Court Opinion

ID: 14881
Source: CourtListenerOpinion
Date Created: 2010-04-25 06:39:48+00
Date Added: 2024-06-11T16:46:37.117478
License: Public Domain

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