Aubris Resources LP v. St Paul Fire and Marine Ins. Co., No. 07-41272 (5th Cir. April 23, 2009), see Aubris Decision .
This case reverses the lower court's judgment in favor of St Paul concerning the interpretation of limiting language in an additional-insured endorsement. United Oil and Minerals LP (later purchased by Aubris) hired J&R Valley Oil Services to service United's oilfield properties. In the contract, J&R agreed to add United as an additional insured to J&R's liability insurance, except for "any obligations for which United has specifically agreed to indemnify" J&R. The contract also required United to indemnify J&R generally against lawsuits arising from United's negligence. J&R's general liability policy added as an additional insured any person that J&R agreed in a written contract to add, "if that written contract for insurance specifically requires such coverages." (I discussed the lower court's decision in an earlier post, here)
An explosion on United's property injured two of J&R's employees who sued United alleging negligence. St Paul refused to defend asserting that United was not an additional insured for claims that United had agreed to cover in the indemnity clause, namely claims arising from United's negligence. Because the plaintiffs asserted negligence, their claims fell within the indemnity and thus were excluded from the additional-insured coverage. The lower court agreed.
On appeal, the 5th Circuit reversed but not for the reason I suggested in my post. Aubris argued that the exception, "any obligation for which United has specifically agreed to indemnify J&R" (emphasis added), refers not to the general indemnification clause in the service contract, but to a separate, independent indemnity for a specific claim that the parties might make later. In other words, should a claim arise, and United agreed in a separate contract that it would indemnify J&R specifically against that claim, then that specific indemnity would be carved out of the additional-insured clause.
The appellate court agreed with Aubris. To accept St. Paul's argument, reasoned the court, would render the word "specifically" meaningless because the contract contains a general indemnity against all claims arising from United's negligence. The parties must have intended to carve from insurance coverage only specific instances of United's negligence that would be the subject of a separate agreement. Therefore, the court reversed and rendered judgment in favor of Aubris.
But I think my point is still valid. Another reason for ruling in Aubris favor is that the indemnification clause itself is unenforceable under Texas law because it fails to expressly state that United will indemnify J&R even if J&R is negligent. This is the "express-negligence" requirement that the Texas Supreme Court has consistently reaffirmed. Without it, the indemnity is pretty much a legal nullity. So, if J&R could never enforce the indemnity provision against United, how can St. Paul rely on it to limit the scope of the additional-insured endorsement? Put another way, St. Paul might avoid covering United only if United agreed to indemnify J&R. But United didn't agree to indemnify J&R because the indemnity is legally insufficient. Therefore, ST. Paul must defend Aubris.
Indemnification law in Texas borders on the irrational. Many businesses draft their indemnity agreements without consulting a lawyer, and a good many lawyers don't understand the quirks of Texas law on the subject. I usually advise my clients to approach contractual risk-shifting agreements with the goal of relying first on insurance before indemnities. Insurance is more reliable, and courts are instructed to interpret insurance policies liberally in favor of coverage. By contrast, courts are supposed to treat indemnities with suspicion. About half the indemnification agreements I come across are unenforceable. Courts more frequently err in construing indemnities than insurance policies.
But if you do rely on an indemnification agreement, make sure it meets Texas' tough enforcement standards.
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