Oil & Gas Contracts: Structuring Indemnification and...
Transcript of Oil & Gas Contracts: Structuring Indemnification and...
Oil & Gas Contracts:
Structuring Indemnification
and Additional Insured Provisions Navigating Anti-Indemnity Statutes and Negotiating Risk Allocation
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TUESDAY, DECEMBER 2, 2014
Presenting a live 90-minute webinar with interactive Q&A
John H. Denton, Senior Vice President, Marsh USA, New York
Harold J. Flanagan, Attorney, Flanagan Partners, New Orleans
C. Brannon Robertson, Partner, King & Spalding, Houston
Marcus R. Tucker, Partner, Royston Rayzor, Houston
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Oil & Gas Contracts: Structuring Indemnification and Additional Insured Provisions
Risk Allocation Terms and Choice of Law
December 2, 2014
Harold J. Flanagan FLANAGAN PARTNERS LLP
Risk Allocation Terms
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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
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Common risk shifting terms: ◦ Indemnify ◦ Release ◦ Hold harmless ◦ Defend
Scope terms: ◦ “For” ◦ “Arising from” ◦ “Related to”
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“For” “Arising
from”
“Related
to”
Narrow Broad
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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
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Pass through indemnity Carve-outs “Catastrophic” or “special” events
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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?
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Choice of Law
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Basic considerations Restatement approach OCSLA Maritime Special issues
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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
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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)
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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
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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
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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:
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Consider: ◦ Geographic proximity ◦ Federal agency determinations ◦ Extension of traditional boundaries ◦ Prior court decisions
Do not consider: ◦ Evidence of the parties’ intent
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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
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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?
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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?
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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
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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
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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
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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
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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
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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.”
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Identify the potentially applicable law Apply law for all circumstances Have a back-up plan
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“Everybody has a plan until they get punched in the face.”
- Mike Tyson
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Harold J. Flanagan FLANAGAN PARTNERS LLP
504/569-0062 [email protected]
http://flanaganpartners.com/harold_flanagan.html
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ANTI-INDEMNITY ACTS
• A restriction on the freedom to contract
• Acts limit agreements that require indemnity for a party’s own negligence
• Four states: Texas, Louisiana, New Mexico, and Wyoming
• Rationale: perceived disparity in bargaining power
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TEXAS
• Tex. Civ. Prac. & Rem. Code § 127.001 et seq.
• Applies to personal injury or property damage
• Extends past the well-head to collateral services
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TEXAS
• Only applies to certain oil & gas contracts and scenarios:
― By statute, does not apply to pipelines, radioactive injuries, pollution property damage, reservoir damage, wild well control, and other specific events
― Courts tend to require a close relationship to an actual well
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TEXAS
• Can insure around the restriction
• Both a mutual indemnity cap and a unilateral indemnity cap ($500,000)
• Ken Petroleum Corp v. Questor Drilling Corp., 24 S.W.3d 344, 346 (Tex. 2000)
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TEXAS
• Additional insureds and subrogation waiver
― Getty Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d 794 (Tex. 1992)
― Certain Underwriters at Lloyd's London v. Oryx Energy Co., 142 F.3d 255 (5th Cir. 1998)
― Tesoro Petro. Corp. v. Nabors Drilling USA, Inc., 106
S.W.3d 118 (Tex. App.—Houston [1st Dist.] 2002)
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LOUISIANA
• La. R.S. 9:2780
• No application to property damage
• Two-part test for scope. Transcon Gas Pipe Line Corp. v. Transp. Ins. Co., 953 F.2d 985, 991 (5th Cir. 1992)
― Lanclos v. Crown DBL Inc., 08-813 (La. App. 3 Cir. 12/10/08) 1 So.3d 685, 688-89
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LOUISIANA
― 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)
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LOUISIANA
• Invalidates additional insureds and subrogation waivers. Babineaux v. McBroom Rig Bldg. Serv., Inc., 806 F.2d 1282, 1284 (5th Cir. 1987).
• Exception: Marcel v. Placid Oil Co., 11 F.3d 563, 569-70 (5th Cir. 1994).
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NEW MEXICO
• N.M. Stat. Ann. § 56-7-2
• Statute does not limit the types of damages covered by the act
• Limited in that it applies to production activities at the well-head. Holduin v. Fulco Oil Servs., LLC, 245 P.3d 42, 47-48 (N.M. App. 2010)
• Statute prohibits waiver of subrogation rights
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WYOMING
• Wyo. Stat. Ann. § 30-1-131 et seq.
• Property 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)
― Union Pac. Res. Co. v. Dolenc, 86 P.3d 1287, 1293 (Wyo. 2004)
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WYOMING
• Statute does not directly address additional insureds or waivers of subrogation
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DRAFTING CONSIDERATIONS
• Choice of law may not be enforceable
― Pina v Gruy Petroleum Mgmt. Co., 139 P.3d 1029 (N.M. App. 2006)
― Roberts v. Energy Dev. Corp., 235 F.3d 935 (5th Cir. 2000)
• Express and conspicuous. Dresser Indus. Inc. v. Page Petroleum Inc., 853 S.W.2d 505 (Tex. 1993)
• Role of Construction Anti-Indemnity Acts
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Oil & Gas Contracts: Structuring Indemnification and Additional Insured Provisions
DECEMBER 2, 2014
John Denton
Excess Casualty Claims Leader and Counsel to
Excess Casualty Practice
(212) 948-2036
New York, NY
• Additional Insured Status and Endorsements • Interplay Between Additional Insured Status and Anti-Indemnity Statutes
MARSH 47 December 2, 2014
“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 48
“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 December 2, 2014
MARSH 49
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
December 2, 2014
MARSH 50
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
December 2, 2014
MARSH 51
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
December 2, 2014
John Denton
Excess Casualty Claims Leader and
Counsel to Excess Casualty Practice
(212) 948-2036
New York, NY
Marcus R. Tucker
Royston, Rayzor, Vickery & Williams, L.L.P.
711 Louisiana, Suite 500
Houston, Texas 77002
(713) 224-8380
53
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?
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ROYSTON RAYZOR Est. 1892
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
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ROYSTON RAYZOR Est. 1892
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. . . .
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ROYSTON RAYZOR Est. 1892
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….
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ROYSTON RAYZOR Est. 1892
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ROYSTON RAYZOR Est. 1892
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
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ROYSTON RAYZOR Est. 1892
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.
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ROYSTON RAYZOR Est. 1892
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
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ROYSTON RAYZOR Est. 1892
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;
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ROYSTON RAYZOR Est. 1892
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.
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ROYSTON RAYZOR Est. 1892
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.
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ROYSTON RAYZOR Est. 1892
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”
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ROYSTON RAYZOR Est. 1892
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
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ROYSTON RAYZOR Est. 1892
Transocean wins
Additional Insured provision in policy and additional insured provision in Drilling Contract work together to limit BP’s additional insured coverage to the extent of contractual indemnity owed
Contractual indemnity not owed for pollution; therefore, no additional insured coverage owed
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ROYSTON RAYZOR Est. 1892
Transocean’s win 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
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ROYSTON RAYZOR Est. 1892
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
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ROYSTON RAYZOR Est. 1892
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
ROYSTON RAYZOR Est. 1892
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
71
ROYSTON RAYZOR Est. 1892
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.
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ROYSTON RAYZOR Est. 1892
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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ROYSTON RAYZOR Est. 1892
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
74
ROYSTON RAYZOR Est. 1892
Operator (Endeavor) and affiliated company (Exxcel) hire contractor (Basic) to provide workover services
Exxcell enters into MSA with Basic MSA requires Basic to name Endeavor and Exxcel as additional
insureds for $1 Million in primary CGL coverage and $4 Million in excess coverage on a primary basis
2 Basic employees get hurt at well site and sue Endeavor and Exxcel
Demand Basic’s full $50 Million limits Endeavor and Exxcel argue don’t look to MSA to determine scope
of coverage like BP Basic policies have same definition of “Insured” and “Insured
Contract” as Transocean’s policies District Court said look at the MSA’s limitations on scope of
coverage i.e., limits of $1 M and $4 million required in MSA On appeal to 5th Circuit
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ROYSTON RAYZOR Est. 1892
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ROYSTON RAYZOR Est. 1892
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ROYSTON RAYZOR Est. 1892
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ROYSTON RAYZOR Est. 1892
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ROYSTON RAYZOR Est. 1892
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ROYSTON RAYZOR Est. 1892