate
an external limit on additional-insured coverage. In such
cases, the external limit is, in effect, an endorsement to the
insurance policy that “suppl[ies] the limits of coverage and
extend[s] those benefits to the customer identified therein as
accepting the [insured’s] offer of insurance.
• By tying additional-insured coverage to the terms of an
underlying agreement, the parties procure only the coverage
the insured is contractually obligated to provide, thereby
minimizing the insurer’s exposure under the policy and the
named insured’s premiums.
75
Key Statements by TSC:
75
• Transocean’s 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;
• 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.
76
Look at Transocean Policy language:
76
• 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.
77
Transocean also contained another relevant
policy provision, which provides as follows:
77
• The language in the insurance policies providing additional-
insured coverage “where required” and as “obliged” requires us
to consult the Drilling Contract’s additional-insured clause to
determine whether the stated conditions exist.
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TSC concludes:
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[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
[Transocean’s] policies, except Workers’ Compensation for
liabilities assumed by [Transocean] under the terms of
this Contract.
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AI Provision in the Drilling Contract
Provides:
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• 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.”
• Although the underlying service contract did not require Triple
S to indemnify Atofina for Atofina’s negligence, we concluded
that the insurance policy neither included nor incorporated a
similar limitation.
• Rather, the only restriction on the scope of additional-insured
coverage under section III.B.6 was the requirement that the
claims involve Triple S’s operations or facilities.
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Important to look at TSC’s decision in Evanston Ins.
Co. v. Atofina Petrochemicals, Inc.,
256 S.W.3d 660 (Tex. 2008).
80
The other AI provision in Atofina supported TSC’s decision:
• That provision (Section III.B.5) defined an insured as “[a]ny
other person or organization who is insured under a policy of
‘underlying insurance’” but stated that ‘[t]he coverage
afforded such insureds under this policy will be no broader
than the ‘underlying insurance’ except for this policy’s Limit of
Insurance.”
• We conclude that III.B.5 encompassed a narrower extension
of coverage because it expressly incorporated limits on
coverage by reference to the underlying CGL policy.
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Evanston Ins. Co. v. Atofina
Petrochemicals, Inc., (cont’d)
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• Contracting parties and their insurers need to make sure that
additional insured endorsements incorporate the limitations
contractual indemnity provisions place on additional insured
obligations in their contracts
• Test: We do 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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What Are the Practical Effects of
the Outcome of TSC Decision?
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• A. Section II – Who Is an Insured is amended to include as an additional insured the person(s) or organization(s) showing in the Schedule…
• However:
• 1. The insurance afforded to such additional insured only applies to the extent permitted by law; and
• 2. If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured.
• B. With respect to the insurance afforded to these additional insureds, the following is added to Section III—Limits of Insurance:
• If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance:
• 1. Required by the contract or agreement; or
• 2. Available under the applicable Limits of Insurance shown in the Declarations; whichever is less. This endorsement shall not increase the applicable Limits of Insurance shown in the Declarations.
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New ISO Language
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• If Party A or B desires contractual indemnity limitations in
contract to limit additional insured obligations must make sure
the language in additional insured endorsement accomplishes
that result
• Put Anti-BP/Transocean provisions in contract
• But there are many other additional insured endorsements
waiting to cause problems and they must be avoided too
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Mandate: Must be Aware of Terms of
Additional Insured Endorsement Terms
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• Ironshore Specialty Ins. Co. v Aspen Underwriting Limited; 783 F3d 456
• Definition of “Insured”: any person or entity to whom the “Insured” is
obliged by any oral or written “Insured Contract” entered into before any
relevant “Claim” to provide insurance such as is afforded by this Policy
• Definition of “Insured Contract”: The words “Insured Contract”, whenever
used in this Policy, shall mean any written or oral contract or agreement
entered into by the “Insured” 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.
• No “where required by written contract” endorsement
• Holding: Policy incorporated limitation on amount of insurance in MSA: $5
million
85
New Fifth Circuit Decision
85
86
Another Case: Not Just Oil & Gas ExxonMobil Corporation v. National Union Ins. Co. of PA., 125th Judicial District
Court of Harris County, Texas (Houston): 2014-22667)
86
87
Another Case: Not Just Oil & Gas ExxonMobil Corporation v. National Union Ins. Co. of PA., 125th Judicial District
Court of Harris County, Texas (Houston): 2014-22667)
87
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Exxon Demands All of Savage’s
Coverage
88
Louisiana Mississippi Texas Florida Alabama North Carolina London 89
Marcus R. Tucker
Phelps Dunbar LLP
500 Dallas Street, Suite 1300
Houston, TX 77002
(713) 225-7250
89
