Difference Between Direct & Vicarious Liability
Indemnity agreements between commercial entities often result in litigation because they are not loved by courts, parties and legislatures. Most CGL’s agree to pay for damages resulting from an indemnity agreement in a contract that meets the definition of insured contract.
In Mid-Continent Cas. Co. v. True Oil Co., — F.3d —-, 2014 WL 4637956 (C.A.10 (Wyo.) Sept. 18, 2014), Mid–Continent Casualty Company (Mid–Continent) brought a declaratory judgment action to ascertain the applicability to True Oil Company (True Oil) of Mid–Continent’s commercial general liability (CGL) policy issued to Pennant Service Company (Pennant). The district court granted summary judgment to True Oil, determining Mid–Continent breached its duty to defend and indemnify True Oil in the underlying action against it by Pennant’s employee. As damages, the court awarded True Oil the amount it paid to settle the underlying suit and the attorney fees and costs incurred in defending itself. Mid–Continent appeals from the district court’s judgment.
THE INDEMNITY AGREEMENT
In 2001, True Oil, an owner and operator of oil and gas wells, entered into a master service contract (MSC) with Pennant for work on a well in Wyoming. The MSC included a provision whereby Pennant agreed to indemnify True Oil “from and against all claims, damages, losses, … causes of action, suits, judgments, penalties, fines and expenses, including attorney fees, of any nature, kind or description whatsoever” resulting from either Pennant or True Oil’s negligence.
Pennant has a CGL policy with Mid–Continent. Under the policy, MidContinent agreed to insure Pennant against damages because of bodily injury “[a]ssumed in a contract or agreement that is an ‘insured contract,’ “ including “reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured” as long as “(a) [l]iability to such party for, or for the cost of, that party’s defense has also been assumed in the same ‘insured contract’; and (b) [s]uch attorney fees and litigation expenses are for defense of that party against a civil … proceeding in which damages to which this insurance applies are alleged.”
According to the policy, an “insured contract” includes: “[t]hat part of any other contract or agreement pertaining to your business … under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.
In July 2001, Christopher Van Norman, an employee of Pennant, was injured in an accident at True Oil’s well. On October 26, 2001, Mr. Van Norman filed a negligence suit against True Oil in Wyoming state court. In accordance with the MSC’s indemnity provision, counsel for True Oil wrote to Pennant on November 20, requesting indemnification for its defense costs, attorney fees, and any award that Van Norman might recover against it. MidContinent refused to defend or indemnify True Oil based on Wyoming’s AntiIndemnity Statute, Wyo. Stat. Ann. § 30–1–131, which invalidates agreements related to oil or gas wells that “indemnify the indemnitee against loss or liability for damages for … bodily injury to persons.”
In May 2002, True Oil brought a federal action against Mid–Continent for declaratory relief, breach of contract (CGL policy), and other related claims. In February 2005, the district court granted Mid–Continent summary judgment, determining that the MSC’s indemnity provision, when invoked with respect to claims of the indemnitee’s own negligence, violated § 30–1–131 and was thus unenforceable as a matter of public policy.
The court held that Mid–Continent was not required to defend or indemnify True Oil in the underlying suit as it then existed because “where an indemnification provision in a MSC is void and unenforceable, the insurer never actually assumed any of the indemnitee’s liabilities under the policy.”
Subsequently, on March 16, 2005, Mr. Van Norman amended his original state court complaint to include an allegation of vicarious liability against True Oil for negligence of Pennant that had caused injury to Mr. Van Norman. True Oil then filed a third-party complaint against Pennant for indemnification.
In September 2005, Mid–Continent agreed to provide True Oil a conditional defense to the vicarious liability claim in the state court action, under a reservation of rights. In November, unable to agree upon the terms of the defense, True Oil refused Mid–Continent’s offer to defend. The following month, just prior to the December scheduled trial date, True Oil settled with Mr. Van Norman for $500,000 for the claims alleged in the amended complaint. While Pennant did not participate in the negotiations, it did stipulate to the reasonableness of the settlement.
The court held that where a claim of vicarious liability exists, the Wyoming Anti–Indemnity Statute, § 30–1–131, does not render the agreement void or unenforceable with respect to that claim. The court affirmed the breach of contract finding and the $500,000 damages award, and it also extended True Oil’s entitlement to attorney fees from the date Mr. Van Norman filed his original complaint.
In light of and consistent with the resolution of the state proceeding, the federal district court awarded True Oil $500,000, attorney fees from October 2001 to December 7, 2005, and pre- and postjudgment interest on both amounts. MidContinent appeals.
In Wyoming, a final judgment on the merits in a prior action is conclusive and bars all subsequent action between the same parties, or their privies, as to all matters which were or might have been litigated in the prior action. Wyoming also follows the general rule prohibiting splitting a cause of action. Wyoming courts view res judicata and the rule against claim splitting as closely related.
In the first case, True Oil sought a defense and indemnity for its alleged negligence, the only claim pending against it, whereas in the present litigation, it seeks a defense and indemnity for its alleged vicarious liability for the negligence of Pennant, the new claim brought by Mr. Van Norman. These causes of action contain different factual circumstances giving rise to distinct rights to maintain an action.
Indemnification for Vicarious Liability
Under its CGL policy, Mid–Continent agreed to cover Pennant’s liability for damages “[a]ssumed in a contract or agreement that is an ‘insured contract.’ Thus, although the CGL policy generally excluded contractual liability from coverage, it excepted damages assumed in an insured contract.
Mid–Continent contends the intervening state court decision in Pennant only resolved a contractual question, “whether … Pennant was liable to True contractually,” rather than a coverage question. It argues its policy does not provide coverage for breach of contract damages, and also contends True Oil voluntarily settled without being either legally liable or an insured.
When an intervening decision of a state’s highest court has resolved an issue of state law directly contrary to this circuit’s prediction of how the state would resolve the same issue, a federal court of appeal is bound by the later state ruling, not by our prior panel’s interpretation of state law.
First, we cannot follow Mid–Continent’s semantic gymnastics, which characterizes the settlement payment as breach of contract damages rather than indemnification damages in order to deny coverage. To the contrary, the Wyoming Supreme Court found that True Oil’s $500,000 settlement payment to Mr. Van Norman was indemnification damages for bodily injuries.
Where an indemnitor is given notice of settlement discussions and chooses not to participate, an indemnitee is only required to prove potential liability to the original plaintiff in order to support a claim against the indemnitor. Potential liability exists unless an indemnitee faced “no exposure to legal liability.
Finally, we are bound by the Wyoming Supreme Court’s holding that the indemnity agreement is a “valid and enforceable part of the MSC” to the extent that it indemnifies True Oil for its vicarious liability. As such, it is an “insured contract” under Mid–Continent’s CGL policy, and the damages assumed therein are covered by the policy.
While the Wyoming Supreme Court did not interpret Mid–Continent’s insurance policy per se, it interpreted what damages were assumed in the “insured contract” for which Mid–Continent provided coverage. Significantly, it held “Pennant was well aware of True Oil’s vicarious liability risk … and agreed … to indemnify True Oil for any damages resulting therefrom. The court held that Pennant assumed liability for the attorneys fees True Oil paid to defend itself against claims for which, as it turned out, Pennant was 100% responsible.
True Oil’s 2001–2005 attorney fees are covered by the MSC, which necessarily triggers Mid–Continent’s coverage for “damages” that it agreed to cover in its CGL policy and the court affirmed the district court’s determination that True Oil is entitled to recover its settlement payment, attorney fees from 2001 to 2005, and pre- and postjudgment interest.
Insurance companies that agree to take on the indemnity agreements of its insureds must review the wording of their policy, the language of the indemnity contract, and the facts of the case to determine its obligation to its insured. The insurer in this case failed to accept the fact that their was a potential or actual claim of vicarious liability that would call their policy into effect. By failing to do so they were bound by the settlement reached by the indemnitee when it could have achieved a different result had it agreed to defend and indemnify.
Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or firstname.lastname@example.org, or 800-285-2221 which is presently available.
Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.