Strict Construction of Master Service Agreements in an Oilfield/Maritime Context

The Facts

Duval claimed he was injured during an offshore personnel basket transfer from a construction support vessel to an oil and gas tension-leg platform in the Gulf of Mexico owned by BHP Billiton Petroleum. The vessel was owned and operated by Deep Marine, Inc. Duval was an employee of Wood Group/Deepwater Specialists, Inc. Duval only sued Deep Marine (the vessel) and Dolphin Services LLC, the operator of the crane that was being used for the personnel transfer. Deep Marine had an MSA with BHP requiring BHP to indemnify Deep Marine for injuries asserted by BHP or members of BHP's other contractors (of which Deepwater Specialists, Duval's employer, was one). Deep Marine sought a defense, additional insured status, and indemnity from BHP under the MSA, which was accepted by BHP.

During the course of the litigation, Deep Marine filed for bankruptcy, and the case was stayed until the bankruptcy court lifted the stay with an order allowing the Duval case to proceed against Deep Marine's insurers but ordering that Duval could not enforce any judgment against Deep Marine or the bankruptcy estate. Duval amended his complaint to sue Deep Marine's protection and indemnity insurers, Northern Assurance, and Markel American (collectively "Underwriters").

Underwriters filed a third-party complaint against BHP seeking protection pursuant to the MSA between BHP and Deep Marine. Underwriters and BHP filed cross-motions for summary judgment. The MSA contained a choice of law clause, stipulating application of general maritime law and, if that was inapplicable, then Texas law was to apply. The court granted BHP's motion and denied Underwriters'. The Fifth Circuit affirmed, and its analysis may have importance to what should be included in MSAs and how they should be interpreted.

The Holdings

Of the various holding, two would seem to have ongoing importance. First, the court ruled that the term "insurers" was not included in the definitions of either "Company Group" or "Contractor Group" in the MSA. Here, it was, in fact, the insurers that were the parties to the case and were the only ones that might be called on to incur liability and pay Duval. The court reasoned that Underwriters were not entitled to have any benefits under the MSA because "insurers" were not within the definition of each party's group. Practice hint: when given an opportunity to revisit the drafting/negotiation of MSAs, include "insurers" as part of the definition of one's group and, when MSAs are involved in the issues in litigation, strict interpretation should be given to how the party groups are defined in the agreement.

The second and perhaps greater issue of importance from this court's decision relates more to the additional insured/primary insurance issue. Underwriters contended that BHP agreed to become Deep Marine's primary insurer for claims for which Deep Marine was to be indemnified. The MSA contained the standard terms requiring BHP to support its indemnification obligations with self-insurance, a liability insurance policy, or a combination of the two, that Deep Marine was to be named on BHP's insurance policies as an additional insured, and that BHP's insurance served as primary coverage without right of contribution from Deep Marine's insurance.

Relying on the fact that BHP chose to self-insure for claims under $1 million, and because Duval's claim was for less than $1 million, the court concluded that the additional insured and primary insurance obligations did not apply to BHP's self-insurance. The court reasoned that the MSA was not clearly written to make the additional insured and primary insurance provisions applicable to the self-insurance parts of the agreement. The court also cited to a Texas state court case that explained "the term 'self-insurance' is a misnomer" because "in effect, a self-insurer does not provide insurance at all." Hertz Corp v. Robineau, 6 S.W.3d 332 (Tex. Ct. App. 1999) (emphasis in original). The self-insurer does not "assume [] all the duties and burdens of an insurer," unless the parties have expressly contracted for "liability coverage." Slip op., p. 3. "To say that a self-insurer will pay the same judgments and in the same amounts as [an] insurance company would have had to pay is one thing; while it is obvious that to assume all the obligations that exist under a [liability policy] is quite another thing." Id.

The court concluded the additional insured and primary insurance requirements in the MSA do not apply to BHP's self-insurance. The author believes that most lawyers and risk managers will be surprised by this holding. The court cites no precedent, and the author is not aware of any on this precise issue.

Conclusion

Only time will tell whether this decision will be held to its facts or be cited for its possibly broader implications. Clearly, adding additional language in MSAs will be warranted if it is important to have the added protections of additional insured/primary insurance obligations when there is the possibility that one or both parties to an MSA self-insure or have a large retention.