How many insureds entering into a master service agreement (“MSA”) go to bat for their insurers when negotiating who will compromise the members of their respective indemnified “Groups?” Given a recent decision of the U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”), Duval v. Northern Assurance Company of America, __ F.3d __, 2013 WL 3367483 (5th Cir. July 5, 2013) (“Duval”), parties to an MSA should add their insurers to the long list of third parties that make up the indemnified “Groups.” In Duval, the Fifth Circuit ruled that the insurers of a party to an MSA were not entitled to enforce their insured’s defense, indemnification, and/or insurance rights under indemnity provisions of the MSA at issue.
Duval arose from injuries sustained by Glenn Duval, an employee of Wood Group/Deepwater Specialists (“Wood Group”), during an offshore personnel basket transfer from a vessel owned by Deep Marine Technologies, Inc. (“Deep Marine”) to a tension-leg platform. Wood Group was a contractor of BHP Billiton Petroleum Deepwater, Inc. (“BHP”). The MSA between BHP and Deep Marine contained reciprocal indemnity obligations and required each party to support their respective indemnity obligations with liability insurance, self-insurance, or a combination thereof. Under the MSA at issue, BHP was the “Company” and Deep Marine was the “Contractor.” Plaintiff Duval filed suit against Deep Marine and others, but not BHP, in the U.S. District Court for the Western District of Louisiana (“District Court”).
After being served with the Complaint, Deep Marine sought defense, indemnity, and an additional insured status from BHP under the MSA. BHP accepted Deep Marine’s tender, as the Wood Group was a member of the “Company Group.” While the suit was pending, and more than one year after BHP accepted Deep Marine’s tender, Deep Marine filed a Chapter 11 Bankruptcy proceeding in the U.S. District Court for the Southern District of Texas. The plaintiff, Duval, moved to lift the automatic stay to proceed with his case against Deep Marine’s insurers, which was granted. Plaintiff Duval amended the Complaint and named Deep Marine’s insurers as defendants under Louisiana’s Direct Action Statute. Deep Marine’s insurers then filed a Third-Party Complaint against BHP seeking defense, indemnity, and insurance coverage in accordance with the MSA. Cross-Motions for Summary Judgment were filed between Deep Marine’s insurers and BHP, and the District Court granted BHP’s Motion for Summary Judgment, and denied Deep Marine’s insurers’ Motion for Summary Judgment. The District Court ruled that BHP was not obligated under the MSA at issue to provide Deep Marine’s insurers with defense, indemnity, and insurance coverage because, among other reasons, Deep Marine’s insurers were not among the long list of parties compromising who was part of the “Contractor Group,” an indemnitee under the MSA at issue.
On appeal, Deep Marine’s insurers put forth several arguments in favor of their interpretation of the MSA at issue. The Fifth Circuit, however, did not find any of the insurers’ arguments compelling. The Fifth Circuit rejected each of the arguments advanced by Deep Marine’s insurers, and affirmed the judgment of the District Court, as follows:
- BHP did not waive defenses to Deep Marine insurers’ claims under the MSA by initially accepting Deep Marine’s tender prior to Deep Marine’s bankruptcy filing.
- Deep Marine’s insurers could not recover under the indemnity provisions of the MSA at issue because the Contractor Group did not include insurers. The Fifth Circuit reasoned that if the parties to the MSA at issue intended to include their insurers as beneficiaries of the indemnity provision of the MSA at issue, they could have expressly done so as other parties have done in other MSAs.
- Deep Marine insurers argued that they stepped into the shoes of the subrogor, Deep Marine, once payment is made. The Fifth Circuit disagreed because the insurers could not recover from BHP absent a loss by Deep Marine in Duval, and Plaintiff Duval’s claims against Deep Marine were stayed indefinitely due to the bankruptcy proceeding.
- Relying on Texas law, the Fifth Circuit also found that BHP’s primary million dollar “self-insurance” did not confer additional insured status to the insurers as “the term ‘self-insurance’ is a misnomer” because “in effect, a self-insurer does not provide insurance at all.”
- Although Deep Marine’s insurers were correct that Deep Marine’s bankruptcy does not discharge the debt of any third party, including BHP, as the Fifth Circuit noted, the Plaintiff Duval did not assert any liability against BHP.
The Fifth Circuit’s decision was based heavily on the language of the MSA at issue, and the posture of Duval. In order to attempt to avoid the same outcome, and to protect insurers, parties to an MSA need to include their insurers as members of the respective indemnified “Groups.” Parties drafting contracts should be familiar with Duval, so, during the negotiating phase, parties can support their rationale when drafting indemnity and insurance provisions of MSAs to include their insurers as members of the indemnified “Groups.”