Marine & Energy Alert: Fifth Circuit Finds Additional Insured Obligation Sufficient to Create Coverage Irrespective of Defense and Indemnity Obligation

September 07, 2017

On August 22, 2017, the United States Court of Appeals for the Fifth Circuit affirmed the decision of Judge Vanessa D. Gilmore of the United States District Court for the Southern District of Texas, Houston Division, finding that additional insured coverage available by virtue of the parties’ contract was not limited by the indemnity provision contained in the contract.

The dispute between ExxonMobil and Exxon’s contractor, Electrical Reliability Services (“ERS”), and ERS’s commercial general liability insurer, Old Republic Insurance Company, involved Exxon’s purported additional insured coverage for an underlying personal injury claim by an employee of ERS’s subcontractor. Specifically, Exxon settled the personal injury claim against it for $2.5 million and sought insurance coverage for costs of the settlement and defense as an additional insured on Old Republic’s policy issued to ERS. Exxon contended that ERS was obligated to provide additional insured coverage pursuant to the parties’ contract governing ERS’s electrical work and services at Exxon’s chemical refinery in Beaumont, Texas.

At the district court, Judge Gilmore determined that Old Republic breached its obligation to provide insurance coverage to Exxon and ERS breached its obligation to pay the policy’s $3 million deductible. ERS appealed, and a prior U.S. Fifth Circuit panel vacated the decision and remanded for reconsideration in light of the intervening decision by the Supreme Court of Texas in In re Deepwater Horizon, 470 S.W.3d 452 (Tex. 2015). On remand, the district court determined that the intervening case did not affect its decision and reinstated its judgment in favor of Exxon. ERS again appealed to challenge its obligation to pay the deductible.

The principal issue was whether the Exxon/ERS contract’s additional insured obligation was limited by the indemnity provision or instead whether Exxon enjoyed additional insured coverage irrespective of the scope of the indemnity provision.

Exxon and ERS agreed to defend and indemnify each other against claims resulting from the indemnitor’s negligence. ERS also agreed to purchase commercial general liability coverage and to name Exxon as an additional insured on its policies. ERS’s policy with Old Republic was endorsed to provide blanket additional insured coverage to ERS’s customers as required by contract. Because the Exxon/ERS contract required ERS to name Exxon as an additional insured, Exxon qualified as an additional insured on Old Republic’s policy.

ERS asserted that the personal injury claim resulted from Exxon’s own negligence. Moreover, Exxon claimed that because the Exxon/ERS contract allocated liability between the parties and provided that Exxon alone would be liable for claims arising from its own negligence, Exxon was not entitled to additional insured coverage and ERS was not required to pay the policy’s $3 million deductible.

In a detailed discussion of Texas law, the Fifth Circuit recognized that indemnity provisions and insurance provisions in a single contract may impose separate and independent obligations as clarified by the Deepwater Horizon court. In Deepwater Horizon, the Texas Supreme Court held that although indemnity and additional insured obligations can be independently and separately enforceable, the scope of the contractual indemnity provision can govern the scope of the additional insured coverage. The Fifth Circuit held that there was no language in the Exxon/ERS contract suggesting that the parties intended the scope of the indemnity provision to govern the scope of the insurance provision because the contract provided that ERS “shall” provide insurance coverage and “shall” pay the applicable deductible without qualification such that the insurance obligation was not tied to the scope of the liability under the indemnity provision.

This decision is significant for energy and maritime operators and insurers because it reinforces the importance of tying contractual additional insured obligations to the scope of the indemnity agreements.

The case is ExxonMobil Corp. v. Elec. Reliability Servs., Inc., No. 15-20751 (5th Cir. Aug. 22, 2017). A link to the Fifth Circuit’s decision is attached here.