Insurance Is Different From Indemnity

Trial Court Erred When It Ruled on Insurance Issue Without Policy in Evidence

When attempt to reassign the risks of loss contracting parties often require the vendor to indemnify the contracting party and simultaneously make the contracting party an additional insured on the vendor’s liability insurance policies. Often the parties fail to recognize the difference between indemnity and insurance since indemnity agreements are fact based while interpretation of an insurance contract require interpretation of the contract wording.

In International Marine, L.L.C.; International Offshore Services, L.L.C., Tesla Offshore, L.L.C., Intervenor v. Integrity Fisheries, Incorporated; Sea Eagle Fisheries, Incorporated, National Security Fire And Casualty Company; Atlantic Specialty Insurance Company; One Beacon Insurance Company; New York Marine And General Insurance Company, United States Court of Appeals, Fifth Circuit 2017 WL 2664595, No. 16-30456 (June 21, 2017) International Marine, L.L.C., International Offshore Services, L.L.C. (collectively “International”), and Tesla Offshore, L.L.C. (“Tesla”), appealed the district court’s grant of summary judgment dismissing their indemnity and insurance claims.

BACKGROUND

This case involves an allision (the striking of a vessel against a fixed object) in the Gulf of Mexico causing significant damage to a submerged mooring line for the M/V NAUTILUS (the “NAUTILUS”), a mobile offshore drilling unit used by Shell Offshore, Inc. (“Shell”), to conduct drilling operations. The principal dispute before the Fifth Circuit concerned whether third parties are contractually obligated to pay for that damage.

Tesla, an offshore survey company, was tasked with performing an archaeological sonar survey in the Gulf of Mexico. To perform this survey, Tesla required two vessels: a larger vessel, called the “tow vessel,” and a smaller vessel, called the “chase vessel.” Tesla contracted with International to provide and operate the tow vessel, called the M/V INTERNATIONAL THUNDER (the “THUNDER”). As to the chase vessel, Tesla initially contracted with Integrity Fishers, Inc. (“Integrity”), but after Integrity’s vessel developed mechanical issues, Integrity substituted a different chase vessel owned and operated by Sea Eagle Fisheries, Inc. (“Sea Eagle”), called the F/V LADY JOANNA (the “JOANNA”).

The precipitating incident for this litigation was an allision between the towfish cable and a submerged mooring line for the NAUTILUS. The THUNDER and the JOANNA temporarily went off the grid toward the south until the towfish was repaired and redeployed, at which point the THUNDER turned north, back toward the grid, followed by the JOANNA. The party chief testified that about thirty to forty-five minutes after being warned of the proximity of the THUNDER the towfish cable allided with the mooring line of the NAUTILUS.

Shell, which was using the NAUTILUS for drilling operations when the allision occurred, sued Tesla and International for negligence. In the Shell v. Tesla negligence litigation, a jury awarded damages to Shell and determined that Tesla was 75% at fault and International was 25% at fault. Tesla and International claim they are entitled to indemnity from Integrity and Sea Eagle because the allision related to the operation of the JOANNA. Tesla and International additionally claim that they are entitled to insurance coverage because they were added as additional insureds on Integrity’s and Sea Eagle’s insurance policies with Atlantic Specialty Insurance Company/One Beacon Insurance Company (“One Beacon”) and New York Marine & General Insurance Company (“NY MAGIC”).

The contractual relationships between Tesla, Integrity, and Sea Eagle were set out in two master service agreements (“MSAs”). Article 9 provides, in relevant part, that the indemnitors (here, Integrity or Sea Eagle) are liable to Tesla and its contractors for damage to third party property “arising out of or related in any way to the operation of any vessel owned … by [Integrity or Sea Eagle] … to perform work under this agreement except to the extent such loss, harm, infringement, destruction, or damages is caused by [Tesla’s or its contractor’s] gross negligence or willful misconduct.” This obligation is owed “regardless of cause including who may be at fault or otherwise responsible under any contract, statute, rule or theory of law.” Article 11 requires, in relevant part, that Sea Eagle and Integrity provide insurance coverage for “third party claims arising out of or connected with the performance of Service hereunder,” and name Tesla and its contractors as additional insureds. The insurance obligations purchased under the MSAs were required to be “independent of the indemnity obligations contained in the contract/agreement and [to] apply regardless of whether the indemnity provisions contained in the contract/agreement are enforceable.”

The district court granted Integrity’s and Sea Eagle’s motions and denied Tesla’s and International’s motions, concluding that “Shell’s claims for damages based on the M/V NAUTILUS incident did not arise out of, and are not related to, the operation of the F/V LADY JOANNA.” Furthermore, because it found that there was no indemnity obligation, the district court also concluded that the insurers did not have any obligations to Tesla or International, and it dismissed all claims against the insurers. Tesla and International timely appealed.

DISCUSSION

Indemnity Claims

Under federal maritime law, an indemnity contract covers losses within the contemplation of the parties but not those which are neither expressly within its terms nor of such a character that it can be reasonably inferred that the parties intended to include them within the indemnity coverage. Though broad, however, such an undertaking is not limitless. When one party’s negligent contractual performance causes third party property damage independent of the alleged indemnitor’s contractual performance, indemnity is usually not required absent a clear indication that the parties agreed to such an unusual undertaking.

Tesla and International’s negligence, as well as the resulting damage to the NAUTILUS, was independent of the operation of the JOANNA. The MSAs are clear that the NAUTILUS’s damage must relate to or arise out of the operation of the JOANNA before an indemnity obligation arises. The JOANNA’s “involvement in such an effort — [the sonar survey] — did not cause the accident and did not contribute to [Tesla’s and International’s] decision to dr[ive] the [towfish] across [the NAUTILUS’s mooring line].

Indemnity is not owed merely because Tesla and International were negligent during the survey, in the absence of the requisite connection to the JOANNA’s operation. JOANNA’s operation carrying out the joint sonar survey and in position over the towfish at the time of the allision, was indisputably a successful operation and had no bearing on the decision to redeploy the towfish near the NAUTILUS and cross the NAUTILUS’s mooring line.

Indemnity agreements containing language such as “arising out of” should be read broadly. It is only when the alleged indemnitor’s contractual performance is completely independent of another party’s negligent act that caused damage that the Fifth Circuit will apply a limitation to the general rule.

Insurance Claims

The district court concluded that because the indemnity claims failed, the insurance claims also failed. Although similarities in the contractual obligations for indemnity and insurance under the MSAs may suggest that indemnity and insurance claims rise and fall together in this litigation, such a parallel is not always the case. The scope of insurance coverage is determined by the language of the insurance policy obtained, which may yield a different result than the indemnity provision in the original contract.

For reasons known only to the litigants none of the insurance policies were in the record nor is there any other evidence from which the policy language can be definitively discerned. Summary judgment cannot be granted on the insurance claims without first reviewing the insurance policies and determining their scope. It is possible that Tesla and International were added as additional insureds on a policy that provides more coverage than that set forth in the MSAs.

On the record given to the Fifth Circuit it was unable to make that determination. As a result it affirmed the summary judgment dismissing the indemnity claims, and vacated the dismissal of the insurance claims so the District Court can take evidence about insurance to resolve the issues at trial.

ZALMA OPINION

The indemnitors successfully avoided the obligation under their contract to indemnify the plaintiffs. The District Court wrongfully tied the obligation to indemnify with the obligation to provide insurance. Since the insurers may have owed a duty to defend Tesla and Sea Eagle if they failed to defend or indemnify the additional insureds, depending on the wording of the insurance contract, that will be established with evidence presented at the trial court.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, 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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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