Certain Underwriters v. Oryx Energy Company , 142 F.3d 255 ( 1998 )

REVISED, June 17, 1998
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 97-40376
_____________________
CERTAIN UNDERWRITERS AT LLOYD’S LONDON, Who are Members of
Lloyd’s Syndicates Numbered 658, 483, 741, 687, 79, 872, 535,
552, 123, 114, 741, 209, 1023, 309, 872 and 500; INDEMNITY
MARINE ASSURANCE CO LTD; ZURICH RE UK LTD.; OCEAN MARINE
INSURANCE CO LTD; COMMERCIAL UNION ASSURANCE; THE TOKIO MARINE
& FIRE; PHOENIX ASSURANCE PLC LSA; NORTHERN ASSURANCE COMPANY
LIMITED; GAN MINSTER INSURANCE COMPANY, LIMITED; TERRA NOVA
INSURANCE COMPANY LTD; PHOENIX ASSURANCE PUBLIC LIMITED;
CORNHILL INSURANCE PLC; THE YORKSHIRE INSURANCE COMPANY,
LIMITED; SKANDIA MARINE INSURANCE COMPANY (UK); SCOTTISH LION
INSURANCE COMPANY, LIMITED; HANSA RE & MARINE INSURANCE
COMPANY (UK) LIMITED; THREADNEEDLE INSURANCE COMPANY, LIMITED;
SPHERE DRAKE INSURANCE; DAI-TOKOYO INSURANCE COMPANY;
COMPAGNIE D’ASSURANCEY MARTIMES; AERIENNES & TERRESTRES
(CAMAT); AMERICAS INSURANCE COMPANY; HANSA RE-MARINE; ANGLO
AMERICAN INSURANCE COMPANY, GAN FRANCE; PHOENIX 09/01/75;
TERRA NOVA; CAMAT 1992; CORNHILL D A/C; SKANDIA MARINE;
INDEMNITY MARINE; YORKSHIRE L A/C; ZURICH RE; OCEAN MARINE;
PHOENIX LSA A/C; NORTHERN MARINE; LONDON & EDINBURGH; GAN
MINSTER; GERNERALI; SPHERE DRAKE NO. 1; SCOTTISH LION,
Plaintiffs-Appellees
Cross-Appellants,
versus
ORYX ENERGY COMPANY,
Defendant-Appellant
Cross-Appellee.
* * * * *
ORYX ENERGY COMPANY,
Plaintiff-Counterclaim
Defendant-Appellant
Cross-Appellee,
versus
LLOYD’S OF LONDON, Certain Underwriters who are members of
Lloyd’s Syndicates Numbered 658, 483, 741, 687, 79, 872, 535,
552, 123, 114, 741, 209, 1023, 309, 872 and 500,
Defendants-Counterclaim
Plaintiffs-Appellees
Cross-Appellants,
INDEMNITY MARINE ASSURANCE CO LTD; ZURICH RE UK LTD; OCEAN
MARINE INSURANCE CO LTD; COMMERCIAL UNION ASSURANCE; THE TOKIO
MARINE & FIRE; PHOENIX ASSURANCE PLC LSA; NORTHERN ASSURANCE
COMPANY LIMITED; GAN MINSTER INSURANCE COMPANY, LIMITED; TERRA
NOVA INSURANCE COMPANY LTD; PHOENIX ASSURANCE PUBLIC LIMITED;
CORNHILL INSURANCE PLC; THE YORKSHIRE INSURANCE COMPANY,
LIMITED; SKANDIA MARINE INSURANCE COMPANY (UK); SCOTTISH LION
INSURANCE COMPANY, LIMITED; HANSA RE & MARINE INSURANCE
COMPANY (UK) LIMITED; THREADNEEDLE INSURANCE CO, LTD; SPHERE
DRAKE INSURANCE; DAI-TOKYO INSURANCE COMPANY; COMPAGNIE
D’ASSURANCEY MARTIMES; AERIENNES & TERRESTRES (CAMAT);
AMERICAS INSURANCE COMPANY; HANSA RE-MARINE; ANGLO AMERICAN
INSURANCE COMPANY; GAN FRANCE; PHOENIX 09/01/75; TERRA NOVA;
CAMAT 1992; CORNHILL D A/C; SKANDIA MARINE; INDEMNITY MARINE;
YORKSHIRE L A/C; ZURICH RE; OCEAN MARINE; PHOENIX LSA A/C;
NORTHERN MARINE; LONDON & EDINBURGH; GAN MINSSTER; GERNERALI;
SPHERE DRAKE NO. 1; SCOTTISH LION,
Defendants-Appellees
Cross Appellants.
_______________________________________________________
Appeals from the United States District Court for
the Southern District of Texas
_______________________________________________________
May 26, 1998
Before REAVLEY, DeMOSS and PARKER, Circuit Judges.
REAVLEY, Circuit Judge:
The district court has held that a Texas statute limiting the
indemnification of a negligent indemnitee limits the liability
insurance coverage obtained by the indemnitor for the indemnitee.
We disagree and reverse the judgment.
BACKGROUND
2
Mallard Bay Drilling, Inc. (Mallard), owner of a drilling
platform off the Texas coast, contracted with Oryx Energy Company
(Oryx) for work on a well. The contract provided for Mallard’s
indemnity of any liability suffered by Oryx, and it also required
Mallard to obtain liability insurance for Oryx. Mallard did
obtain coverage of Oryx by Lloyds of London (Underwriters). An
employee of Mallard was seriously injured while working on the
platform and sued Oryx for negligence. That case was settled
with Underwriters contributing $11,050,000 but asserting that
coverage above $500,000 was barred by the Texas Anti-Indemnity
Act (the Act) which prevents enforcement of mineral agreements
providing for indemnification of negligent indemnitees as against
the public policy.1 Underwriters sued Oryx for reimbursement and
Oryx sued Underwriters for a declaration that Underwriters owed
full coverage. That is the dispositive issue in this appeal.
As an initial view of the controversy, we would not expect
insurance covering an insured for liability due to his negligence
to violate a state law or policy, regardless of which party pays
the premium. Two questions, however, must be answered: First, do
the terms of Underwriters’ policy limit coverage, and Second, do
the provisions of the Texas statute reach the coverage of the
indemnitee when the indemnitor is required to obtain the
1
TEX. CIV. PRAC. & REM. CODE § 127.001 et seq. (West 1997).
3
insurance by a contract that also imposes an unenforceable
indemnity upon the indemnitor?2
DISCUSSION
Terms of Underwriters’ Policy
Oryx is an “Assured” under the policy and thereby insured to
the full policy limit for personal injury claims. Several
provisions so state. Definition 1(d) of Section II of the policy
2
Oryx continues to argue on appeal that because they never
consented to Underwriters’ condition of reserving their right to
dispute coverage, Underwriters are now estopped from arguing any
coverage defenses or have waived any such defenses. We agree with
the district court that Underwriters are not estopped from
asserting coverage defenses. Oryx did not show all three element
necessary to establish waiver or estoppel. Pennsylvania Nat’l Mut.
Case. Ins. Co. v. Kitty Hawk Airways, Inc., 964 F.2d 478, 481 (5th
Cir. 1992); Texas Farmers Ins. Co. v. McGuire, 744 S.W.2d 601, 603
n.1 (Tex. 1988). The record evidence shows that Underwriters knew
of facts and circumstances indicating non-coverage by January 26,
1995. Nonetheless, Underwriters never fully assumed Oryx’s defense
prior to issuing its reservation of rights letter. The policy did
not require Underwriters to assume Oryx’s defense, and the letter
from Robert Killeen to Oryx’s first counsel clearly stated that
Killeen was the counsel for Mallard Bay Drilling and that it was
Mallard who had agreed to defend and indemnify Oryx. Underwriters
did send to Oryx a reservation of rights letter dated February 23,
1996 that fully and unambiguously informed Oryx of Underwriters’
position, and was specifically written to show Underwriters’ intent
to prevent a later claim by Oryx that coverage defenses not raised
in the reservation of rights letter were either waived or that
Underwriters were otherwise estopped from asserting them. Unless
Oryx can demonstrate that they suffered a “clear and unmistakable”
harm from Underwriters’ actions, Underwriters will not be estopped
from raising coverage defenses. State Farm Lloyds, Inc. v.
Williams, 791 S.W.2d 542, 553 (Tex.App.—Dallas 1990) reh’g denied;
Pennsylvania Nat., 964 F.2d at 482 (finding insurer not estopped
from raising coverage defenses even though more than one year
passed since insurer assumed and continued the insured’s defense
before issuing its reservation of rights letter). Considering Oryx
believed that $26,000,000 was a fair amount to pay Mote in view of
the nature, extent and severity of his injuries, Oryx cannot now
successfully argue that it was harmed by the $12,000,000
settlement.
4
provides that an “Assured” is “any additional Assured (not being
the Named Assured under this Policy) included in the Underlying
Insurances, subject to the provisions in Condition B; but not for
broader coverage than is available to such an additional Assured
under any underlying insurances set out in attached schedule.”3
Oryx is an “additional assured” pursuant to the Declarations and
General Conditions portion of the policy. It provides:
It is understood and agreed that any . . . corporation
. . . and/or entity for whom or with the Assured may be
operating is hereby named as additional assured when
required.
The policy was required by the agreement between Mallard and
Oryx. Under the terms of that agreement the parties mutually
agreed that all indemnity obligations and/or liabilities assumed
by the parties would be without limit and without regard to
causes or negligence of any of the parties. The agreement
further provides that Mallard shall carry
at its own expense and with deductibles for its sole
account, the insurance coverage set forth in Schedule E
. . . . Any failure by [Mallard] to obtain and
maintain such coverages shall constitute a breach
hereof and [Mallard] shall be solely responsible for
any loss suffered as a result of such deficiency in
coverage. . . . It is expressly understood and agreed
that the coverage required represent Company’s minimum
requirements and are not to be construed to void or
limit Mallard’s indemnity obligations as contained in
this [Agreement] (except to the extent that the laws of
the state or states where the Work is to be performed
3
Condition B dictates only that in the event additional
assureds are added to the coverage, Underwriters will be promptly
informed and are entitled to charge an appropriate additional
premium. Despite Underwriters’ suggestion to the contrary,
Condition B is specific to Section II of the policy and does not
need to be linked to any other policy section.
5
require that the amounts of such insurance coverages
and/or indemnity obligations are limited).
Schedule E, incorporated into the insurance provision,
specifically states that:
[t]he policy (or policies) of insurance obtained by
[Mallard], except Worker’s Compensation, and Protection
and Indemnity shall provide that [Oryx] . . . are
additional insured for all coverages, to the extent of
the indemnity provided by Mallard under this Contract.
The district court focused on the italicized language and
concluded that Oryx need be insured only to the extent of
Mallard’s unenforceable indemnity obligation; the Texas Anti-
Indemnity Act renders indemnity obligation itself invalid as
against public policy; and because Oryx is an additional assured
only to the extent of an unenforceable indemnity provided by
Mallard, Underwriters’ insurance obligation is limited under the
Act. We disagree.
The “extent” of the indemnity is “without limit”“on account
of bodily injury” arising in favor of Mallard’s employee. The
obligation of Mallard is to insure Oryx to that extent. There is
no justification for an argument that Texas courts would engraft
a limit on coverage to match the Texas law defense as if the suit
were only to enforce the indemnity itself.
The Texas Anti-Indemnity Act
The Texas Anti-Indemnity Act provides that an agreement
pertaining to an oil or gas well is void if it purports to
indemnify a party against liability caused by the indemnitee’s
6
sole or concurrent negligence and arising from personal injury,
death or property damage.4
The Act was enacted in 1973 in response to a perceived
inequity in the oil and gas industry.5 The Texas legislature
concluded that big oil companies and oil well operators
maintained an unfair bargaining position allowing them to enter
into “hold harmless” drilling and service contracts with small
contractors.6 Such agreements would require the contractors to
indemnify the oil companies and operators against losses caused
by their own negligent acts.7 The Act memorialized the
legislature’s conclusion that such agreements placed an undue
financial burden on the smaller contractors with less bargaining
power than the operators with whom they had negotiated.8 The
Act’s purview, however, is not restricted to agreements between
large oil companies and small contractors, but extends to all oil
and gas parties who enter into agreements seeking indemnification
against its own negligence.9
4
See TEX. CIV. PRAC. & REM. CODE ANN. § 127.003 (West 1997).
5
Getty Oil Co. v. Insurance Co. of North America, 845 S.W.2d
794, 803 (Tex. 1992).
6
Id.
7
Id.
8
Id.
9
See id; see also Greene’s Pressure Testing & Rentals, Inc. v.
Flournoy Drilling Co., 113 F.3d 47 (5th Cir. 1997); Campbell v.
Sonat Offshore Drilling, Inc., 979 F.2d 1115 (5th Cir. 1992);
Arkwright-Boston Mfg. Mut. Ins. Co. v. Aries Marine Corp., 932 F.2d
442 (5th Cir. 1991).
7
In 1989, without changing the basic purpose of the Act, the
Texas legislature amended it, and thereby expanded the Act by
broadening the definition of “well or mine service” and the
number of exclusions under the Act.10 Prior to the 1989
amendments, the Act equally treated all oilfield related
indemnification agreements, generally prohibiting those that
purported to indemnify an indemnitee for its own negligent acts,
but with the exception of allowing such agreements if the
indemnitor agreed in writing that its obligation would be
supported by insurance, the amount required not to exceed a sum
that equaled $300,000.11 The 1989 amendments heralded the most
extensive additions to the Act and by § 127.005 provided for
exceptions for indemnity provisions that are supported by
liability insurance.
The district court concluded that the Texas legislature
intended § 127.005 to encompass the entire field of insurance
coverage where the parties also contract for indemnity
obligations. Section 127.005, however, does not apply to this
case. The difference between Oryx’s claim as an insured and a
claim relating to § 127.005 (i.e., a claim by an indemnitee
against an insurer of the indemnitor) is displayed by a case
10
Patrick H. Martin & J. Lanier Yeates, Louisiana & Texas Oil
and Gas Law: An Overview of the Differences, 52 LA. L. REV. 769,
853-54 (1992).
11
See id; Campbell, 979 F.2d at 1126.
8
Underwriters mistakenly contend supports them: Greene’s Pressure
Testing & Rentals, Inc. v. Flournoy Drilling Co.12
Greene did not sue as an insured but sued the operator, and
the insurer of the operator, contending that § 127.005 of the Act
lifted the indemnity proscription. At issue was the insurance
coverage of the indemnitor, not the indemnitee. The contract
between Greene and the operator did not require the contractor to
obtain coverage for Greene but only obligated the parties to
support the indemnity agreement with available liability
insurance. The Greene case and § 127.005 have no application to
the case before us.
Moreover, the Supreme Court of Texas in Getty Oil v.
Insurance Co. of North America,13 rejected Underwriters’ position
that the Act necessarily bars insurance coverage for the
indemnitee. In that case, as in our case, Getty Oil sued an
insurance company on grounds of a contract provision requiring NL
Industries to purchase liability insurance for Getty Oil.
Judgment had been rendered against Getty Oil on the ground that
the insurance requirement was facially invalid because it made NL
Industries indemnify Getty Oil for Getty Oil’s own negligence,
which was forbidden by the Act. The Texas Supreme Court
reversed, saying the Act applied only to indemnity agreements and
that § 127.005 does not purport to regulate any agreements for
the purchase of insurance unless the insurance is only to support
12
113 F.3d 47 (5th Cir. 1997).
13
Getty Oil Co., 845 S.W.2d at 805.
9
the performance of the indemnity. Further, “the additional
insured provision, which does not support an indemnity agreement,
is not prohibited by the language of the [Act].”14
As the Getty Oil court remarked, insurance is meant to
protect the contractors from large and uncertain liabilities. By
paying premiums, Mallard and Oryx essentially shifted the risk of
loss to Underwriters. Mallard and Oryx intended to and did enter
into a contract in which all insurance coverage carried by
Mallard was to extend to and protect Oryx. The policy itself
clearly contemplates that the number of additional assureds may
increase and required increased premiums for coverage precisely
for such situations. Underwriters should pay as directed under
the policy.
Right to Reimbursement for Punitive Damages
While Underwriters are not entitled to reimbursement for
funds paid in the Mote settlement to cover the personal injuries,
they are entitled to reimbursement for funds paid to cover
punitive damages that are excluded from coverage under the
policy. The policy expressly excludes liability for “fines,
penalties, punitive or exemplary damages, including treble
damages or any other damages resulting from multiplication of
compensatory damages.” Underwriters have no liability for that
part of the settlement paid to settle Oryx’s punitive damage
14
Id. at 804.
10
exposure. The parties have raised a genuine issue of material
fact regarding the amount attributable to punitive damages.
Conclusion
For the foregoing reasons, we REVERSE the judgment and
remand the case for further proceedings in accord with this
opinion.
Reversed and Remanded.
11