Wednesday, March 5, 2014 Houston, TX. 1:30 2:45 p.m. DEEPWATER HORIZON INDEMNITY AND INSURANCE LESSONS LEARNED

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1 Wednesday, March 5, 2014 Houston, TX 1:30 2:45 p.m. DEEPWATER HORIZON INDEMNITY AND INSURANCE LESSONS LEARNED Presented by Julia M. (Adams) Palmer Member Gray Reed & McGraw, P.C. The Ranger v. Transocean case is set for rehearing before the Fifth Circuit. There are many questions arising out of that case with regard to additional insured status. There are also a number of issues relating to the interplay between indemnity and insurance. This session will review the current status of the litigation, outline the various issues, and discuss the impact of decisions on additional insured status and indemnity. Copyright 2014 International Risk Management Institute, Inc. 1

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3 Julia M. (Adams) Palmer Member Gray Reed & McGraw, P.C. Julia Palmer, formerly Julia Adams, is an active and respected member of the admiralty and energy bar. Her practice focuses on marine, energy, and insurance issues. For more than 30 years, Ms. Palmer has handled marine and energy litigation, including collision cases, hurricane losses, onshore and offshore oil and gas claims, hydraulic fracturing cases, marine 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 expertise is the handling of down hole losses, environmental claims, property damage, business interruption, vessel and dock operations, and offshore and marine construction. Ms. Adams is often called upon to analyze insurance, indemnity, and defense provisions in marine and drilling contracts, 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 Sedgwick LLP where she led the firm s Admiralty and Energy Group and the Hydraulic Fracturing Task Force. She also served as the briefing attorney to the Honorable Hugh Gibson, Judge, US District Court, Southern District of Texas, Galveston Division, from 1982 to She is a member of the Fifth 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 on the Magistrate Judge Judicial Selection Panel for the Southern District of Texas. She is a proctor in the Maritime Law Association of the United States. Ms. Palmer is a past president of the Houston Propeller Club and continues to serve on the board. In 2010, she was named Propeller Club Person of the Year. She also serves on the board of International Seafarers Center and the Maritime Gala planning committee and chaired the 2008 and 2009 Maritime Gala. Ms. Palmer is a member of the planning committee for the University of Texas Admiralty and Maritime Law Conference, a trustee of the Houston Maritime Museum, and a member of the board of directors of the Judith Liebenthal Robison Ovarian Cancer Foundation. She is AV Preeminent Rated, the highest possible Martindale-Hubbell Peer Review Rating 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 While attending law school, she was the editor of the Special Maritime Edition of the South Texas Law Journal and a member of the Order of the Lytae. She received her B.A. (1979) from the University of Dayton. 3

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5 Presented By: Julia M. (Adams) Palmer Member Gray Reed & M cgraw, P.C. w.ir.com 1 Recent Developments in Indemnity and Insurance Law Lessons Learned from Deepwater Horizon 2014 IRMI Energy Risk Conference Houston, Texas March 5, 2014 Julia M. (Adams) Palmer Gray Reed & McGraw, P.C Post Oak Blvd., Suite 2000 Houston, Texas P: (713) F: (713) jpalmer@grayreed.com 2 5

6 Key Rulings from DWH Applicable law Admiralty contract analysis Arguments to void/invalidate indemnity agreements Additional insured status 3 Key DWH Orders and Opinions 1. 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 4 6

7 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 (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 5 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 6 7

8 Pending Appeal In re: Oil Spill by the Oil Rig Deepwater Horizon, No in the Supreme Court of Texas, questions certified from the US Court of Appeals for the Fifth Circuit, Case No (oral argument not yet scheduled). 7 Applicable Law 8 8

9 What Law Applies? Explosion occurred on high seas on the Outer Continental Shelf (OCS), not state waters OCSLA? State law? General maritime law? 9 Outer Continental Shelf Lands Act OCSLA allows adjacent state law to be adopted as surrogate federal law 10 9

10 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) 11 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) 12 10

11 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 13 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) 14 11

12 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) 15 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 16 12

13 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. 17 Vessel The 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)

14 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) 19 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) 20 14

15 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) 21 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) 22 15

16 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 23 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) 24 16

17 Admiralty Contract Analysis 25 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

18 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) 27 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) 28 18

19 Admiralty Contract Analysis (cont d) 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. 29 Admiralty Contract Analysis (cont d) 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) 30 19

20 Admiralty Contract Analysis (cont d) Contracts must specifically and clearly shift liability. No extrinsic evidence permitted If contract is ambiguous, apply contra proferentem rule 31 Arguments To Void/Invalidate Indemnity Agreements 32 20

21 Gross Negligence Public policy does not bar a claim for contractual indemnity for gross negligence The court considered: a) Reciprocal nature of indemnity clauses b) Sophistication of the parties and their roughly equal bargaining power c) Freedom of contract d) 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) 33 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) 34 21

22 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) 35 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 36 22

23 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. 37 Additional Insured Status 38 23

24 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. 39 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 spills and without regard to negligence of any party or parties

25 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. 41 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 insurers In 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)

26 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) 43 Fifth Circuit Certifies Questions to Texas Supreme Court After en banc hearing, Fifth Circuit panel withdraws opinion and certifies questions of Texas law to Texas Supreme Court In re Deepwater Horizon, 710 F.3d 338 (5th Cir. 2013) 44 26

27 Questions Certified to Texas Supreme Court 1. 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 45 Questions Certified to Texas Supreme Court (cont d) 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 46 27

28 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? 47 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

29 Workarounds To Avoid Uncertainty 49 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 50 29

30 Potential Workarounds: Policy Endorsement Amend or endorse the policy because that is the central document under the fourcorners rule. Explicitly limit insurance for additional insureds to the extent liability is assumed under contract by the named insured 51 Potential Workaround: Choice of Law Avoid uncertainty of Texas law by adopting a non-texas choice of law provision New York General maritime law 52 30

31 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. 53 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

32 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 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 56 32

33 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 57 Contract Review 58 33

34 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? 59 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? 60 34

35 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? 61 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? 62 35

36 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? 63 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? 64 36

37 Policy Review 65 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? 66 37

38 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? 67 Policy Review (cont d) Are the parties sophisticated insureds? Is the policy a product of negotiation? Is contra proferentem precluded? 68 38

39 Conclusion 69 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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