ACC Houston Chapter Meeting

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ACC Houston Chapter Meeting

Indemnities and Insurance: Managing Risks Via

Contracts in the Post-Macondo World

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Panelists

• Lisa Brown – Managing Counsel, Oxy Permian

– Former outside counsel.

– Received her Bachelor and Juris Doctor degree from the University of Texas.

• John Eldridge – Partner, Haynes and Boone, LLP

– 30 years of experience in environmental transactional, litigation and regulatory practice.

– Represents clients in contract negotiations and disputes

– Argued several appeals before the Fifth Circuit and tried cases in various courts.

– Received his Bachelor of Arts from Rice University and his Juris

• Lisa Brown – Managing Counsel, Oxy Permian

– Former outside counsel.

– Received her Bachelor and Juris Doctor degree from the University of Texas.

• John Eldridge – Partner, Haynes and Boone, LLP

– 30 years of experience in environmental transactional, litigation and regulatory practice.

– Represents clients in contract negotiations and disputes

– Argued several appeals before the Fifth Circuit and tried cases in various courts.

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Panelists Continued

• Micah Skidmore – Partner, Haynes and Boone, LLP

– Represents policyholders in significant insurance coverage disputes.

– Advises clients on the insurance implications of corporate transactions, including mergers and acquisitions.

– He obtained his Bachelor of Science and his Juris Doctor from Brigham Young University.

• Jessica Rivera – Associate, Haynes and Boone, LLP

• Worked one year in-house for a power plant and marine engine supplier.

• Proficient in Spanish and Portuguese.

• She obtained her Bachelor of Arts from Messiah College and her Juris Doctor from Duke University.

• Micah Skidmore – Partner, Haynes and Boone, LLP

– Represents policyholders in significant insurance coverage disputes.

– Advises clients on the insurance implications of corporate transactions, including mergers and acquisitions.

– He obtained his Bachelor of Science and his Juris Doctor from Brigham Young University.

• Jessica Rivera – Associate, Haynes and Boone, LLP

• Worked one year in-house for a power plant and marine engine supplier.

• Proficient in Spanish and Portuguese.

• She obtained her Bachelor of Arts from Messiah College and her Juris Doctor from Duke University.

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Risks and Contracts

• Risk has changed: nature and scope

- Macondo incident

- $50 Billion ??

- Multiple parties

- Government/political responses

- Litigation ongoing

• Risk has changed: nature and scope

- Macondo incident

- $50 Billion ??

- Multiple parties

- Government/political responses

- Litigation ongoing

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Contracts Address Risks

• Multiple types (service, drilling, transportation,

cleanup, etc).

• Indemnity and release clauses are key features.

• Insurance contracts are also a key to risk

management.

• Macondo rulings affect energy industry most, but

also other situations where the rulings have

effect.

• Multiple types (service, drilling, transportation,

cleanup, etc).

• Indemnity and release clauses are key features.

• Insurance contracts are also a key to risk

management.

• Macondo rulings affect energy industry most, but

also other situations where the rulings have

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Discussion Plan

• Re-cap the recent rulings.

• Discuss reactions in the industries and how

contract terms are being re-evaluated.

• Identify key distinctions of Texas and New York

law.

• Describe the changes in the insurance

landscape.

• Re-cap the recent rulings.

• Discuss reactions in the industries and how

contract terms are being re-evaluated.

• Identify key distinctions of Texas and New York

law.

• Describe the changes in the insurance

landscape.

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Enforceability of Indemnity Claims

Recent Macondo Litigation Rulings Based on Maritime Law

Type of Damage Arising from

Third Party Indemnity Claims Level of Negligence/Culpability Negligence or Strict

Liability Gross Negligence Intentional/Willful orFraud

Compensatory / Actual Damages for Common Law Tort Claims

(including personal injury, property damage, and unseaworthiness)

Yes – if expressly stated in the contract that indemnifying party is responsible even if claim arises from indemnified party’s negligence.

Yes – if expressly stated in the contract that indemnifying party is responsible even if claim arises from indemnified party’s gross negligence.

No – always against public policy. Yes – if expressly stated in the

contract that indemnifying party is responsible even if claim arises from indemnified party’s negligence.

Yes – if expressly stated in the contract that indemnifying party is responsible even if claim arises from indemnified party’s gross negligence. Punitive Damages for Common Law

Tort Claims (including personal injury, property damage, and unseaworthiness)

[Punitive damages are usually not available for ordinary negligence]

No – always against public

policy. No – always against public policy. Civil Penalties Under the Clean

Water Act (“CWA”) No – always against public_policy. No – always against public_policy. No – always against public policy

Damages Under the Oil Pollution Act

Yes – if expressly stated in the contract that indemnifying party is responsible even if claim arises from indemnified party’s negligence.

Yes – if expressly stated in the contract that indemnifying party is responsible even if claim arises from indemnified party’s gross negligence.

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What Does the Duty to Indemnify a Party Include? Recent Macondo Litigation Rulings

Issue Answer

Payment of attorneys’ fees to prove that the

party has a right to be indemnified? No, unless expressly stated in the contract. Payment of attorneys’ fees to prove that the

party has a right to be indemnified? No, unless expressly stated in the contract.

When does the indemnifying party have to pay or begin paying the indemnified party’s

attorneys’ fees?

Not until the final determination of the claims on the merits, unless expressly stated otherwise in

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Industry Reactions to Macondo and

Trends in Contract Drafting

• More specificity in wording what is included in environmental indemnities (pollution, clean-up, etc.).

• More attention to indemnities for fines and penalties arising out of statutory violations.

• Service companies want pollution liability limited to pollution: – Actually caused by the service company.

– Emanating from service company’s equipment. – Located above-ground.

• Service companies – cap on certain types of liability:

– Example: Caps on liability for gross negligence and willful misconduct.

– Are these caps legally enforceable?

• More specificity in wording what is included in environmental indemnities (pollution, clean-up, etc.).

• More attention to indemnities for fines and penalties arising out of statutory violations.

• Service companies want pollution liability limited to pollution: – Actually caused by the service company.

– Emanating from service company’s equipment. – Located above-ground.

• Service companies – cap on certain types of liability:

– Example: Caps on liability for gross negligence and willful misconduct.

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Enforceability of Indemnities Under Texas Law

• Texas courts generally enforce indemnity

agreements except where:

– The provision violates the constitution or a

statutory duty.

– Agreement violates public policy.

• Texas courts generally enforce indemnity

agreements except where:

– The provision violates the constitution or a

statutory duty.

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Fair Notice Requirements

–

Express Negligence Doctrine: Must express

intent to indemnify for other party’s negligence

in unambiguous terms within the four corners

of the document.

–

Conspicuous: A reasonable person would

notice the language.

• Capital headings

• Large font

• Contrasting type or color

–

Express Negligence Doctrine: Must express

intent to indemnify for other party’s negligence

in unambiguous terms within the four corners

of the document.

–

Conspicuous: A reasonable person would

notice the language.

• Capital headings

• Large font

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Exception to Fair Notice Requirements –

Proof of Actual Knowledge

• Fair Notice Requirements are irrelevant where there is

proof of actual knowledge.

• Evidence that a party read the agreement is evidence of

actual knowledge:

– Proof that a party requested or made changes to an

agreement’s language could prove actual knowledge.

RLI Ins. Co. v. Union Pacific Railroad Co., 463

F.Supp.2d 646, 650 (S.D. Tex. 2006).

• Fair Notice Requirements are irrelevant where there is

proof of actual knowledge.

• Evidence that a party read the agreement is evidence of

actual knowledge:

– Proof that a party requested or made changes to an

agreement’s language could prove actual knowledge.

RLI Ins. Co. v. Union Pacific Railroad Co., 463

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Enforceability of Indemnities for a Party’s

Gross Negligence

• “Enforcement of indemnity for gross negligence

does not offend public policy when parties are

sophisticated and bargain from positions of

substantially equal strength.”

• Two different outcomes based on bargaining

power of parties:

– Valero Energy Corp. v. M.W. Kellogg Const. Co.

– Smith v. Golden Triangle Raceway

• “Enforcement of indemnity for gross negligence

does not offend public policy when parties are

sophisticated and bargain from positions of

substantially equal strength.”

• Two different outcomes based on bargaining

power of parties:

– Valero Energy Corp. v. M.W. Kellogg Const. Co.

– Smith v. Golden Triangle Raceway

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Valero Energy Corp. v. M.W. Kellogg Const. Co.

866 S.W.2d 252 (Tex. App.—Corpus Christi 1993, writ denied) • Valero hired Ingersoll-Rand and Kellogg to supply machinery for a

refinery expansion.

• A piece of this machinery failed and exploded, causing extensive damage to the Valero plant.

• The Court upheld a provision disclaiming all of the contractor’s liability for negligence, despite Valero’s contention that the clause was unconscionable.

• Parties were both represented by counsel, they had engaged in extensive negotiations, and they had equal bargaining power. • Indemnity agreement did not expressly state gross negligence. • Valero hired Ingersoll-Rand and Kellogg to supply machinery for a

refinery expansion.

• A piece of this machinery failed and exploded, causing extensive damage to the Valero plant.

• The Court upheld a provision disclaiming all of the contractor’s liability for negligence, despite Valero’s contention that the clause was unconscionable.

• Parties were both represented by counsel, they had engaged in extensive negotiations, and they had equal bargaining power. • Indemnity agreement did not expressly state gross negligence.

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Smith v. Golden Triangle Raceway,

708 S.W.2d 574 (Tex. App.—Beaumont 1986, no writ).

• In order to be a spectator in the pit of a raceway, Jerry Smith had signed a document releasing the race promoter for negligence and gross negligence.

• The release was upheld with respect to the race promoter’s ordinary negligence.

• Court held that the release for gross negligence was unenforceable because it violated public policy.

• In order to be a spectator in the pit of a raceway, Jerry Smith had signed a document releasing the race promoter for negligence and gross negligence.

• The release was upheld with respect to the race promoter’s ordinary negligence.

• Court held that the release for gross negligence was unenforceable because it violated public policy.

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Enforceability of Indemnity Agreements under

New York Law

• Indemnity agreements are usually enforceable

unless they are:

– Prohibited by statute (construction anti-indemnity

statute)

– Against public policy

• Indemnity agreements are usually enforceable

unless they are:

– Prohibited by statute (construction anti-indemnity

statute)

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Language Requirement:

Clear and Unmistakable Intent to Indemnify

• Enforceable provisions:

– “any and all loss…occasioned directly or indirectly by

the act of the negligence of the indemnitor or

otherwise.”

– “against any and all liability…including any and all

expense, legal or otherwise.”

• Unenforceable provision:

– “other obligations and liabilities arising in the ordinary

course of business.”

• Enforceable provisions:

– “any and all loss…occasioned directly or indirectly by

the act of the negligence of the indemnitor or

otherwise.”

– “against any and all liability…including any and all

expense, legal or otherwise.”

• Unenforceable provision:

– “other obligations and liabilities arising in the ordinary

course of business.”

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Distinction Between Release and Indemnity

• Release – “deprives the contracting party of the

right to recover for damages suffered as the

result of the exonerated party’s tortious act.”

• Indemnity Contracts – “shift the source of

compensation without restricting the injured

party’s ability to recover.”

• Release – “deprives the contracting party of the

right to recover for damages suffered as the

result of the exonerated party’s tortious act.”

• Indemnity Contracts – “shift the source of

compensation without restricting the injured

party’s ability to recover.”

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Enforceability of Releases and Indemnities under New York Law for Negligence, Gross Negligence and Willful Misconduct

Type of Claim Release Indemnity

Negligence Yes Yes

Gross Negligence –

Compensatory Damages No Yes

Gross Negligence –

Punitive Damages No No

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• Does the scope of additional insured coverage

depend on the underlying indemnity?

• If the underlying indemnity is unenforceable,

what is the effect on the supporting insurance?

• What coverage does a general liability policy

provide for contractual liability?

Interplay Between Insurance & Indemnity

• Does the scope of additional insured coverage

depend on the underlying indemnity?

• If the underlying indemnity is unenforceable,

what is the effect on the supporting insurance?

• What coverage does a general liability policy

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Additional Insured Coverage & Indemnity

In re Deepwater Horizon, __ F.3d __ (5th Cir. Mar. 1, 2013)

• The scope of additional insured coverage: • Determined by insurance policy terms • Not underlying indemnity contract

• “Separate and independent” insurance and indemnity provisions

• Need not be physically separate • Insurance provision can mandate

coverage for contractual liabilities • What if insurance and indemnity provisions

are not separate and independent?

• The scope of additional insured coverage: • Determined by insurance policy terms • Not underlying indemnity contract

• “Separate and independent” insurance and indemnity provisions

• Need not be physically separate • Insurance provision can mandate

coverage for contractual liabilities • What if insurance and indemnity provisions

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Unenforceable Indemnity & Insurance

• Texas Law

• Getty Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d 794 (Tex. 1992) • Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487 (5th Cir.

2000)

• Texas Oilfield Anti-Indemnity Act

• Mutual indemnity enforceable up to the lowest limit of insurance obtained by indemnitor.

• Unilateral indemnity enforceable up to $500,000. • No effect on validity of insurance contracts.

• Consolidated Insurance Programs (TEX. INS. CODE § 151.001, et seq.)

• Indemnity in construction contracts for indemnitor’s conduct void and unenforceable.