The Shifting & Allocation of Risks An Analysis and Discussion About the Legal Landscape of Indemnification and Insurability of Gross Negligence, Punitive Damages, and Fines and Penalties September 18, 2014
Contact Information Daniel Johnson Partner-in-Charge (Houston) Daniel represents clients in commercial, insurance and energy-related litigation. Daniel s national practice involves litigation in many state and federal courts, at both the trial and appellate levels. He litigates insurance and indemnity issues that arise from oil field services and energy sector contracts. daniel.johnson@sutherland.com (713) 470-6193 Stephany Olsen-LeGrand Attorney (Houston) Stephany represents energy producers, drilling contractors, oil field service providers, and pipeline owners in a variety of complex commercial, insurance, maritime, and energy-related disputes and in the negotiation and finalization of oil field service agreements. Recently, Stephany served on the trial team in a multi-district litigation in which she represented an international drilling contractor in unprecedented litigation arising from the Gulf of Mexico oil spill in 2010. stephany.olsen-legrand@sutherland.com (713) 470-6187 2
Overview Key Concepts for Risk Shifting & Allocation Jurisdictional Overview of Indemnity & Insurability Industry Perspective Tips & Practice Considerations Questions & Answers 3
Key Concepts for Risk Shifting & Allocation 4
Key Concepts for Risk Shifting & Allocation Types of Risk: Whose Damage? People Property Economic Loss Pollution Clean-Up 5
Key Concepts for Risk Shifting & Allocation First Party Versus Third Party Indemnity: Third-Party Liabilities Release: First-Party Liabilities 6
Key Concepts for Risk Shifting & Allocation Criminal Culpability Types of Civil Culpability Willful Misconduct Gross Negligence Negligence Strict Liability 7
Key Concepts for Risk Shifting & Allocation Types of Damages Compensatory Direct Indirect / Consequential Punitive Civil Fines & Penalties 8
Jurisdictional Overview of Indemnity & Insurability 9
Jurisdictional Overview of Indemnity & Insurability Jurisdiction General Maritime Gross Negligence * Compensatory Not punitive [Barbier] Indemnity * Civil Fines & Penalties * No [Barbier] Gross Negligence Insurability - - Civil Fines & Penalties Texas Maybe Maybe Likely yes Likely yes New York No No No No Louisiana Likely yes Maybe - - Oklahoma Likely no Maybe - - United Kingdom Likely yes Maybe Yes Yes 10
State of Texas Law Insurability of Punitive Damages Texas Law Permits Insuring Corporation for Punitive Damages Based on Grossly Negligent Acts of Employee 11
State of Texas Law Release & Indemnification for Gross Negligence Texas Supreme Court has declined to rule on the issue Atlantic Richfield Co. v. Petro. Personnel, Inc., 768 S.W.2d 724, 724 n.2 (Tex. 1989): We do not decide whether indemnity for a party s own gross negligence or willful misconduct is enforceable. Fairfield Insurance Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653, 688 (Tex. 2008): The issue of whether an agreement to indemnify a person for his own gross negligence [is] against public policy [is] an issue on which this Court has expressed no opinion. ). Some Texas appellate courts have held release / indemnity for gross negligence unenforceable Smith v. Golden Triangle Raceway, 708 S.W.2d 574 (Tex. App. Beaumont 1986, no writ): We hold a term in a release attempting to exempt one from liability or damages occasioned by gross negligence is against public policy. Akin v. Bally Total Fitness Corp., 2007 WL 475406, at *3 n.1 (Tex. App. Waco Feb. 14, 2007, pet. denied): Most [Texas] courts hold that pre-injury waivers of gross negligence are void as against public policy. 12
State of Texas Law Release & Indemnification for Gross Negligence (continued) Other Texas appellate courts have upheld a release / indemnity when contract is negotiated by sophisticated parties Valero Energy Corp. v. M. W. Kellogg Const. Co., 866 S.W.2d 252 (Tex. App. Corpus Christi 1993, writ denied): Valero and Kellogg are sophisticated entities, replete with learned counsel and a familiarity with the oil refinery industry. They negotiated their working relationship over the course of almost three years, with Kellogg submitting several proposals for Valero s review.... Valero, having a bargaining power equal to Kellogg s, agreed to the exculpatory clause in this contract. Valero possessed the resources necessary to ascertain and understand the rights it held on the date of the signing of the contract, and those it would hold in the future. Nevertheless, Valero, of its own accord, negotiated those rights away. The waiver and indemnity provision absolving Kellogg of all liability sounding in products liability and gross negligence does not offend public policy. 13
State of General Maritime Law 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. Louisiana 2012) (Honorable Carl Barbier) Facts Transocean moved for summary judgment regarding BP s obligation to indemnify it against third-party pollution claims and civil fines and penalties arising from the Macondo blowout 14
State of General Maritime Law Parties Arguments Transocean Sanctity of contract Industry standard and historical practice Risk resides with party best able to control Insurance as a form of indemnity Safety incentives remain OPA recognizes indemnity CWA penalties are remedial CWA provides rights against third party that caused incident 15
State of General Maritime Law Parties Arguments BP Indemnify for negligence or fault Indemnity for gross negligence eliminates safety incentives Indemnity for civil fines and penalties thwarts deterrent effect Defense obligations limited to payment of attorneys fees after finding indemnity obligation Core breach vitiates indemnity obligations 16
State of General Maritime Law Parties Arguments Department of Justice Indemnity for CWA fines and penalties contravenes deterrent and punishment objectives Individually tailored, thus improper to shift Equitable indemnity versus contractual indemnity Agrees that indemnity is proper for OPA 17
State of General Maritime Law Holding & Reasoning Gross negligence invalidates a release / exculpatory clause, but not reciprocal indemnities Indemnity for compensatory damages, not punitive damages, if grossly negligent No indemnity for civil fines and penalties Core breach could be a viable concept Phase 1 Findings of Fact & Conclusions of Law BP grossly negligent; Transocean and Halliburton negligent No punitive damages assessed against BP Indemnities upheld and (impliedly) no core breach 18
State of General Maritime Law Energy XXI, GOM, LLC v. New Tech Engineering, L.P., 787 F. Supp. 2d 590 (S.D. Texas 2011) (Honorable Gray Miller) Facts Energy XXI brought suit for costs incurred in a stuck pipe incident, alleging New Tech was grossly negligent New Tech filed motion for summary judgment seeking declaration that Energy XXI was contractually obligated to indemnify New Tech per MSA between the companies Holding Indemnity for gross negligence contravenes public policy Appeal taken but subsequently rendered moot 19
Industry Perspective 20
Industry Perspective Traditional Risk Allocation in Drilling Contracts Purpose Trends Indemnity Choice of Law Insurance 21
Tips & Practice Considerations 22
Tips & Practice Considerations Contractual Representations / Obligations Addressing Public Policy Concerns? Liability Caps? Indemnity for Attorneys Fees? Classification of Damages as First Party or Third Party? Are Limited Remedies Considered Releases? Arbitration Clauses? Investigatory Costs? 23
Questions & Answers 24
The Shifting & Allocation of Risks An Analysis and Discussion About the Legal Landscape of Indemnification and Insurability of Gross Negligence, Punitive Damages, and Fines and Penalties September 18, 2014