Shifting Risk in a Shifting Environment: Contractual Indemnity and Additional Insured Issues After Deep Water Horizo - PowerPoint PPT Presentation

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Shifting Risk in a Shifting Environment: Contractual Indemnity and Additional Insured Issues After Deep Water Horizo

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  1. Shifting Risk in a Shifting Environment: Contractual Indemnity and Additional Insured Issues After Deep Water Horizon Marcus R. Tucker Royston, Rayzor, Vickery & Williams, L.L.P. Houston Marine Insurance Seminar Royston Rayzor Est. 1892

  2. DEEPWATER HORIZON 4/10/10 • 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 Royston Rayzor Est. 1892

  3. DEEPWATER HORIZON (Cont’d) • BP assumes greater risk because BP controls well operations and receives the economic reward from the oil production • Transocean like all drilling contractors or service contractors are hired to complete a specific job • Transocean receives no economic reward for oil extracted from the well • Transocean assumed risk of pollution from the drilling rig Royston Rayzor Est. 1892

  4. Transocean’s Contractual Indemnity Obligation Regarding Pollution • 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. . . . Royston Rayzor Est. 1892

  5. BP Contractual Indemnity Obligation Regarding Pollution • 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…. Royston Rayzor Est. 1892

  6. DWH Exposes BP To Significant Pollution Liability Royston Rayzor Est. 1892

  7. Custom and Practice in Industry • 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 Royston Rayzor Est. 1892

  8. AI Provision In Drilling Contract Drafted To Prevent This Says Transocean • 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. Royston Rayzor Est. 1892

  9. Transocean Argues BP Is Attempting To Turn Oil And Gas Risk Transfer On Its Head • WOULD ALLOW AN OPERATOR AS AN ADDITIONAL INSURED TO FUND ITS POLLUTION INDEMNITY OBLIGATION WITH THE CONTRACTOR’S INSRUANCE EVEN IF THE PARTIES EXPRESSLY EXTENDED THE ADDITIONAL INSURED OBLIGATION IN A MANNER TO PREVENT SUCH A RESULT Royston Rayzor Est. 1892

  10. BP Argues: Look At Transocean’s Policy Only • 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; Royston Rayzor Est. 1892

  11. Transocean’s Insurance Policy (Continued) • 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. Royston Rayzor Est. 1892

  12. Transocean’s Policy (Continued) • Transocean points to other relevant policy provisions, which provide 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. Royston Rayzor Est. 1892

  13. BP/Transocean Arguments • 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 • 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 Royston Rayzor Est. 1892

  14. BP/Transocean Arguments (Continued) • 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” Royston Rayzor Est. 1892

  15. What DC decided? • District Court ruled for Transocean, finding that the definition of “Insured” and “Insured Contract” required examination of the Drilling Contract’s additional insured provision to determine whether the provision “obliges” Transocean to obtain coverage for BP • The District Court found that the only reasonable interpretation of the Drilling Contract’s AI provision is that BP is an additional for those liabilities that Transocean assumed under the Drilling Contract Royston Rayzor Est. 1892

  16. What happened in DC? (continued) • District Court held that the only provision of the Drilling Contract that establishes which liabilities Transocean has assumed are the indemnity provisions • With regard pollution risks, BP Transocean assumed all liabilities for pollution originating above the surface of the water while BP assumed all other possible pollution liabilities. • Therefore, no additional insured coverage was owed to BP, because the AI provision in the Drilling Contract did not require it Royston Rayzor Est. 1892

  17. What happened next at the 5th Circuit? • Reversed and Rendered in favor of BP • 5th Circuit concludes that Atofinaand its own decision in Aubrissaylook at the Transocean Policy, not the AI Provision in conjunction with the indemnity provisions in the Drilling 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 so long as the insurance provision and the indemnity clauses in the drilling contract are separate and independent Royston Rayzor Est. 1892

  18. 5th Circuit Agreed With BP • Atofina says look to policy alone to determine additional insured coverage • Transocean policy does not incorporate terms of AI provision or drilling contract • AI provision and CI provision in drilling contract are separate and independent Royston Rayzor Est. 1892

  19. Transocean Asserts Fundamental Faulty Assumptions in the 5th Circuit Opinion • 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. • Atofinadoes 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 Royston Rayzor Est. 1892

  20. Transocean Asserts Fundamental Faulty Assumptions in the 5th Circuit Opinion (cont’d) • Atofina involved whether the following following additional insured provision 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. • The Atofina court found there was coverage for Atofina’s sole negligence • There was no issue about whether the service contract’s additional insured provision only extended additional insured coverage to liabilities assumed under the contract Royston Rayzor Est. 1892

  21. Transocean Asserts Fundamental Faulty Assumptions in the 5th Circuit Opinion (cont’d) • The service agreement’s additional insured provision in Atofinadid include a clause similar to the AI provision in the Drilling Contract: [ATOFINA], its parents, subsidiaries and affiliated companies, and their respective employees, officers and agents shall be named as additional insured in each of [Triple S’s] policies, except Workers’ Compensation; however, such extension of coverage shall not apply with respect to any obligations for which [ATOFINA] has specifically agreed to indemnify [Triple S]. Royston Rayzor Est. 1892

  22. Transocean Argues That Atofina Did Not Agree To Indemnify Triple S For Any Obligation So this Clause was not at issue in Atofina Royston Rayzor Est. 1892

  23. Transocean Argues Another Issue In AtofinaIs Not At Issue In the BP/Transocean Case • Relying on the Texas Supreme Court’s Fireman Fund case, Evanston, the insurer, argued that the contractual indemnity provision did not indemnify Atofina for its own negligence, and the insurance provision was only intended to assure performance of the contractual indemnity provision • Transocean says issue is not present in the BP/Transocean case – no question there is an additional insured provision; only a question of whether additional insured obligation extends to BP for pollution risks that BP has assumed in the Drilling Contract Royston Rayzor Est. 1892

  24. That Leaves Us With the AubrisDecision • Aubris was based on Atofina which brings the Aubrisdecision into question • Employee of J&R Valley died working for Aubris, an oil and gas operator • Aubris sought additional insured coverage from J&R Valley pursuant to AI provision in service contract Royston Rayzor Est. 1892

  25. 5th Circuit: AI Endorsement In Policy Incorporates AI Contract Provision By Reference Any person or organization that you agree in a written contract for insurance to add as an additional protected person under this agreement is also a protected person for the following if that written contract for insurance specifically requires such coverages for that person or organization…. AI coverage is to be provided where Transocean “is obliged by any oral or written ‘Insured Contract’” or “where required by written contract, bid or work order” J&R Valley AI End. Provided: Transocean Policy Provides: Royston Rayzor Est. 1892

  26. 5th Circuit: AI Endorsement Incorporates AI Contract Provision By Reference (Cont’d) UNITED and its subsidiaries, affiliated companies, co-owners, partners and joint venturers (if any), and their respective members, managers, officers, directors, agents, and employees shall be named as additional insureds in each of Contractor’s policies, except Workers’ Compensation; however, such extension of coverage shall not apply with respect to any obligations for which UNITED has specifically agreed to indemnify Contractor. [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. J&R/Aubris Service Agreement AI Provision: BP/Transocean Drilling Contract Service Provision: Royston Rayzor Est. 1892

  27. Transocean Argues AI Provision In Drilling Contract Is Distinguishable • Aubris held that word “specifically” in AI provision in service agreement referred to a separate and extra-contractual agreement whereby Aubris agreed to contractually indemnify J&R • The “under the terms of this Contract” language in the BP/Transocean AI Provision can only be reasonably construed to refer to the contractual indemnity provisions in the Drilling Contract Royston Rayzor Est. 1892

  28. One Other Issue: Separate and Independent Issue • 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 Royston Rayzor Est. 1892

  29. No Case Has Address the Separate and Independent Issue In This Context • The Texas Supreme Court’s Getty decision addressed this issue when there was two insurance provisions, one supporting the contractual indemnity provision and a separate additional insured provision • No Texas case has addressed this issue when the “for liabilities assumed by contractor under this Contract” is in the additional insured provision tying the additional insured coverage to the risks assumed in the indemnity provisions in the contract Royston Rayzor Est. 1892

  30. 5th Circuit Withdrew Opinion and Certified Two Questions to the Texas Supreme Court • Whether Evanston Ins. Co. v. ATOFINAPetrochems., 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? Royston Rayzor Est. 1892

  31. Second Question Is An Important Question • 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 Royston Rayzor Est. 1892

  32. 5th Circuit Addressed The Same Issue Under Maritime Law: Becker • In Becker, Baker and Tidewater entered into a time-charter • Baker and Tidewater indemnified each other pursuant to “knock-for-knock” contractual indemnity provisions • Tidewater was required to name Baker as an additional insured in its PI policy in the time-charter • Baker employee was hurt, and Baker wanted additional insured coverage under Tidewater’s P&I policy • But under the knock-for-knock indemnity provisions, Baker was required to indemnify Tidewater for the Baker employee’s injuries Royston Rayzor Est. 1892

  33. 5th Circuit Addressed the Same Issue Under Maritime Law: Becker (Continued) • The AI provision in the Drilling Contract provided as follows: [Tidewater] shall include CHARTERER [Baker], in its capacity as time-charterer of the vessel, as an additional assured, but only with respect to the risks assumed by OWNER [Tidewater] in this Charter. • The “but only with respect to the risks assumed by [Tidewater] in this Charter.” clause is very similar to the clause in the BP/Transocean Drilling Contract Royston Rayzor Est. 1892

  34. 5th Circuit Addressed the Same Issue Under Maritime Law: Becker (Continued) • The Tidewater P&I Policy AI provision provided as follows: [T]he unqualified word “Assured” includes…any person, organization, trustee or estate to whom or to which the “Named Assured” [Tidewater] is obligated by virtue of a contract or agreement to include or name as an assured, co-assured or additional assured. • This Policy language is very similar to the Transocean Policy language: where Transocean “is obliged by any oral or written ‘Insured Contract’ or “where required by written contract, bid or work order” Royston Rayzor Est. 1892

  35. Fifth Circuit Held That The Tidewater Policy And The Time Charter Precluded AI Coverage Royston Rayzor Est. 1892

  36. What Are the Practical Effects of the Outcome of a TSC Decision? • Service Contractors and their Insurers may need to tighten the AI language in their policies • Where a party is being made an additional assured under the policy by virtue of  a contractual obligation to do so,  the insurance 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 assured coverage are incorporated into and made a part of  the policy by reference Royston Rayzor Est. 1892

  37. Other BP/Transocean Contractual Risk Transfer Issues • Did Drilling Contract require BP to contractually indemnify Transocean for gross negligence? • If so, did the contractual indemnity obligation to indemnify for gross negligence extend to punitive damages? • Did Drilling Contract require BP to contractually indemnify Transocean for penalties under the Clean Water Act? Royston Rayzor Est. 1892

  38. Other BP/Transocean Contractual Risk Transfer Issues • Article 25.1 in the Drilling Contract stated as follows: 25.1 INDEMNITY OBLIGATION Except to the extent any such obligation is specifically limited to certain causes elsewhere in this contract, the parties intend to and agree that the phrase “shall protect, release, defend, and indemnify and hold harmless” means that the indemnifying party shall protect, release, defend, indemnify, and hold harmless the indemnified party or parties from and against any and all claims, demands, causes of action, damages, costs, expenses (including reasonable attorneys fees), judgments and awards of any kind or character, without limit and without regard to the cause or causes thereof, including preexisting conditions, whether such conditions be patent or latent, the unseaworthiness of any vessel or vessels (including the drilling unit), breach of representation or warranty, expressed or implied, breach of contract, strict liability, tort, or the negligence of any person or persons, including that of the indemnified party, whether such negligence be sole, joint or concurrent, active, passive or gross or any other theory of legal liability and without regard to whether the claim against the indemnitee is the result of an indemnification agreement with a third party. • BP argued that indemnity clause purporting to include gross negligence is void as against public policy Royston Rayzor Est. 1892

  39. Certain Contractual Indemnity for Gross Negligence Not Against Public Policy • DC Distinguished authority invalidating releases between contractual parties that release liability for gross negligence as opposed to contractual indemnity for injuries to third parties • DC held that if Transocean committed gross negligence that caused pollution originating below the surface of the water, public policy would not bar its claim for contractual indemnity from BP for compensatory damages Royston Rayzor Est. 1892

  40. What About Contractual Indemnity for Punitive Damages Resulting From Gross Negligence? • DC held that public policy precluded contractual indemnity for punitive damages which might arise if Transocean is found grossly negligent • Why? Punitive damages are intended to punish and would not punish if could pass punitive damages to another party Royston Rayzor Est. 1892

  41. What About Contractual Indemnity for CWA Penalties? • DC held that public policy invalidated the Drilling Contract’s indemnity clause to the extent it includes civil penalties under the CWA? • Why? Penalties under CWA are designed to punish Royston Rayzor Est. 1892

  42. Is Transocean Entitled To Contractual Indemnity for Pollution If Drilling Contract Is Breached? • DC found that a breach of contract under the right circumstances might preclude a right to contractual indemnity as would an act on the part of the indemnitee which materially increases the risk or prejudices the right of the indemnitor could discharge the indemnitor to the extent he has been damaged as a result of that act • DC deferred ruling on this issue Royston Rayzor Est. 1892

  43. Corpus Christi OfficeFrost Bank Plaza802 N. Carancahua, Suite 1300Corpus Christi, Texas 7840(361) 884-8808Rio Grande Valley Office55 Cove CircleBrownsville, Texas 78521(956) 542-4377 Royston, Rayzor, Vickery & Williams, L.L.P.Est. 1892 Houston OfficePennzoil Place711 Louisiana St., Suite 500(713) 224-8380 Galveston Office The Hunter Building 306 22nd St, Suite 301 Galveston, Texas 77550 (409) 763-1623 San Antonio OfficeUniversity of Phoenix Building8200 I.H. 10 West, Suite 610San Antonio, Texas 78230(210) 524-9696 Royston Rayzor Est. 1892