deepwater horizon - indemnity and insurance lessons learned

CIn

Wednesday, March 5, 2014Houston, TX

1:30–2:45 p.m.

DEEPWATER HORIZON—INDEMNITY AND INSURANCE LESSONS LEARNED

Presented by

Julia M. (Adams) PalmerMember

Gray Reed & McGraw, P.C.

The Ranger v. Transocean case is set for rehearing before the Fifth Circuit. There are manyquestions arising out of that case with regard to additional insured status. There are also anumber of issues relating to the interplay between indemnity and insurance. This sessionwill review the current status of the litigation, outline the various issues, and discuss theimpact of decisions on additional insured status and indemnity.

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Julia M. (Adams) PalmerMember

Gray Reed & McGraw, P.C.

Julia Palmer, formerly Julia Adams, is an active and respected member of the admiralty and en-ergy bar. Her practice focuses on marine, energy, and insurance issues.

For more than 30 years, Ms. Palmer has handled marine and energy litigation, including collisioncases, hurricane losses, onshore and offshore oil and gas claims, hydraulic fracturing cases, ma-rine and energy products liability litigation, the defense of personal injury and death actions,contract and lien claims, dock and stevedore liabilities, and subrogation litigation. Her expertiseis the handling of down hole losses, environmental claims, property damage, business interrup-tion, vessel and dock operations, and offshore and marine construction. Ms. Adams is oftencalled upon to analyze insurance, indemnity, and defense provisions in marine and drilling con-tracts, as well as complex issues arising under the Outer Continental Shelf Lands Act.

Prior to joining Gray Reed & McGraw, Ms. Palmer was a partner in the Houston office of Sedg-wick LLP where she led the firm’s Admiralty and Energy Group and the Hydraulic Fracturing TaskForce. She also served as the briefing attorney to the Honorable Hugh Gibson, Judge, US DistrictCourt, Southern District of Texas, Galveston Division, from 1982 to 1984. She is a member of theFifth Circuit Bar Association, College of the State Bar of Texas, and the Houston Mariners Club.Ms. Adams has been appointed by Chief US District Court Judge Ricardo H. Hinojosa to serve onthe Magistrate Judge Judicial Selection Panel for the Southern District of Texas. She is a proctorin the Maritime Law Association of the United States.

Ms. Palmer is a past president of the Houston Propeller Club and continues to serve on theboard. In 2010, she was named “Propeller Club Person of the Year.” She also serves on the boardof International Seafarers Center and the Maritime Gala planning committee and chaired the2008 and 2009 Maritime Gala. Ms. Palmer is a member of the planning committee for the Uni-versity of Texas Admiralty and Maritime Law Conference, a trustee of the Houston Maritime Mu-seum, and a member of the board of directors of the Judith Liebenthal Robison Ovarian CancerFoundation. She is AV Preeminent Rated, the highest possible Martindale-Hubbell Peer ReviewRating designation.

Ms. Adams frequently authors and lectures on insurance coverage and maritime law topics.

Ms. Adams earned her J.D., cum laude, from South Texas College of Law in 1982. While attend-ing law school, she was the editor of the Special Maritime Edition of the South Texas Law Journaland a member of the Order of the Lytae. She received her B.A. (1979) from the University ofDayton.

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Presented By:

Julia M . (Adams) PalmerM ember

Gray Reed & M cGraw , P.C.

IRMI.com 1

Julia M. (Adams) PalmerGray Reed & McGraw, P.C.1300 Post Oak Blvd., Suite 2000Houston, Texas 77056P: (713) 986–7240 F: (713) 986–[email protected]

2014 IRMI Energy Risk ConferenceHouston, Texas—March 5, 2014

Recent Developments in Indemnity and Insurance Law—Lessons Learned from Deepwater Horizon

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Key Rulings from DWH� Applicable law� Admiralty contract analysis � Arguments to void/invalidate indemnity

agreements� Additional insured status

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Key DWH Orders and Opinions1. In re: Oil Spill by the Oil Rig Deepwater

Horizon in the Gulf of Mexico on April 20, 2010, 747 F. Supp. 2d 704 (E.D. La. 2010)—District court order on jurisdiction under OCSLA

2. In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, 808 F. Supp. 2d 943 (E.D. La. 2011)—District court order on motion to dismiss state law claims

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Key DWH Orders and Opinions (cont’d)3. In re Oil Spill by the Oil Rig “Deepwater

Horizon” in the Gulf of Mexico, on April 20, 2010, MDL No. 2179, 2011 U.S. Dist. LEXIS 131069 (E.D. La. Nov. 15, 2011)—District court order on BP claim for additional insured status

4. In re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, 841 F. Supp. 2d 988 (E.D. La. 2012)—District court order on indemnity claims

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Key DWH Orders and Opinions (cont’d)5. In re Deepwater Horizon, 710 F.3d 338 (5th Cir.

2013) (opinion withdrawn)—5th Circuit opinion on BP’s additional insured status

6. In re Deepwater Horizon, 728 F.3d 491 (5th Cir. 2013)—5th Circuit panel opinion, after en banc hearing, withdrawing prior opinion and certifying questions to Texas Supreme Court

7. In re: Oil Spill by the Oil Rig “Deepwater Horizon,” _____ F.3d _____ (5th Cir. Feb. 24, 2014)—5th Circuit opinion affirming removal jurisdiction, CWA preemption, and dismissal of state law claim

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Pending AppealIn re: Oil Spill by the Oil Rig “Deepwater Horizon,” No. 13–0670 in the Supreme Court of Texas, questions certified from the US Court of Appeals for the Fifth Circuit, Case No. 12–30230 (oral argument not yet scheduled).

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Applicable Law

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What Law Applies?� Explosion occurred on “high seas” on the

Outer Continental Shelf (OCS), not state waters�OCSLA?�State law?�General maritime law?

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Outer Continental Shelf Lands Act� OCSLA allows adjacent state law to be

adopted as surrogate federal law

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OCSLA Jurisdiction� OCSLA jurisdiction if:�Activities causing injuries in question

could be classified as operations on the OCS involving exploration or production of minerals

�Case arises in connection with the operation

In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, 747 F. Supp. 704 (E.D. La. 2010)

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PLT Test� PLT test: OCSLA allows adjacent state law to be

adopted as surrogate federal law if� Controversy arises on situs covered by OSCLA

(subsoil, seabed, or artificial structures permanently or temporarily attached thereto)

� Federal maritime law does not apply of its own force

� State law is not inconsistent with federal law

Grand Isle Shipyard Inc., 598 F.3d 778 (11th Cir. 2010)Union Tex. Petroleum Corp. v. PLT Eng’g Inc., 895 F.2d 1043 (5th Cir. 1990)

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OCSLA/State Law Argument� Cameron and plaintiffs argued for

application of state law� Deepwater Horizon not in navigation and

affixed to sea floor� BOP on sea floor

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Priority� “Where OCSLA and general maritime law

both apply, the case is to be governed by maritime law.” Tennessee Gas Pipeline v. Houston Cas. Ins. Co., 87 F.3d 150 (5th Cir. 1996)

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General Maritime Law� With admiralty jurisdiction cases the

“application of substantive admiralty law”

Grobart Inc. v. Great Lakes Dredge & Dock Co., 513 U.S. 527 at 545 (1995)

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Admiralty Jurisdiction� Governed by the two-part test adopted by

the US Supreme Court in Sisson v. Ruby, 497 U.S. 358 (1990)

� Location test� Connection test

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The “Location Test”� Can be satisfied in two ways:

� by showing the tort occurred on navigable water or � by showing that an injury suffered on land was caused by

a vessel on navigable water.

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VesselThe word “vessel” includes every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water. 1 U.S.C. 3 (2005).

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Vessel: New Test� Structure is not a “vessel” unless a

reasonable observer, looking to structure’s physical characteristics and activities, would consider it designed to a practical degree for carrying people or things over water.Lozman v. City of Riviera Beach, Fla., 133 S. Ct.735 (2013)

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The “Connection Test”� Does the incident have a potentially disruptive

impact on maritime commerce? � Does the general character of the activity giving

rise to the incident show a substantial relationship to traditional maritime activity?Jerome Grubart, Inc. v. Great Lakes Dredge & Dock Co., 513 U.S. 527 (1995)

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Oil and Gas Operations� “Special-purpose movable drilling rigs,

including jack-up rigs, are vessels within the meaning of admiralty law.”Demette v. Falcon Drilling Co., Inc., 280 F.3d 492 (5th Cir. 2002)

� “Oil and gas drilling on navigable waters aboard a vessel is recognized to be maritime commerce.”Theriot v. Bay Drilling Corp., 783 F.2d 527 (5th Cir. 1986)

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Oil and Gas Operations (cont’d)� Maritime law “ordinarily treats an

‘appurtenance’ attached to a vessel in navigation as part of the vessel itself.”Grubart Inc. v. Great Lakes Dredge & Dock, 513 U.S. 527 (1995)

� Drill strings and BOPs in deepwater drilling operations can be appurtenances of a vessel/rig. In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, 808 F. Supp. 2d 943 (E.D. La. 2011)

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DWH Rulings� General maritime law applies� Oil pollution act applies� State law cannot be adopted as surrogate

federal law as general maritime law applies and OPA inconsistent with state law

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DWH Rulings (cont’d)� As general maritime law precludes state

law claims, state law claims were dismissed� 5th Circuit affirmed dismissal of state law

claims� Oil Pollution Act does not preclude claims

for punitive damages under general maritime law

� See also McBride v. Estis Well Serv., 731 F.3d 505 (5th Cir. 2013)

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Admiralty Contract Analysis

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Admiralty Contract Analysis� A maritime contract “should be read as a whole,

and a court should not look beyond the written language of the contract to determine the intent of the parties unless the disputed language is ambiguous.” Fontenot v. Mesa Petroleum Co., 791 F.2d 1207 (5th Cir.1996).

� No extrinsic evidence.

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Admiralty Contract Analysis (cont’d)� Contract is unambiguous if “its language as

a whole is clear, explicit and leads to no absurd consequences, and as such it can be given only one reasonable interpretation.”Chembulk Trading LLC v. Chemex Ltd., 393 F.3d 550 (5th Cir. 2004)

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Admiralty Contract Analysis (cont’d)� “Disagreement as to the meaning of a

contract does not make it ambiguous nor does uncertainty or lack of clarity in the language chosen by the parties.”Breaux v. Halliburton Serv., 562 F.3d 358 (5th Cir. 2009)

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� “A contract of indemnity should be construed to cover all losses, damages, or liabilities which reasonably appear to have been within the contemplation of the parties, but it should not be read to impose liability for those losses or liabilities which are neither expressly within its terms nor of such a character that it can reasonably inferred that the parties intended to include them within the indemnity coverage.”

Admiralty Contract Analysis (cont’d)

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� “Thus, for example, it is widely held that a contract of indemnity will not afford protection to an indemnitee against the consequences of his own negligent act unless the contract clearly expresses such an obligation in unequivocal terms.”

Corbitt v. Diamond M. Drilling Co., 654 F.2d 329 (5th Cir. 1981)


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� Contracts must specifically and clearly shift liability.

� No extrinsic evidence permitted� If contract is ambiguous, apply contra

proferentem rule


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Arguments To Void/InvalidateIndemnity Agreements

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Gross Negligence� Public policy does not bar a claim for

contractual indemnity for gross negligence� The court considered:

a) Reciprocal nature of indemnity clausesb) Sophistication of the parties and their roughly

equal bargaining powerc) Freedom of contractd) Injured party was not left without recourse (i.e.,

indemnity agreement, not a release)In re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, 841 F. Supp. 2d 988 (E.D. La. 2012)

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Punitive Damages� Contractual indemnity does not extend to

punitive damages.� Purpose of punitive damages “is to punish

the defendant for egregious conduct, teaching him not to do it again and deter others from engaging in similar behavior.”In re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, 841 F. Supp. 2d 988 (E.D. La. 2012)

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Clean Water Act Penalties� Similar to punitive damages.

� Public policy “invalidates” indemnity for Clean Water Act civil penalties under Section 311(b)(7).

In re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, 841 F. Supp. 2d 988 (E.D. La. 2012)

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Breach of Contract� In some circumstances, breach of contract

can invalidate indemnity clause� “An act on the part of an indemnitee which

materially increases the risk or prejudices the right of the indemnitor will discharge the indemnitor to the extent that he has been damaged as a result of that act.” General Ins. Co. of Am. v. Fleeger, 389 F.2d 159 (5th Cir. 1968)

� Question of fact, precludes summary judgment

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Fraud� Fraud could void an indemnity clause on public

policy grounds, given that it necessarily includes wrongdoing and involves willful conduct.

� “Mere failure to perform contractual obligations as promised does not constitute fraud but is instead breach of contract.” Kevin M. Ehringer Ent. v. McData Servs. Corp., 646 F.3d 321 (5th Cir. 2011)

� Question of fact, precludes summary judgment.

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Additional Insured Status

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Background � BP, as an additional insured, made demand

on Transocean’s insurers for full coverage for BP’s well pollution liabilities.

� Transocean intervened to protect its sole, finite sum of insurance from BP’s well pollution demands.

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BP–TO Indemnity Agreement� [TO shall assume full responsibility for] and shall

protect, release, defend, indemnity and hold [BP] harmless from and against any loss, damage, expense, claim, fine, penalty, demand or liability for pollution originating on or above the surface of the land or water, from spillsand without regard to negligence of any party or parties.

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Additional Insured Provision in Drilling Contract� [BP] shall be named as additional insured

in each of [TO’s] policies, except Workers’ Compensation for liabilities assumed by [TO] under the terms of this Contract.

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District Court Ruling� Applies “eight-corners” rule�Underlying contract determines scope of

coverage for additional insured � This interpretation reflects:�The reasonable expectations of the two

parties to the drilling contract, BP and Transocean

�The reasonable expectations of the insurersIn re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, 731 F. Supp. 2d 1352 (E.D. La. 2011).

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Fifth Circuit Reverses� Adopts a “four-corners” analysis in favor of BP� Only the policy may limit the extent to which an

additional insured is covered.� Looking only to Transocean’s policies, the 5th

Circuit holds that there is no relevant limitation to BP’s coverage under Transocean’s policies. In re Deepwater Horizon, 710 F.3d 338 (5th Cir. 2013)

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Fifth Circuit Certifies Questions toTexas Supreme Court� After en banc hearing, Fifth Circuit panel

withdraws opinion and certifies questions of Texas law to Texas Supreme CourtIn re Deepwater Horizon, 710 F.3d 338 (5th Cir. 2013)

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Questions Certified to TexasSupreme Court1. 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”

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2. Whether the doctrine of contra proferentem applies to the interpretation of the insurance coverage provision of the drilling contract under the ATOFINA case, given the facts of this case

Questions Certified to Texas Supreme Court (cont’d)

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Contra Proferentem� “Against the one bringing forth”� Construed against the drafter� Only applies if contractual provision is

ambiguous� Interpretation method of last resort� Will Texas adopt “sophisticated insured”

exception?

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Practical Effect of “Four-Corners” Rule� The well owner, which never expected, relied,

or paid for coverage, is afforded a potential windfall of insurance coverage at the expense of the insured, which negotiated and funded the policy, and the insurer that wrote the policy.

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Workarounds To Avoid Uncertainty

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Be Prepared!� Anticipate application of either the four- or

eight-corners rules� Explicitly state intentions in the contract

(including attachments, schedules, and short forms) and in all policies

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Potential Workarounds: Policy Endorsement� Amend or endorse the policy because that

is the central document under the “four-corners” rule.�Explicitly limit insurance for additional

insureds to the extent liability is assumed under contract by the named insured

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Potential Workaround:Choice of Law� Avoid uncertainty of Texas law by adopting

a non-Texas choice of law provision�New York�General maritime law

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Potential Workaround: Contracting� Specifically limit insurance

obligations in contract to indemnity obligations.

*Note: This is a good practice but may not be sufficient under four-corners rule.

� Do not include additional insured provisions in contract.

� State that contract negotiated at arms’ length, and in the event of ambiguity, contra proferentem will not apply.

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Broad Master Service Agreement, Insurance Provision� “To the extent of the liabilities assumed by

Subcontractor hereunder, all Subcontractor’s insurance policies and coverages will extend to and protect the Contractor Group to the full extent and amount of such coverage ...”

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Master Service Agreement, Restricted Insurance Provision� “Only to the extent of the liabilities

assumed by Subcontractor hereunder, all Subcontractor’s Required insurance policies and coverages will extend to and protect the Contractor Group to the full extent and amount of such coverage ...”

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Broad Additional Insured Provision� “Contractor agrees that all

of its policies of insurance, whether or not required by this Agreement, shall be endorsed to name Company as an additional insured (except for workers’ compensation coverage) on a broad form basis …”

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Restricted Additional Insured Provision� “Contractor agrees that all of its policies of

insurance, whether or not required by this Agreement (listed in Schedule X) shall be endorsed to name Company as an additional insured (except for workers’ compensation coverage) but such coverage is limited to the indemnity obligations assumed by Contractor in this Agreement on a broad form basis…”

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Contract Review

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Contract Review�Complete contract? All attachments?�Has contract expired?� Does the contract incorporate other

documents, terms, contracts, charters, parties, or terms on Internet sites?

� What are the additional terms?

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Contract Review (cont’d)� Is applicable law specified?�What law applies?�Are all contract provisions valid under

applicable law?�Are all contract provisions valid in all

locations where work is performed?� Is venue specified?� Is mediation or arbitration required?

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Contract Review (cont’d)� Is the contract between the correct parties? � Does it apply to operations in question?� Are risk transfer provisions reciprocal?� What risks are retained and not transferred

by each party?

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Contract Review (cont’d )� Are indemnity provisions supported by,

limited to, tied to, or separate from insurance provisions?

� What insurance is required of each party?� Is insurance limited to what is required or

what is available?� Is insurance coverage limited to indemnity

obligations?

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Contract Review (cont’d)� Is it an indemnity agreement or release?� Does it include indemnity for a party’s own

negligence or for gross negligence?� What is the relative position of the parties?� Any ambiguous terms?� Does the contract preclude application of

contra proferentem?� Is the contract a product of negotiation?

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Contract Review (cont’d)� Does the contract include or exclude

indemnity for fines, penalties, or punitive damages?

� Has there been a material breach of contract? Prejudice? Fraud?

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Policy Review

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Policy Review�What policies are required by the contract?�What policies are available?�Who is insured?�Who is an additional insured?�Do the policies meet contract

requirements?

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Policy Review (cont’d)�Provide cover for liability assumed by

contract?�Limit additional insured coverage to

indemnity obligations?�Fully cover anticipated exposure? �What law will be applied to interpret each

policy?� Is venue specified?�Arbitration required?

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Policy Review (cont’d)�Are the parties sophisticated insureds?� Is the policy a product of negotiation?� Is contra proferentem precluded?

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Conclusion

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Conclusion� “Certainty” is of great value in negotiating

contracts and designing insurance programs.� Given the current uncertainty of the law, it is

important to fully evaluate all contracts and insurance policies, closely analyze the risks that are transferred, and strategically plan to limit potential exposures.

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Notes


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deepwater horizon - indemnity and insurance lessons learned

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