Another “Additional-Insured” Coverage Riddle: Court Misses Key Distinction

Aubris Resources, LP, f/k/a United Resources, L.P. v. St. Paul Fire & Marine Ins. Co., (N.D. Tex.  July 26, 2007)

 

In this case, it appears both the court and the additional insured may have missed the key issue in determining whether an insurance company had a duty to defend an additional insured.  United Resources (“United”) entered an Oilfield Services term Agreement with J&R Valley Oilfield Service, Inc. (“J&R”) in which J&R agreed to purchase liability insurance and add United as an additional insured to the policy.  The agreement also contained several indemnity clauses including one requiring United to indemnify and hold harmless J&R for liabilities caused by United’s negligent acts.  (Note well: as discussed below, this indemnity is not enforceable and will not in fact obligate United to indemnify J&R.  For as fuller discussion of this vexed issue under Texas law, see Risk Shifting Agreements Article).  J&R procured a policy issued by St Paul Fire and Marine Insurance Company (“St Paul”) that contained an endorsement adding United as an additional insured to the policy.  However, the endorsement excluded “obligations for which United has specifically agreed to indemnify [J&R].”

 

A J&R employee was injured at the work site and later died.  His family and estate sued United for negligence.  The plaintiffs initially sued J&R but later dropped it from the lawsuit.  United sought defense and indemnity from St Paul who denied coverage based on the indemnity exclusion.  St Paul argued that the lawsuit alleged a claim for which United was required by the Oilfield agreement to indemnify J&R, which falls squarely within the exclusion.  The court agreed.

 

The court held that that United had agreed to indemnify J&R for United’s negligence.  The plaintiffs alleged that United was negligent.  The policy excluded claims for which United was obligated to indemnify J&R.  End of story.  No coverage.  But no one in the case, neither United nor the court, focused on the fact that the indemnity fails to meet Texas’s “fair notice” rule that an indemnity must expressly state that it covers the indemnitee (J&R) against the indemnitee’s negligence.  The Oilfield Agreement protects J&R only against the indemnitor’s negligence and so fails to pass muster under Texas law.  United would be justified in refusing to defend or indemnify J&R against any claim seeking legal liability against J&R. 

 

Therefore, the lawsuit is not an “obligation” of United to defend or indemnify J&R and should not trigger the indemnity exclusion in the policy.