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Shifting Risk in a Shifting Environment: Contractual

Indemnity and Additional Insured Provisions – Recent Developments

Marcus R. TuckerChristopher Lowrance

Royston, Rayzor, Vickery & Williams, L.L.P.In House Summit Seminar

ROYSTON RAYZOR

Est. 1892

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Contractual provision whereby one party agrees to indemnify the other party for certain risks

Can agree to indemnify another party for party’s own negligence

Enforceability requirements

Contractual Indemnity Provisions

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What are they?

-Provision found in a contract that requires one party to name another party as an additional insured in insurance policy

-Usually done by contractual requirement and endorsement in insurance policy

-Sometimes named in policy

Additional Insured Provisions

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Company A hires Company B to perform services

Company A requires Company B to provide additional insured coverage to Company B 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?

How Do Contractual Indemnity and Additional Provisions Interrelate?

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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

DEEPWATER HORIZON 4/10/10

ROYSTON RAYZOR

Est. 1892

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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. . . .

Transocean’s Contractual Indemnity Obligation Regarding

Pollution

ROYSTON RAYZOR

Est. 1892

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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….

BP Contractual Indemnity Obligation Regarding Pollution

ROYSTON RAYZOR

Est. 1892

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DWH Exposes BP To Significant Pollution Liability

ROYSTON RAYZOR

Est. 1892

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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

Custom and Practice in Industry

ROYSTON RAYZOR

Est. 1892

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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.

AI Provision In Drilling Contract Drafted To Prevent This Says

Transocean

ROYSTON RAYZOR

Est. 1892

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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

Transocean Argues BP Is Attempting To Turn Oil And Gas

Risk Transfer On Its Head

ROYSTON RAYZOR

Est. 1892

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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;

BP Argues: Look At Transocean’s Policy Only

ROYSTON RAYZOR

Est. 1892

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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.

Transocean’s Insurance Policy (Continued)

ROYSTON RAYZOR

Est. 1892

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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.

Transocean’s Policy (Continued)

ROYSTON RAYZOR

Est. 1892

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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: “…for liabilities assumed by [Transocean] under the terms of this Contract.”

Transocean says the Atofina decision did not involve the issue of whether a clause in a drilling or service contract’s AI provision can determine whether the drilling or service contractor has an additional insured obligation for a particular risk

BP/Transocean Arguments

ROYSTON RAYZOR

Est. 1892

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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”

BP/Transocean Arguments (Continued)

ROYSTON RAYZOR

Est. 1892

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Transocean wins in district court but reversed and rendered in favor of BP by 5th Circuit

5th Circuit concludes 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

What happened at the 5th Circuit?

ROYSTON RAYZOR

Est. 1892

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Panel adopts a “policy only” approach - only policy itself may establish limits upon the extent to which an AI is covered

Panel holds that there is no relevant limitation to BP’s coverage under Transocean’s Policies

Transocean Policies do not incorporate terms of AI provision or drilling contract

Drilling Contract’s AI provision was separate and independent from BP’s agreement to forego contractual indemnity for its well pollution risks

5th Circuit Agreed With BP

ROYSTON RAYZOR

Est. 1892

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Fifth Circuit misapplied the Texas Supreme Court’s 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

Transocean Asserts Fundamental Faulty Assumptions in the 5th

Circuit Opinion

ROYSTON RAYZOR

Est. 1892

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Atofina involved whether the following additional insured endorsement 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.

Transocean says the Atofina court interpreted an AI endorsement that was unlimited in scope except to require that the claim arise from “operations performed” by or on behalf of the named insured

In contrast, Transocean argues its Policies limit the scope of additional insured coverage

Transocean Asserts Fundamental Faulty Assumptions in the 5th

Circuit Opinion (cont’d)

ROYSTON RAYZOR

Est. 1892

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Endorsement No. 1 of the Policies recognizes additional insureds only “where required by written contract”

The Policies grant additional insured status only where Transocean is “obligated by any oral or written ‘Insured Contract’” to provide insurance

The Policies define “Insured Contract” as a contract under which Transocean “assumes the tort liability of another party”

This Policy language requires resort to the Drilling Contract to determine if Transocean has assumed the tort liability of another i.e. BP’s tort liability for well pollution, which Transocean did not contractually assume

Transocean’s Position regarding its Policies

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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

One Other Issue: Separate and Independent Issue

ROYSTON RAYZOR

Est. 1892

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The Texas Supreme Court’s Getty decision addressed this issue when there were two insurance provisions, one supporting the contractual indemnity provision and a separate additional insured provision

No Texas state court case has addressed this issue when “for liabilities assumed by contractor under this Contract” or similar language is in the additional insured provision tying the additional insured coverage to the risks assumed in the indemnity provisions in the contract

No Case Has Address the Separate and Independent Issue In This Context

ROYSTON RAYZOR

Est. 1892

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The additional insured provision in Getty stated:

All insurance coverage carried by Seller, whether or not required hereby, shall extend to and protect Purchaser…to the full amount of such coverages…

Getty’s separate and independent holding:

Moreover, the additional insured provision required that NL extend insurance coverage to Getty “whether or not required [by other provisions of the contract].” Thus, the additional insured provision of the contract does not support the indemnity agreement, but rather is a separate obligation.

The BP/Transocean Drilling Contract ‘s AI provision contains language “for liabilities assumed by [Transocean] under the terms of this Contract,” which Transocean argues unlike Getty, textually ties Transocean’s insurance obligation to, and makes them dependent upon, the Drilling Contract’s indemnity, because the indemnity provisions are “terms” of the Contract.

Getty Decision

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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?

5th Circuit Withdrew Opinion and Certified Two Questions to the

Texas Supreme Court

ROYSTON RAYZOR

Est. 1892

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5th 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

Second Question Is An Important Question

ROYSTON RAYZOR

Est. 1892

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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

Where a party is being made an additional insured under the policy by virtue of  a contractual obligation to do so,  the insurance policy 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 insured coverage are incorporated into and made a part of  the policy by reference

What Are the Practical Effects of the Outcome of a TSC Decision?

ROYSTON RAYZOR

Est. 1892

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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.

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

Mandate: Must be Aware of Terms of

Additional Insured Endorsement Terms

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Royston, Rayzor, Vickery & Williams, L.L.P.

Est. 1892Houston OfficePennzoil Place711 Louisiana St., Suite 500(713) 224-8380

Galveston OfficeThe Hunter Building306 22nd St, Suite 301Galveston, Texas 77550(409) 763-1623

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ROYSTON RAYZOR

Est. 1892