Right to Subrogation Under Master Service Agreement
Master Service Agreements usually transfer the risk of losses from one party to the other and from one party’s insurer – adding the other as an additional insured – to the benefit of the other. Construction contracts are true risk transfer devices.
In AIG Specialty Insurance Company; fka Chartis Specialty Insurance Company as Subrogee of Sherwin Alumina, LLC v. Ace American Insurance Company, Civil Action No. 2:18-CV-16, United States District Court Southern District of Texas Corpus Christi Division (March 18, 2019) Plaintiff AIG Specialty Insurance Company (ASIC) suedTurner Industries Group, LLC (Turner) and Ace American Insurance Company (ACE) to obtain reimbursement for monies paid and defense costs incurred in the course of defending and settling a personal injury case brought by one of Turner’s employees against ASIC’s insured, Sherwin Alumina, LLC (Sherwin). ASIC’s claims for breach of contract are based on Turner’s agreement to indemnify Sherwin and provide insurance under a master service agreement (MSA) and ACE’s responsibility to provide policy proceeds to Sherwin as an additional insured on Turner’s policy.
Turner’s Agreement with Sherwin
Sherwin agreed to hire Turner as an independent contractor to perform separately-contracted services pursuant to an MSA. Under the MSA, Turner agreed to be solely responsible for inspecting the Work site on a daily basis to ensure that the Work is being done in a safe manner and that the Work is in compliance with all safety rules and regulations.
Turner further agreed to indemnify Sherwin for certain claims for bodily injury that might be brought against Sherwin by Turner employees and to provide insurance through additional insured endorsements on Turner’s policies.
Turner did, in fact, obtain the insurance policies that the MSA required. The ACE Comprehensive General Liability Insurance Policy at the center of this case was effective March 1, 2012 through March 1, 2013, and includes additional insured endorsements. And the Certificate of Liability Insurance issued to Sherwin does indicate that the policy contains an additional insured endorsement and a waiver of subrogation.
The Warren Injury and Claim
Edward Warren (Warren), as Turner’s employee, went to the Sherwin plant to perform emergency descaling work, involving washing down the top, mezzanine, and bottom floors of the press floor. While working on a platform attached to a catwalk structure, the tack welds on a square of metal grating below Warren’s feet gave way, causing him to fall through the resulting hole, suffering serious and permanent bodily injuries.
Warren sued Sherwin and its plant manager as owner and operator of the property, alleging negligence in the form of premises liability and gross negligence, as well as failing to maintain a safe work environment. Turner and ACE denied the claim on the basis that the indemnity agreement in the MSA was limited, did not require Turner to indemnify for the negligence or gross negligence of Sherwin or its plant manager, and violated the express negligence rule. After ACE denied the claim, Sherwin settled the case for the ASIC policy limits. ASIC then filed this breach of contract action as Sherwin’s subrogee for reimbursement of that amount, along with its defense costs.
The parties’ respective motions seek construction of a policy of insurance and an indemnity agreement. Under Texas law, insurance policies are construed according to ordinary contract principles. Summary Judgment. Summary judgment is proper if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.
ACE’s Liability on its Policy
There is no dispute that the ACE policy covers ASIC’s claim as Sherwin’s subrogee.
The additional insured language in Endorsement #27 only requires reference to the written contract (MSA) to determine if Turner agreed to make Sherwin an additional insured prior to the date of loss. By not referencing the written contract for any other purpose, ACE does not get the benefit of any limitation on Turner’s indemnity obligation that might be supported by full incorporation of the MSA into the policy’s terms. The fact that the carrier’s obligation to provide insurance to an additional insured might exceed the scope of the named insured’s liability is a risk taken when the carrier fails to reference the terms of the outside contract for purposes of determining the scope of liability.
The only reasonable construction was that the judgment referred to in the final phrase of the predetermination sentence relates to a judgment that ACE’s obligation to provide coverage to Sherwin has been triggered pursuant to the scope set out in the first sentence.
In sum, Sherwin is entitled to additional insured status on the ACE policy under Endorsement #27 for the Warren claim and that the scope of the policy is determined by its own terms without reference to any limitations on the indemnity obligations of Turner in the MSA. Any obligations ACE owes under its policy fully triggered, whether or not they were previously triggered.
The Court also held that any prerequisites for ASIC’s claim as subrogee of Sherwin have been satisfied.
ASIC has sued Turner for breach of the MSA with respect to Turner’s alleged failures to provide insurance and indemnity. The Court concluded that Turner did, in fact, secure insurance in the form of the ACE policy with the additional insured endorsement. Therefore, the Court dismissed the breach of contract claim.
Indemnity for Sherwin’s Own Negligence and Gross Negligence
The conspicuous qualification of Turner’s indemnity obligation expressly limits Turner’s liability to its own negligence or fault. This construction of the indemnity agreement leaves open the question whether ASIC, as Sherwin’s subrogee, can establish that its settlement with Warren included liability based on responsibilities that Turner had contractually assumed, raising questions of Turner’s own negligence or fault.
These provisions clearly contemplate Turner’s liability to Sherwin for allegations of negligence in the nature of premises liability and allegations for the failure to provide a safe workplace, the claims Warren asserted and Sherwin settled. Because Turner accepted these obligations in a contract executed before Warren’s injury occurred, ASIC, as Sherwin’s subrogee, is entitled to pursue its breach of contract claim against Turner to establish what amount of damages, if any, were caused by Turner’s negligence or fault and are thus covered by the indemnity agreement.
When an MSA requires that the customer be made an insured and the vendor fulfills the obligation, the insurer that insured the vendor as a named insured and the customer as an additional insured has an obligation to defend and indemnify the additional insured. When it fails to do so and the insurer of the customer pays the claim it is subrogated to the rights of the customer and may work to prove it is entitled to obtain repayment of its settlement from the insurer that made its insured an additional insured and who the named insured promised to indemnify.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest 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 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 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Passover Seder for Americans
Passover is one of the many holidays Jewish people celebrate to help them remember the importance of G_d in their lives. We see the animals, the oceans, the rivers, the mountains, the rain, sun, the planets, the stars, and the people and wonder how did all these wonderful things come into being?
All Jewish fathers are required to teach their children, at least once a year at the Passover holiday, about the exodus from slavery in Egypt. For American Jews who have difficulty understanding Hebrew and complicated books describing the Exodus, my wife and I wrote this book to use for our own Seder where each member of the family reads part of the book.