Marine & Energy News Alert: U.S. Fifth Circuit Finds LOIA Applies to Contract for Services Related to Decommissioned Oil Well

February 25, 2016

On February 24, 2016, the United States Court of Appeals for the Fifth Circuit reversed Chief Judge Kurt D. Engelhardt’s decision that the Louisiana Oilfield Indemnity Act (“LOIA”) did not apply to the salvage of a fully decommissioned production platform because those services lack a sufficient nexus to a well.

Continental Insurance Co. (“Continental”) appealed the district court’s final judgment in favor of Tetra Technologies, Inc. (“Tetra”) and Maritech Resources, Inc. (“Maritech”) finding that Continental’s insured, Vertex Services (“Vertex”), owed Tetra and Maritech contractual defense and indemnity for its employee’s personal injury claims.

The parties’ contractual dispute arose from injuries sustained by Abraham Mayorga, a crane rigger employed by Vertex, who was injured when he fell from the platform at issue during the salvage operation being conducted offshore from Louisiana in federal waters on the Outer Continental Shelf (“OCS”). Tetra and Maritech are parties to an agreement to salvage the decommissioned oil production platform. Tetra retained Vertex to perform some aspects of the salvage operation pursuant to a “work order” issued under the parties’ Master Service Agreement (the “Tetra/Vertex MSA”).

Vertex agreed to defend and indemnify Tetra and Maritech for injuries sustained by Vertex’s employees while providing services under the Tetra/Vertex MSA. Additionally, the Tetra/Vertex MSA required Vertex to name Tetra and Maritech as additional insureds on its general liability policy issued by Continental. Importantly, the LOIA, if applicable, renders void any agreement that purports to indemnify a party for damages resulting from death or bodily injury caused by the indemnitee’s own negligence or fault. The LOIA also invalidates any attendant provisions requiring the indemnitor to name the indemnitee as an additional insured on its insurance policies. Therefore, if the LOIA applies to the Tetra/Vertex MSA, then any requirement that Vertex defend and indemnify and name Tetra and Maritech as additional insureds on its general liability policy with Continental would be barred.

Because the dispute stemmed from events that occurred on the OCS, Louisiana law could apply by virtue of the Outer Continental Shelf Lands Act (“OCSLA”), which adopts the law of the adjacent state, in this case Louisiana, under certain circumstances. For OCSLA to adopt Louisiana law (the LOIA):

  1. the controversy must arise on a situs covered by OCSLA;
  2. federal maritime law must not apply of its own force; and
  3. the state law must not be inconsistent with federal law.

If the Court determines that OCSLA applies to adopt the LOIA, then the Court must conduct an analysis to determine whether the LOIA applies to the Tetra/Vertex MSA. For the LOIA to apply to the Tetra/Vertex MSA, the agreement:

  1. must pertain to a well; and
  2. must be related to the exploration, development, production, or transportation of oil, gas, or water.

In determining if an agreement pertains to a well, the decisive factor is whether a functional nexus exists between the agreement and the well.

Therefore, the critical issue before the Court was whether Vertex’s services to salvage the decommissioned production platform under the Tetra/Vertex MSA (and subsequent “work order”) have a sufficient nexus to a well such that the LOIA would apply. Tetra and Maritech argued that the parties’ agreement does not pertain to a well because the salvage operation occurred on a platform that had already been fully decommissioned before the salvage operation ever commenced. The Court rejected the arguments set forth by Tetra and Maritech and followed a long line of cases interpreting the LOIA in connection with agreements to perform “plugging and abandoning” work.

The Court refused to set a precedent that the LOIA could never apply to a nonproducing well and held that a contract for salvaging a platform from a decommissioned oil well has a sufficient nexus to a well under the LOIA. Accordingly, the Court held that the LOIA, if applicable through OCSLA, would void Vertex’s contractual defense and indemnity and additional insured obligations to Tetra and Vertex.

The Court did, however, remand the case to the district court because the Court found there was insufficient information on the record to determine whether OCSLA applied to make Louisiana law – the LOIA – surrogate federal law. Finally, the Court rejected Continental’s insurance coverage defense that Tetra’s and Maritech’s claims for coverage as additional insureds under Vertex’s insurance policy with Continental were excluded by virtue of policy language prohibiting coverage for the insured’s obligations arising under the general maritime law. The Court affirmed the district court’s decision that the exclusionary provision relied upon by Continental was ambiguous and thus did not exclude coverage for plaintiff’s claims. However, the Court commented that coverage will only be implicated if the district court determines Louisiana law does not apply under OCSLA since the additional insured provision in the Tetra/Vertex MSA requiring Vertex to name Tetra and Maritech as additional insureds on Continental’s Policy would then be enforceable.

The Fifth Circuit’s decision demonstrates that the analysis of oil and gas related contractual defense and indemnity and insurance coverage issues turns on specific factual circumstances. Accordingly, an involved analysis on a case-by-case basis is needed to determine whether contractual defense and indemnity and attendant additional insured obligations are enforceable.

The case is Tetra Technologies, Inc. et al v. Continental Ins. Co., No. 15-30446. Click here to review the Fifth Circuit’s decision.