Recently, the U.S. Fifth Circuit Court of Appeals decided some important indemnity issues in an offshore context in American Home Assurance Company v Chevron, U.S.A., Inc., 2005 WL 318693, ___ F3d ___ (5th Cir 2005). Issues concerning both defense and indemnity aspects of contractual provisions in master service agreements will be affected by this case.
The case is, in many respects, a "typical" offshore personal injury in which the plaintiff sued his employer under the Jones Act and many of the other companies on the site under various other theories of liability. Here, it occurred on a spar off the coast of Louisiana. After the case was filed, it was determined that the spar was a work platform and not a vessel, so the Jones Act did not apply, and the plaintiff's employer was dismissed. However, the other defendants claimed contractual indemnity and defense from the employer, who decided to grant both indemnity and defense.
The employer and its own insurer disagreed over that decision with the insurer believing that the Louisiana Oilfield Indemnity Act voided the contractual indemnity and defense. The insurer ultimately agreed to defend the oil company defendants in return for an assignment of rights under the master service agreement. The insurer then settled the personal injury case and paid the settlement but first attempted to get the oil companies to agree to the reasonableness of the settlement or to take back their own defense, neither of which they would do. The instant case is the later filed suit wherein the insurer attempted to recoup the settlement amount and defense costs from the oil companies.
The Louisiana Oilfield Indemnity Act (LOIA) voids certain indemnity and defense agreements regardless of whether the parties have insurance to back such provisions.1 In essence, if the indemnitee is negligent or at fault, then the indemnitee cannot obtain contractual indemnity or defense. The problem is, when is the determination of whether an indemnitee is negligent or at fault made—at the beginning of a case based on the pleadings, sometime during the case on motions, after a judgment or settlement, or upon a later independent adjudication of such negligence or fault? In this case, the federal Fifth Circuit Court of Appeals holds that those questions, under the circumstances present therein, may be decided at the last possible time, on an independent adjudication of negligence or fault of the indemnitee.
The main holdings of the case are:
The LOIA does not prohibit an indemnifying contractor from voluntarily accepting an indemnitee's request for a defense before adjudication of fault; and
The LOIA does not prohibit a determination on the merits after the indemnifying contractor settles with the plaintiff before trial, even if the settlement results in a dismissal with prejudice of the underlying lawsuit.
Because the trial court below reached the opposite conclusion, the Fifth Circuit reversed and remanded the case for further proceedings consistent with its decision. American Home Assurance Company v Chevron, U.S.A., Inc., 2005 U.S. App LEXIS 2165, 2005 WL 318693 (5th Cir Feb. 10, 2005).
Facts of the Case
In March 2000, James Blackmon was working on an offshore rig off the Louisiana coast when he sustained injuries. Blackmon sued his employer, M-I LLC, Halliburton Energy Services, Inc., whose personnel Blackmon was working alongside when he was injured, and Chevron USA, Inc., the operator of the rig, in the U.S. District Court for the Eastern District of Louisiana. Although Blackmon's employer was named as a Jones Act defendant in Blackmon's original complaint, M-I was dismissed without prejudice when it was determined that the rig was not a vessel. (The rig, "Chevron Genesis," is a floating production platform (or, "spar"), and not a vessel for Jones Act purposes. Thus, Blackmon's claim against M-I was limited to a claim for workers compensation.)
Regarding Blackmon's suit against Chevron and Halliburton, Chevron requested defense and indemnity from M-I pursuant to its Master Service Order and Agreement ("MSA") with M-I and Halliburton sought the same in accordance with a Mutual Indemnity and Waiver of Recourse Agreement ("MIA"), signed by Halliburton, Chevron, and M-I. M-I agreed to assume the defense of both Chevron and Halliburton and notified its primary liability insurer, American Home Assurance Company, and its excess insurer, National Union Fire Insurance Company of Pittsburgh, Pennsylvania (collectively, "AIG").
Approximately 6 months later, a settlement conference for resolution of the suit was held resulting in a $900,000 settlement offer. Blackmon rejected the offer and, several months later, AIG settled the matter for $2 million. Subsequently, the district court entered a Final Motion of Dismissal with Prejudice as to "all matters and claims by any party against any party … to M-I LLC, … Chevron USA, Inc., and Halliburton Energy Services, Inc…."2 Importantly, 2 days before AIG settled, it requested that Chevron and Halliburton participate in the settlement negotiations—an offer both Chevron and Halliburton declined.
Ancillary to AIG's settlement with Blackmon, M-I assigned its rights in the litigation to AIG, who thereafter filed an action in the U.S. District Court for the Eastern District of Louisiana against Chevron and Halliburton ("the defendants") seeking to recover the $2 million paid to Blackmon.3 AIG and the defendants filed cross-motions for summary judgment. AIG argued that pursuant to the LOIA, the indemnity and additional insured obligations contained in the MSA and MIA were void and unenforceable because the defendants had not been adjudicated free from fault. Therefore, AIG reasoned, since the indemnity obligations were void, it was entitled to recover all sums expended in settling the Blackmon suit. Furthermore, by virtue of M-I's assignment to AIG of its defense and indemnity agreement with the defendants, AIG claimed it was also entitled to recover all sums expended in defending the underlying case.
Conversely, the indemnitee defendants argued that the LOIA could not void the indemnity provisions of the MSA and MIA absent a finding of fault on their part. Arguing that a determination or trial on the merits of a settled claim was inappropriate because, in essence, it would be a re-litigation of the Blackmon matter, which was settled with full prejudice, the indemnitee defendants averred that the LOIA does not apply to an already settled claim. Rather, they argued, the LOIA applies only if the party seeking indemnification is found to be solely or concurrently at fault. And, since a fault determination was never made due to AIG's settlement with Blackmon, the indemnitee defendants reasoned that the LOIA could not operate to void the indemnity provisions of the MSA and MIA.
In August 2003, the district court granted the indemnitee oil companies' summary judgment motion finding that the LOIA voids indemnity agreements only when there has been an adjudicated finding of fault. Since the indemnitee defendants had chosen litigation over settlement by refusing to participate in the Blackmon settlement, the district court ruled that the indemnitor should not be allowed to circumvent the LOIA by settling the suit and then claiming the indemnity agreement was invalid.
In February 2005, the Fifth Circuit Court of Appeals reversed the District Court. As noted above, the appellate court held that a settling indemnitor should be allowed the opportunity to re-litigate the fault of the indemnitee such that LOIA might void the contractual indemnity agreement.
Meloy v Conoco, Inc.
In reaching its conclusion, the court of appeals discussed two key cases dealing with indemnification under the LOIA. In Meloy v Conoco, Inc., 504 S2d 833 (La 1987), a Louisiana State Supreme Court case, an indemnifying service contractor's employee was injured while working on the indemnitee oil company's offshore oil platform. The service contractor was working under a blanket oilfield master service contract requiring the contractor to indemnify the oil company for its own negligence. The Louisiana Supreme Court in Meloy held that LOIA voided any indemnification and defense agreements requiring an oilfield contractor to provide defense or indemnity where the indemnitee oil company was in some way at fault; however, if the indemnitee was not found at fault, the indemnity agreement was not void to the extent that the service indemnitor was liable for the indemnitee's costs for defense. Moreover, the nature of the indemnity before the court was such that the allegations in the pleadings did not control the service contractor's contractual duty to pay for the costs of defending the suit.4
Quite interestingly, while the Fifth Circuit in American Home notes that the Louisiana Supreme Court in Meloy found that LOIA prohibits a contractual provision requiring that the defense be taken up at the beginning of a personal injury suit before there is a determination of fault of the indemnitee (as opposed to a reimbursement for defense costs incurred after the fact), the court holds that there is nothing in LOIA that prohibits a "voluntary" agreement for the indemnitor to undertake the up-front defense. Query: If a statute as interpreted by the state's highest court prohibits an up-front defense requirement, how can parties "voluntarily" agree to do that? There is quite obviously a disconnect in logic by the court on that issue, which presumably the Louisiana legislature or that state's supreme court will (or should) fix. Either parties are free to contract on that issue or they are not. Here the Fifth Circuit is apparently saying the parties were not free to contractually agree before the injury to an up-front defense, but after the injury they are free to do so. Surely, that cannot be the correct interpretation of the statute.5
Tanksley v Gulf Oil Corporation
Another puzzling aspect of the American Home decision is how it distinguishes its prior holding in Tanksley v Gulf Oil Corporation, 848 F2d 515, 517-518 (5th Cir 1988). Tanksley involved an injured worker who filed a negligence action against an oil company for injuries sustained while performing workover duties on an oil company's platform. The oil company invoked an indemnity provision in the workover contract and filed a third-party complaint against the employee's employer, an indemnifying service contractor. The district court granted the contractor's motion for summary judgment, which contended that the LOIA nullified the indemnity provision, thus barring the oil company's recovery, and dismissed the oil company's third-party claim. The oil company appealed the district court's decision and then settled with the plaintiff, but tried to maintain its appeal seeking remand of the case to determine its actual fault; i.e., to determine if the LOIA applied.
The Fifth Circuit declined to remand the case noting that when the indemnitee chose to settle the personal injury case it opted to forego trial to determine whether it was free from fault and thus outside the scope of the LOIA. The Tanksley court concluded, therefore, that absent such fault finding, the LOIA nullified the indemnity agreement. Query, why should this be logically different and thus completely distinguishable from the situation in which the indemnitee "requests" and the indemnitor "voluntarily agrees" to an up-front defense from the indemnitor and the indemnitor settles the personal injury case?
It appears to the author that if one employs a logic based approach, then the American Home case was completely results driven. If, in this case, the court had decided that based on the Louisiana Supreme Court's Meloy decision there could be no "voluntary" "requests" for an up-front defense by the indemnitee to the indemnitor, then there is no way for the court to have reached the conclusion that after a settlement of the personal injury case, the fault of the indemnitee can be relitigated just because it is the indemnitor that is controlling defense and settlement. If Meloy means what it says, then the indemnitee has no right to "foist" a "voluntary request" on an indemnitor for defense and any later settlement of the case should be governed by the prior precedent in Tanksley. In American Home it appears that a quid pro quo was struck: the indemnitee will be allowed to "voluntarily request" a defense, but if the indemnitor accepts that defense, then the indemnitor will be allowed the opportunity to prove fault of the indemnitee after a settlement.
The better reasoned approach would have been to not allow the defense to be "volunteered" onto the indemnitor such that there then needed to be some return consideration. The LOIA says no indemnity and defense unless the indemnitee is free from fault. What this case has done is that now a big company indemnitee (whether it is a contractor or oil company) can force a defense onto the smaller indemnitor by using the "We won't do business any more with you if you don't defend us in this case"; then any settlement is subject to wide open full relitigation of the negligence or fault of the indemnitee if the indemnitor wants to try to recoup the settlement amounts. In short, LOIA has now lost some of its teeth and the author wonders whether that is a good thing.
Perhaps, the real reason for the author's dismay over this result is the expectation that the "We won't do business with you any more if you don't defend us in this case" 800-pound-gorilla rule is now fully in play and there is no way for a practitioner to answer the question from the indemnitor client who asks, "Can they really do that?" The better way to have ruled would have been that Meloy says no up-front defense to the indemnitee. The indemnitee must handle its defense and settle, or try the personal injury case as it pleases. Then, based on the Louisiana state court cases on point which were decided after the Tanksley case, Tanksley is no longer good law and the issue of negligence or fault can be re-litigated upon a settlement, if the indemnitee thinks it needs to try to gets its money back based on it not being at fault to any degree.
To have both Tanksley and American Home as "good law" in the Fifth Circuit can only lead to further confusion in an area that is already fraught with difficulty. Apparently, until there is a Louisiana Supreme Court case on this exact issue, the law is now that if the indemnitor "voluntarily" agrees to defend the indemnitee, then the issue of negligence or fault can be relitigated; but if the indemnitee defends itself, then, on a settlement there can be no relitigating negligence or fault of the indemnitee. The result is that if the indemnitee defends itself and believes it is without fault, it must not settle the personal injury case. However, if the indemnitor is successfully "volunteered" to defend, then it would do best to not put on such a great defense of the indemnitee, settle, then relitigate the negligence or fault of the indemnitee.
Aren't we turning the system upside down over a statute that seems to be fairly clear in its meaning? One can only hope that the Louisiana Supreme Court or legislature does something to fix this situation so that practitioners can properly read and interpret an otherwise clear statute without having to apply unwritten and uncontrollable business influence rules.
The author gratefully acknowledges the assistance of associate Richard Preston.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
Any provision contained in, collateral to, or affecting an agreement pertaining to a well for oil, gas, or water, or drilling for minerals … is void and unenforceable to the extent that it purports to or does provide for defense or indemnity, or either, to the indemnitee against loss or liability for damage arising out of or resulting from death or bodily injury to persons, which is caused by or results from the sole or concurrent negligence or fault (strict liability) of the indemnitee… La. Rev. Stat. § 9:2780.
LOAI was applicable to this case by virtue of the Outer Continental Shelf Lands Act, 43 U.S.C. § 1331, et. seq.
2 Civil Action 00-1907, Rec. Doc. 88, Final Motion of Dismissal with Prejudice.
3American Home Assurance Company v Chevron, U.S.A., Inc., 2003 U.S. Dist LEXIS 15401; 2003 WL 21999336 (ED La, Aug. 20, 2003).
4 Note: The dissent in Meloy cogently disagreed with the majority opining that under well settled law of Louisiana and the Fifth Circuit, the pleadings of a suit, not the indemnity provisions, determine the obligation to defend. Additionally, the pleadings of the suit, not the outcome of the suit, determine the obligation to pay defense costs. Citations omitted.