Martin K. Eby Construction v. OneBeacon Insurance , 777 F.3d 1132 ( 2015 )

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
February 3, 2015
UNITED STATES COURT OF APPEALS
Elisabeth A. Shumaker
Clerk of Court
FOR THE TENTH CIRCUIT
_________________________________
MARTIN K. EBY CONSTRUCTION
COMPANY, INC.,
Plaintiff - Appellee,
v. No. 13-3076
(D.C. No. 6:08-CV-01250-MLB)
ONEBEACON INSURANCE
COMPANY, as successor to Commercial
Union Insurance Company,
Defendant,
and
KELLOGG BROWN & ROOT, LLC,
Defendant - Appellant.
--------------------------------------------------
CONTINENTAL CASUALTY
COMPANY; NATIONAL FIRE
INSURANCE COMPANY OF
HARTFORD, as successor by merger with
Transcontinental Insurance Company;
COLUMBIA CASUALTY COMPANY;
VALLEY FORGE INSURANCE
COMPANY,
Plaintiffs,
v.
ONEBEACON INSURANCE
COMPANY, as successor to Commercial
Union Insurance Company,
Defendant,
and
TRAVELERS CASUALTY AND
SURETY COMPANY, as successor to
Aetna Casualty and Surety Company;
UNITED STATES FIDELITY AND
GUARANTY COMPANY; ST. PAUL
FIRE AND MARINE INS. CO.; ATHENA
ASSURANCE COMPANY; MARTIN K.
EBY CONSTRUCTION COMPANY,
INC.,
Defendants - Appellees,
and
KELLOGG BROWN & ROOT, LLC,
Defendant - Appellant.
_________________________________
ORDER
_________________________________
Before BACHARACH, McKAY, and McHUGH, Circuit Judges.
_________________________________
This matter is before the court on appellant Kellogg Brown & Root’s Petition for
Panel Rehearing. Consistent with our order dated December 31, 2014, we also have
responses from the appellees. Upon consideration, we grant panel rehearing in part with
respect to proposition IV in the rehearing request. We otherwise deny the petition in full.
2
An amended opinion is attached to this order. The clerk is directed to substitute this
opinion for the one that issued originally on December 9, 2014.
Entered for the Court
ELISABETH A. SHUMAKER, Clerk
3
FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS February 3, 2015
Elisabeth A. Shumaker
TENTH CIRCUIT Clerk of Court
MARTIN K. EBY
CONSTRUCTION COMPANY,
INC.,
Plaintiff-Appellee,
v. No. 13-3076
ONEBEACON INSURANCE
COMPANY, as Successor to
Commercial Union Insurance
Company,
and
KELLOGG BROWN & ROOT,
LLC.,
Defendant-Appellant.
CONTINENTAL CASUALTY
COMPANY; NATIONAL FIRE
INSURANCE COMPANY OF
HARTFORD, as Successor by
Merger with Transcontinental
Insurance Company; COLUMBIA
CASUALTY COMPANY; VALLEY
FORGE INSURANCE COMPANY,
Plaintiffs,
v.
ONEBEACON INSURANCE
COMPANY, as Successor to
Commercial Union Insurance
Company,
Defendant,
and
TRAVELERS CASUALTY AND
SURETY COMPANY, as Successor
to Aetna Casualty and Surety
Company; UNITED STATES
FIDELITY AND GUARANTY
COMPANY; ST. PAUL FIRE AND
MARINE INS. CO.; ATHENA
ASSURANCE COMPANY;
MARTIN K. EBY
CONSTRUCTION COMPANY,
INC.,
Defendants-Appellees,
and
KELLOGG BROWN & ROOT,
LLC,
Defendant-Appellant.
Appeal from the United States District Court
For the District of Kansas
(D.C. No. 6:08-CV-01250-MLB
And 2:08-CV-02392-MLB)
Lauren B. Harris, Porter Hedges LLP, Houston, Texas (David M. Rapp and
Eric Barth, Hinkle Law Firm, LLC, Wichita, Kansas, and Jonna N.
Summers, Porter Hedges, LLC, with her on the briefs) for Plaintiff-
Appellant Kellogg Brown & Root, LLC.
2
James Oliver, Foulston Siefkin LLP, Overland Park, Kansas (Randall K.
Rathburn, Depew Gillen Rathburn & McInteer LC, and Jeffery A. Jordan,
Foulston Siefkin LLP, Overland Park, Kansas, with him on the brief) for
Defendant-Appellee Martin K. Eby Construction Co., Inc.
Donna J. Vobornik, Dentons US LLP, Chicago, Illinois (Geoffrey J. Repo
and William T. Barker, Dentons US LLP, Chicago, Illinois, with her on the
brief) for Defendants-Appellees Travelers, et al.
Before BACHARACH, McKAY, and McHUGH, Circuit Judges.
BACHARACH, Circuit Judge.
This appeal involves indemnity and insurance.
The indemnity issues arise out of a promise by Martin K. Eby
Construction Company’s predecessor to build a water pipeline. To build
the water pipeline, Eby engaged another company (the predecessor to
Kellogg Brown & Root, LLC), promising indemnity for claims resulting
from Eby’s work.
While building the water pipeline, Eby accidentally hit a methanol
pipeline, causing a leak. At the time, no one knew about the leak. It was
discovered over two decades later, and the owner of the methanol pipeline
had to pay for the cleanup.
The owner of the methanol pipeline sought to recover the expenses
from Kellogg and Eby. Kellogg and Eby prevailed, but Kellogg incurred
3
over $2 million in attorneys’ fees and costs. Kellogg invoked Eby’s
indemnity promise, suing Eby and its liability insurer, Travelers Casualty
and Surety Co. The district court granted summary judgment to Eby and
Travelers, leading Kellogg to appeal. Some of our issues involve Eby;
others involve Travelers.
To resolve the Kellogg-Eby portion of the appeal, we must address
the enforceability of Eby’s promise of indemnity. This promise is broad
enough to cover the pipeline owner’s claims against Kellogg for its
inaction after Eby caused the leak. But we can enforce the indemnity
promise only if it was expressly stated and conspicuous. This indemnity
clause was not conspicuous; thus, it is unenforceable.
The Kellogg-Travelers appeal turns on Kellogg’s argument that
Travelers’ insurance policy covered liabilities assumed by its insured
(Eby).
4
But, because the indemnity clause is unenforceable, it is as if Eby never
agreed to assume Kellogg’s liabilities. In the absence of Eby’s assumption
of Kellogg’s liabilities, Travelers did not insure Kellogg.
5
Accordingly, Kellogg is not entitled to indemnity from Eby or
insurance coverage from Travelers, and Eby and Travelers were entitled to
summary judgment. We affirm.
I. Standard of Review
We engage in de novo review over the summary judgment rulings.
Holmes v. Colo. Coal. for Homeless Long Term Disability Plan, 762 F.3d
1195, 1199 (10th Cir. 2014). This review requires us to consider the
evidence in the light most favorable to Kellogg. See Lenox MacLaren
Surgical Corp. v. Medtronic, Inc., 762 F.3d 1114, 1118 (10th Cir. 2014).
Viewing the evidence in this light, we decide whether a genuine issue of
material fact exists on coverage for indemnity or insurance. See SEC v.
Thompson, 732 F.3d 1151, 1156-57 (10th Cir. 2013). We conclude that no
such issue exists, and we affirm the award of summary judgment to Eby
and Travelers.
II. Eby’s Indemnity Obligation to Kellogg: The Fair Notice Rule
Eby acknowledges that the indemnity clause covers the claims that
had been asserted against Kellogg, but argues that the coverage is
unenforceable. We agree.
6
A. The Applicability of the Fair Notice Rule to Eby’s Promise
of Indemnity
To determine enforceability, we must understand the scope of Eby’s
promise. Eby promised to indemnify Kellogg for all claims, including
attorneys’ fees and expenses, “directly or indirectly arising from or caused
by or in connection with the performance or failure to perform any work”
by Eby (or its predecessor). Appellant’s App. at 504. This promise covers
the pipeline owner’s claims against Kellogg, but indemnity coverage is
unenforceable under the fair notice rule.
1. Coverage for Kellogg’s Malfeasance
Kellogg argues that Eby’s promise covers only claims involving
Eby’s malfeasance, not Kellogg’s. But this is not what the clause says: It
says that Eby will indemnify Kellogg for all claims arising “directly or
indirectly” from Eby’s work. Thus, the indemnity clause covers claims
involving Kellogg’s failure to comply with a duty created by something
Eby had done.
This clause fits our facts. Eby hit the methanol pipeline and caused
the leak, and the pipeline owner claimed that Kellogg should have taken
corrective action. Thus, the claims involved Kellogg’s wrongdoing, not
Eby’s. But Kellogg allegedly incurred a duty only because Eby had caused
a leak. Thus, the indemnity clause is broad enough to cover the pipeline
7
owner’s claims against Kellogg for Kellogg’s fault (failure to take
corrective action). The resulting issue is the enforceability of that
promise. The parties agree that enforceability is governed by Texas law,
which restricts indemnity clauses through the “fair notice rule.”
2. Kellogg’s Arguments
Kellogg makes two challenges to the applicability of the fair notice
rule:
● The fair notice rule does not apply because Kellogg is seeking
indemnity for Eby’s conduct, not Kellogg’s.
● The jury attributed fault to Eby, not Kellogg.
We reject both arguments.
Kellogg characterizes the pipeline owner’s claims as stemming from
the damage to the pipeline and points out that the jury attributed that
damage to Eby. Because all of the claims can be traced to Eby’s conduct,
Kellogg argues that it is seeking indemnity for Eby’s actions, not
Kellogg’s. As discussed above, the pipeline owner sued Kellogg for its
inaction after Eby had caused the leak. Thus, our indemnity issues are
unaffected by the jury’s finding that Eby had caused the leak.
3. Absence of a Reference to Kellogg’s Fault
Though the indemnity clause applies, it does so implicitly rather than
explicitly because there is no mention of coverage for claims involving the
8
indemnitee’s fault. Thus, we must ask: Does the fair notice rule apply
when the indemnity clause covers the indemnitee’s fault implicitly, but not
explicitly? We conclude the fair notice rule applies in these
circumstances.
The indemnity clause covers all claims arising directly or indirectly
from Eby’s acts. This language is broad enough to cover claims involving
Kellogg’s failure to take action once Eby damaged the pipeline. Because
the indemnity clause covers claims against Kellogg for its own fault, the
fair notice rule applies under Texas law. The rule applies even though the
indemnity clause doesn’t explicitly mention claims involving Kellogg’s
fault.
In applying the fair notice rule in these circumstances, we are guided
by two of the Texas Supreme Court’s decisions applying a related rule (the
“express negligence rule”): Ethyl Corp. v. Daniel Construction Co., 725
S.W.2d 705 (Tex. 1987), and Fisk Electric Co. v. Constructors &
Associates, Inc., 888 S.W.2d 813 (Tex. 1994).
In Ethyl, the court held that the express negligence rule applied when
the claims involved the indemnitee’s fault. Ethyl Corp., 725 S.W.2d at
708. The promise in Ethyl broadly covered damages incurred because of
9
the indemnitor’s conduct. Id. at 707. 1 But the claims involved the
indemnitee’s fault. Id. Under the express negligence rule, a party seeking
indemnity from the consequences of its own negligence must specifically
express that intent in the four corners of the contract. Id. This restriction
applied even though the contractual indemnification clause had not
referred to coverage for the indemnitee’s fault. Id. Thus, the Texas
Supreme Court concluded that the express negligence rule applies when an
indemnity clause implicitly covers claims involving the indemnitee’s fault.
Id.
The indemnity language in Fisk was similar. There the clause stated
that Fisk “‘shall indemnify . . . [Constructors] . . . from and against all
claims, damages, losses, and expenses, including but not limited to
attorney’s fees . . .’ arising out of or resulting from the performance of
Fisk’s work.” Fisk Elec. Co. v. Constructors & Assocs., Inc., 888 S.W.2d
813, 814 (Tex. 1994). Though the indemnity clause did not mention the
1
The Ethyl agreement stated:
Contractor shall indemnify and hold Owner harmless against
any loss or damage to persons or property as a result of
operations growing out of the performance of this contract and
caused by the negligence or carelessness of Contractor,
Contractor’s employees, Subcontractors, and agents or
licensees.
Ethyl Corp., 725 S.W.2d at 707.
10
indemnitee’s (Constructors’) fault, the Texas Supreme Court applied the
express negligence rule because the claims involved the indemnitee’s fault.
Id. at 815.
Our case resembles Ethyl and Fisk. 2 Eby’s promise of indemnity
does not mention Kellogg’s fault. Instead, the clause promises to
indemnify Kellogg for money spent defending claims caused by Eby’s
conduct. This language is broad enough to reach the pipeline owner’s
claims that
● resulted indirectly from Eby’s conduct
● even though the coverage is for claims involving Kellogg’s own
actions.
Under Ethyl and Fisk, the fair notice rule can cover promises of
indemnity bearing no mention of claims involving the indemnitee’s fault.
2
Kellogg relies on English v. BGP International, Inc., 174 S.W.3d 366(Tex. App. 2005). Kellogg’s Opening Br. at 22. There the court held that
the fair notice rule did not apply, distinguishing Fisk. English, 174
S.W.3d at 375. The court explained that in Fisk, the express negligence
rule applied because the only claim against the indemnitee was based on its
negligence. Id. In English, however, the only claims against the
indemnitee were based on the indemnitor’s negligence, not the
indemnitee’s. Id.As discussed in the text, the distinction in Fisk applies equally here.
Like the indemnity clause in Fisk, our clause serves to indemnify the
indemnitee (Kellogg) for any claims resulting from the indemnitor’s
(Eby’s) acts. But, like the claimant in Fisk, our indemnitee (Kellogg) is
being sued only for its own misconduct, not the indemnitor’s (Eby’s).
Thus, Kellogg’s reliance on English is misplaced.
11
Thus, we must apply the fair notice rule even though the indemnity clause
does not refer to claims involving the indemnitee’s (Kellogg’s) fault.
B. The Requirements of the Fair Notice Rule
We apply the fair notice rule to decide if the indemnity clause can be
enforced. Under this rule, promises to indemnify a party for its own fault
must be expressly stated and conspicuous. See Dresser Indus., Inc. v. Page
Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993).
C. Applicability of the Fair Notice Rule to the Pipeline
Owner’s Claims
Kellogg has sought indemnity for its fees and expenses to defend five
claims:
● fraud,
● nuisance,
● restitution,
● violation of a federal environmental statute, and
● violation of a state environmental statute.
The fair notice rule covers application of the indemnity clause for each
claim.
12
1. Fraud
The parties debate the application of the fair notice rule to
intentional torts, like fraud. We conclude that the fair notice rule applies
to contractual indemnification for fraud.
The Texas Court of Appeals has held that the fair notice rule restricts
clauses indemnifying a party for its intentional torts. Hamblin v. Lamont,
433 S.W.3d 51, 57 (Tex. App. 2013). Though this holding does not bind
us, it does provide guidance. RSR Corp. v. Int’l Ins. Co., 612 F.3d 851,
857-58 (5th Cir. 2010). The Texas court’s reasoning makes sense: If
Texas public policy restricts indemnity clauses covering a party’s
negligence, there would be even greater reason to restrict indemnity for a
party’s intentional wrongdoing.
Kellogg denies the applicability of the fair notice rule to claims
involving intentional torts, relying on DDD Energy, Inc. v. Veritas DGC
Land, Inc., 60 S.W.3d 880 (Tex. App. 2001), and English v. BGP
International, Inc., 174 S.W.3d 366 (Tex. App. 2005). Kellogg’s Opening
Br. at 33 n.9; Kellogg’s Reply Br. at 9. In these cases, however, the fair
notice rule didn’t apply because the contracts indemnified the indemnitees
for the indemnitors’ intentional torts, not the indemnitees’. DDD Energy,
Inc., 60 S.W.3d at 882; English, 174 S.W.3d at 369. As discussed above,
13
our indemnity clause covered claims involving the indemnitee’s
(Kellogg’s) torts. Thus, DDD Energy and Veritas do not affect our issue.
In these circumstances, we take our guidance from the Texas Court of
Appeals and conclude that the fair notice rule applies to the claim against
Kellogg for fraud.
2. Nuisance
Kellogg was sued not only for fraud, but also for nuisance. That
claim required proof of
● negligent or intentional invasion of interests or
● abnormal conduct out of place in the surroundings.
City of Tyler v. Likes, 962 S.W.2d 489, 503 (Tex. 1997). Regardless of the
claimant’s method of proof, the fair notice rule would apply.
Under Texas law, the fair notice rule applies equally to claims
involving negligence, 3 intentional conduct, 4 and abnormal activity (strict
liability). 5 Therefore, the rule would apply to all variants of a nuisance
3
See Leonard v. Aluminum Co. of Am., 767 F.2d 134, 137 (5th Cir.
1985) (applying Texas law).
4
See part II(C)(1), above.
5
See Hanson Aggregates W., Inc. v. Ford, 338 S.W.3d 39, 46 (Tex.
App. 2011) (describing nuisance, based on activity out of place in the
surroundings, as “essentially a form of strict-liability nuisance”); see also
Hous. Lighting & Power Co. v. Atchison, Topeka, & Santa Fe Ry. Co., 890
14
claim. In these circumstances, we conclude that the fair notice rule applies
to the pipeline owner’s claim against Kellogg for nuisance.
3. Federal and State Environmental Statutes
The owner of the methanol pipeline also sued Kellogg for violation
of
● the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 94 Stat. 2767, as amended, 42 U.S.C. §§
9601 et seq. (“C.E.R.C.L.A.”) and
● the Texas Solid Waste Disposal Act, Tex. Health & Safety
Code Ann. §§ 361.001-.992 (“S.W.D.A.”).
These claims also fall under Texas’s fair notice rule.
C.E.R.C.L.A. and the S.W.D.A. apply to owners, operators, and
arrangers. 42 U.S.C. § 9607(a)(1), (a)(3); Tex. Health & Safety Code
§ 361.271(a)(1), (a)(3). For owners and operators, the statutes create strict
liability. See Celanese Corp. v. Martin K. Eby Const. Co., 620 F.3d 529,
532 (5th Cir. 2010). But the pipeline owner didn’t suggest that Kellogg
was an owner or operator of the pipeline; the pipeline owner characterized
Kellogg as an “arranger.” Kellogg could qualify as an “arranger” only if it
had taken “intentional steps to dispose of a hazardous substance.”
S.W.2d 455, 459 (Tex. 1994) (“[W]e hold that parties to an indemnity
agreement must expressly state their intent to cover strict liability claims
in specific terms.”).
15
Burlington N. & Santa Fe Ry. Co. v. United States, 556 U.S. 599, 611
(2009).
Based on this definition of “arranger,” the parties disagree over the
characterization of these claims: Kellogg says they involve intentional
torts; Eby says they involve strict liability. But we have already concluded
that Texas’s fair notice rule applies to both types of claims. Thus, we need
not decide whether the pipeline owner’s claim involves strict liability or an
intentional tort. Either way, the fair notice rule would apply.
4. Restitution
The owner of the methanol pipeline also sued Kellogg for restitution.
Restitution is a remedy rather than a theory of liability. See McCullough v.
Scarborough, Medlin & Assocs., Inc., 435 S.W.3d 871, 891 (Tex. App.
2014) (“[U]njust enrichment is not an independent claim; rather it is a
theory of recovery.”). But, in its reply brief, Kellogg characterizes the
restitution claim as a quasi-contract theory, suggesting that it should be
treated like a conventional contract claim. Kellogg’s Reply Br. at 10.
According to Kellogg, this characterization would prevent application of
the fair notice rule. Id. We reject this argument.
Restitution does not provide an independent theory of liability; thus,
Texas courts have not had any reason to confront applicability of the fair
16
notice rule to restitution claims. Restitution would simply describe the
remedy being proposed (disgorgement of the benefits retained by Kellogg)
for tortious conduct.
As discussed above, the fair notice rule applies to claims involving
the indemnitee’s negligence, intentional torts, strict liability, nuisance, and
violation of C.E.R.C.L.A. and the S.W.D.A. Because the fair notice rule
applies to these theories of liability, the rule applies equally to the
remedies (like restitution).
D. Failure to Satisfy the Fair Notice Rule’s Requirement of
Conspicuousness
In these circumstances, we must apply the fair notice rule to
Kellogg’s indemnity claim. Applying the rule, we conclude the indemnity
clause is unenforceable because it is not conspicuous. 6
1. The Fair Notice Rule’s Requirement of Conspicuousness
As discussed above, indemnity clauses are enforceable only if they
expressly and conspicuously state that they cover claims based on the
indemnitee’s fault. See part II(B), above. Because we conclude that Eby’s
promise was not conspicuous, it is unenforceable.
6
The district court held that the indemnity clause did not satisfy the
express negligence requirement, but did not address the conspicuousness
requirement. Nonetheless, we can affirm on this ground if it is supported
by the record. Citizen Center v. Gessler, 770 F.3d 900, 909 (10th Cir.
2014).
17
In its reply brief, Kellogg argues that the indemnity clause satisfied
the requirement of conspicuousness. Kellogg’s Reply Br. at 14. We
disagree.
As noted above, the fair notice rule requires an indemnity clause to
be conspicuous. See part II(B), above. A clause is considered
“conspicuous” when it would attract the attention of a reasonable person.
Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 511 (Tex.
1993). Texas cases provide examples of provisions that would attract
attention, such as different size type, all capital letters in a heading, and
different colors. See Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190,
192 (Tex. 2004) (type-size and colors); Dresser Indus., Inc. v. Page
Petroleum, Inc., 853 S.W.2d 505, 511 (Tex. 1993) (all capital letters in a
heading).
The indemnity language appears on page 86 of a 197-page document.
Appellant’s App. at 263. The clause, along with the rest of the document,
is single-spaced, small type, and in black-and-white. There is nothing,
amidst the 197 pages, to capture the attention of a reasonable person.
Kellogg argues that the indemnity clause is mentioned in another
document, which is only 4 pages long. That is true. In the 4-page
document, labeled “Exhibit C,” the indemnity clause is mentioned, stating
18
that Eby’s predecessor “agree[d] to be bound by all of the terms,
provisions, conditions, indemnification, and liabilities imposed upon
Contractor under the terms and provisions of said Contract Documents to
the same extent as though the same were copied verbatim herein at length.”
Id. at 264. But, the 4-page document does not state the terms. To learn
the terms of the indemnity obligation, a reader must go to “said Contract
Documents” and read 86 pages (almost halfway into the document). The
table of contents and headings do not help because the indemnity clause is
buried in a section that doesn’t seem related to indemnity (called
“Protection of Existing Structures and Facilities”). Id. at 502.
In short, the indemnity clause bears none of the indicia that might
typically attract a reader’s attention: The clause is on page 86 of a 197-
page document, single-spaced along with the rest of the document, in
black-and-white, without a heading that calls attention to indemnity. The
clause is not conspicuous.
2. Actual Notice
In a reply brief, Kellogg argues for the first time that Eby had actual
notice of the indemnity provision. Kellogg’s Reply Br. at 11-13. We
reject this argument because it was waived and unsupported when Kellogg
responded to Eby’s summary judgment motion.
19
The argument is too late because an appellant must present its
grounds for reversal in the opening brief. Fed. R. App. P. 28(a)(8)(A). In
the opening brief, Kellogg made no mention of “actual notice.” This issue
was first raised in Kellogg’s reply brief. Thus, Kellogg waived the issue.
See, e.g., M.D. Mark, Inc. v. Kerr-McGee Corp., 565 F.3d 753, 768 n.7
(10th Cir. 2009) (“[T]he general rule in this circuit is that a party waives
issues and arguments raised for the first time in a reply brief.”).
Kellogg’s argument is not only waived, but also unsupported.
Kellogg raised the argument in district court, but failed to present any
evidence that Eby’s predecessor had known that it was promising
indemnity for claims involving the indemnitee’s own fault.
Instead, Kellogg argued that Eby’s predecessor must have known
about the indemnity terms because it signed a 4-page contract referring to
the indemnity clause. 7 But as noted above, the 4-page contract did not
contain any terms and referred only to the indemnification terms in the 197
single-spaced pages. The 4-page contract does not support a reasonable
7
In a surreply brief filed in district court, Kellogg added evidence that
Eby had admitted knowledge of the indemnity agreement. Appellant’s
App. at 1289. But, the District of Kansas does not permit the raising of
new arguments in a surreply brief. See First Specialty Ins. Corp. v. NAIS,
Inc., 459 F. Supp. 2d 1094, 1099 (D. Kan. 2006). Eby had no opportunity
to address the new arguments in either of the briefs that it filed in district
court.
20
inference of actual notice regarding the indemnity terms buried in the
middle of 197 pages. See Am. Home Shield Corp. v. Lahorgue, 201 S.W.3d
181, 186-87 (Tex. App. 2006) (holding that actual notice requires proof
beyond the fact that a party read the contract before signing it).
Kellogg’s argument of actual notice is waived and unsupported.
Thus, actual notice cannot serve as the basis for reversal.
E. Effect of the Fair Notice Rule
The fair notice rule involves a tool of contract interpretation. See
Fisk Elec. Co. v. Constructors & Assocs., Inc., 888 S.W.2d 813, 814 (Tex.
1994) (“The express negligence requirement is not an affirmative defense
but a rule of contract interpretation.”). Because the indemnity clause is
unenforceable, we read the clause as if it didn’t cover the pipeline owner’s
claims against Kellogg. See Reyes v. Storage Processors, Inc., 86 S.W.3d
344, 351 (Tex. App. 2002) (“[A]n employee who has executed a liability
waiver that is defective for failing to meet the fair notice requirements is
in the same position as if he had never signed the release, unless he had
actual knowledge of the release’s provisions.”), aff’d, 134 S.W.3d 190(Tex. 2004). As a result, Eby has no contractual obligation to reimburse
Kellogg for its attorneys’ fees or costs. In these circumstances, the award
of summary judgment to Eby was proper.
21
III. Travelers and Eby: Assumption of Contractual Liability
Kellogg sued not only Eby, but also Eby’s insurer: Travelers.
Travelers did not name Kellogg as an insured. But Travelers apparently
acknowledges that it agreed to insure parties whose liabilities were
assumed by Eby in a “covered contract.” Kellogg contends that
● even if Eby’s promise of indemnity was unenforceable, it had
been made, and
● because the promise had been made, Travelers (as Eby’s
insurer) indirectly insured Kellogg for the money spent
defending the pipeline owner’s claims.
We disagree with Kellogg. 8
Under Texas law, we must interpret the indemnity clause in a way
that does not cover damages caused by Kellogg’s fault. See part II(E),
above. As discussed above, this interpretation means that the indemnity
clause does not cover the pipeline owner’s claims against Kellogg. And
without an underlying indemnity clause covering Kellogg’s expenses, Eby
did not assume Kellogg’s liability. Therefore, Eby’s insurer (Travelers)
never agreed to provide insurance to cover Kellogg’s claims. In the
absence of insurance coverage, the district court properly granted summary
8
Because Travelers is not liable on other grounds, we need not decide
whether there is a covered contract.
22
judgment to Travelers on the claim involving Eby’s assumption of
contractual liability. 9
IV. Conclusion
Applying the fair notice rule to the indemnification clause, we
conclude that Eby’s indemnity promise was unenforceable. It was as if the
indemnity promise had never been made.
Without an enforceable indemnity promise, Eby and Travelers are
entitled to summary judgment: Eby cannot incur liability for an
unenforceable promise, and Travelers did not insure Kellogg. As a result,
we affirm the summary judgment rulings.
9
Kellogg relies on Gilbane Building Co. v. Admiral Insurance Co.,
664 F.3d 589 (5th Cir. 2011). But there the court was addressing coverage
of the indemnitee as an “additional insured.” Gilbane Bldg. Co., 664 F.3d
at 593-96. “A contract provision that extends direct insured status as an
additional insured is deemed to be separate and independent from the
indemnity agreement.” Travelers Lloyds Ins. Co. v. Pac. Emp’rs Ins. Co.,
602 F.3d 677, 682 (5th Cir. 2010). Our issue is different: the effect of an
unenforceable indemnity clause. Kellogg has not raised the argument
involved in Gilbane Building Co.: the indemnitee’s coverage as an
“additional insured.”
23