Law and Insurance

Parties Under Contractual Indemnity Obligation May Seek Equitable Subrogation -- So What's New?

Frymire Engineering Co. By and through Real Part In Interest, Liberty Mutual Ins. Co. v. Jomar Int'l, Ltd., #06-0755 (Tex. June 13, 2008), see Frymire Decision.

I am not sure why this case was ever a problem.  It looks like a run-of-the-mill insurance subrogation case, but for some reason both the lower courts and the Texas Supreme Court approached the subrogation issue as if Liberty Mutual wasn't involved.  So, the lower courts got hung up on the issue of whether a manufacturer of a defective product owes a "debt" to the injured plaintiff and whether payment under a contractual indemnity agreement is "voluntary."  The result is a helpful clarification that a contractual indemnitor, here Frymire, that pays a loss does not lose its equitable subrogation rights against a third-party tortfeasor.

For those lucky enough not to have grappled with subrogation issues before, subrogation is the right to collect a payment for a loss made on behalf of the person primarily responsible for causing the loss.  Typically, insurance companies that pay to or on behalf of insureds seek subrogation from some third party primarily responsible for the loss or liability.  The insurance company has a contractual right under its policy to seek subrogation.  However, in this case, the court considered Frymire's equitable subrogation right, meaning one not based on contract or statute, but based on inherent principles of fairness.

Frymire contracted with a general contractor to install air conditioning at a hotel.  Frymire installed a valve manufactured by Jomar. The valve leaked causing extensive damage.  Frymire had agreed both to indemnify the general contractor and hotel owner and to purchase liability insurance (Liberty Mutual).  Accordingly, the hotel sued Frymire for contractual indemnity.  (Note that the hotel could have sued in tort or breach of contract rather than contractual indemnity, which appears to be the sticking point for the lower court.)  Liberty Mutual paid $458,496 on behalf of Frymire.  Liberty Mutual next brought a subrogation suit to recover its payment from Jomar alleging that the valve was defective.  As the Court observed (see below), this kind of subrogation suit happens all the time.

But Jomar argued that Liberty Mutual had no standing to bring its subrogation suit because Frymire had no standing to sue Jomar.  The Court demolished Jomar's argument with a solid reaffirmation of the doctrine of equitable subrogation, to wit: one not acting voluntarily that has paid a debt that another party should have paid, may recover from the other to prevent the other's unjust enrichment.  Jomar obtained summary judgment, affirmed on appeal, that Frymire lacked standing to assert its claims because it could not establish a right to equitable subrogation.  Specifically, because Frymire paid the hotel to satisfy its own contractual indemnity obligation, the payment was voluntary and did not unjustly enrich Jomar.

The Texas Supreme Court reversed this holding and accepted Frymire's argument that (1) the indemnity payment extinguished the debt primarily owed by Jomar; (2) the indemnity payment was involuntary because it was made under a contractual obligation; and (3) Jomar would be unjustly enriched if it escaped liability for its defective product.  The Court confirmed that tort liability could be considered a "debt" for purposes of applying equitable subrogation.  Moreover, one paying under a contractual obligation is not a volunteer and may seek subrogation.  The Court noted that insurance companies have contractual obligations to pay losses to or on behalf of insureds and seek subrogation all the time.

Which raises my original question: why isn't this case being treated as one in which the insurance company is asserting its routine right to subrogation?  Liberty Mutual paid the claim to the hotel.  Liberty Mutual is the party seeking payment from Jomar. 

Whatever the answer, this case should strengthen the rights of commercial entities of all kinds that step up to the plate and promptly pay claims to resolve business disputes and then seek to recover from the party that should have paid the claim.

"Assumption of Liability" Exclusion Misapplied In Coverage Lawsuit

Underwriters at Lloyd's of London v. Gilbert Texas Constr., 245 S.W.3d 29 (Tex. App.-- Dallas 2007, pet. filed May 7, 2008)

This decision appears to jump the tracks when analyzing the effect of a common CGL policy exclusion for "liability assumed in a contract."  Everyone in the case, Lloyd's, the court, even the insured, appear to agree that the exclusion applies in this case (the insured tries to rely on exceptions to the exclusion), but I think they all misunderstand what it is that is excluded.  So it is worth a look.

Gilbert contracted with the Dallas Area Rapid Transit Authority, a state agency, to help construct a commuter rail system.  Gilbert allegedly breached some of its duties under the contract prompting an adjacent landowner to sue DART and Gilbert.  Gilbert's primary insurer defended it, and Gilbert was able to get all of the tort allegations case dismissed under governmental immunity, leaving only breach of contract claims (apparently, the plaintiff landowner asserted that it was a third-party beneficiary under the DART contract).  Gilbert then settled the breach of contract claims.

It is unclear at this point what happened to Gilbert's primary insurer, but Gilbert's excess insurer, Lloyd's, denied a demand to pay the settlement based on the "assumed liability exclusion" (Lloyd's denial letter also asserted a separate breach of contract exclusion, but that defense is never mentioned in the decision).  Most CGL policies contain this provision that excludes damages which the insured is obligated to pay "by reason of the assumption of liability in a contract or agreement."  Since Gilbert was sued for failing to perform duties it had assumed in the contract, the parties agreed that this exclusion applied and went on to other issues.  But they all appear to misread the exclusion.

It is not an "assumption of duties" exclusion; it excludes "liabilities" assumed by contract.  When I agree to dig a ditch and protect nearby structures in doing so, I undertake contract duties.  If I breach those duties, I may be liable to the parties or beneficiaries of the contract, but that is not what the "assumption of liability" exclusion is about.  To assume liability means that I agree to indemnify and hold someone harmless from legal liability to third parties.  The Gilbert Court converts the "assumption of liability" exclusion into a "breach of contract" exclusion, which is a different animal.

It is now clear that a breach of contract lawsuit may be covered by a CGL policy.  (Lamar Homes, Inc. v. Mid-Continent Cas. Co., 239 S.W.3d 236 (Tex. 2007), discussed at Lamar Homes Decision).  Therefore, the mere fact that all tort claims against Gilbert were dismissed does not mean the contract claims do not fall with coverage, and nothing is said about Gilbert's agreements to assume the liability of anyone else.

This case does not implicate the "assumption of liability" exclusion.

Additional Insureds' Rights Expanded In Significant Texas Decision

Evanston Ins. Co. v. ATOFINA Petrochem. Inc., # 03-0647 (Tex. February 15, 2008) (See ATOFINA Decision)

Today, the Texas Supreme Court cleared three significant insurance cases, each of which deserves attention.  I think the most significant of the three is the ATOFINA ("Atofina") case.  I will address the other two in subsequent postings.

This case substantially expands the rights of additional insureds under liability policies.  An "additional insured" is typically added to a named insured's policy by virtue of the parties' contract in which the named insured, for example a contractor or commercial tenant, agrees to procure liability insurance and add the general contractor or landlord as an additional insured to the policy for claims that arise from or relate to the contract operations or premises.  If the policy contains a provision, usually an "additional-insured endorsement," that adds such contract parties to the policy, then they become "additional insureds" under the policy. (See discussion, Additional-Insured Coverage)

Atofina expands coverage for additional insureds in at least three important respects:

1. The additional insured is entitled to insured status under the policy even if the accident or injury was caused by the additional insured itself or some agent other than the named insured;
2. "Sole-negligence" exclusions in the additional-insured endorsement will not excuse the insurer from defending additional insureds (even if the additional insured is the only defendant in the lawsuit) if the additional insured alleges that the plaintiff or someone else may also be negligent (this, I think, may have the greatest impact for future cases, as discussed below);
3. Insurers, including excess insurers, that wrongfully refuse to defend an insured (including an additional insured) may not dispute the reasonableness of a settlement amount, if the insured was offered an opportunity to defend or participate in settlement negotiations.

Here are the facts:  Atofina hired a contractor to perform some construction at Atofina's refinery.  The contract required the contractor to indemnify and hold Atofina harmless from claims "except to the extent any loss is attributable to the concurrent or sole negligence . . . of [Atofina]."  The contractor also agreed to procure a primary liability insurance policy with certain minimum limits and an excess policy "following form" (having the same terms) to the primary policy.  The contractor procured this insurance.  The primary policy contained an additional-insured endorsement that excluded the sole negligence of the additional insured.

Contractor's employee fell through a rusted tank and drowned in the fuel oil below. The decedent's family sued the contractor and Atofina for wrongful death (but soon dismissed the contractor leaving Atofina as the sole defendant).  The primary insurer tendered its limits, but Evanston, the excess insurer, denied coverage to Atofina primarily on the basis that the policy did not cover additional insureds for their own negligence (i.e., coverage applied only if the contractor caused the accident at least in part).  Atofina answered the lawsuit and alleged that the decedent was contributorily negligent.  Atofina also sued Evanston for coverage and settled the underlying lawsuit for $6.75 million (all but one million of which it claimed from Evanston).

The trial court granted summary judgment to Evanston, but the intermediate court of appeals reversed in favor of Atofina.  The Supreme Court reviewed the case (twice -- it issued an initial decision in May 2006, which it now withdraws).  Evanston first argued that the underlying policy covers Atofina "only for liability arising out of [the contractor's] ongoing operations [for Atofina] . . ."  The contractor was not hired, argued Evanston, to work on the storage tanks.  Therefore, the liability was not sufficiently connected to the insured operations.

On this issue, the high court recognized a split among Texas cases.  One case, Granite Contr. Co. v. Bituminous Ins. Co., 832 S.W.2d 427 (Tex. App. - Beaumont 2003) imposed a "fault-based" interpretation that bars coverage for an additional insured unless the named insured's conduct caused the accident.  Two other appellate cases, Admiral Ins. Co. v. Trident NGL, Inc., 988 S.W.2d 451 (Tex. App. Houston [1st Dist.] 1999) and McCarthy Bro. Co. v. Continental Lloyds Ins Co., 7 S.W.3d 725 (Tex. App.- Austin 1999) applied a broader theory of causation that allowed coverage for the additional insured as long as the accident occurred more or less within the contract works.  For example, if the named insured is a painting contractor whose employee is injured on the work site by a stray truck driven by, say, a plumbing contractor, the injury bears a close enough connection to the painting contractor's operations to trigger coverage.  It was on the work site and the employee was within the scope of the contract works.  "We do not require proximate cause or legal causation," said the Atofina Court.

This is a significant clarification of Texas law on this point.  Many insurers routinely challenge additional-insured coverage because the accident was not caused by the named insured's operations.  No more.

Second, and most significant.  Evanston argued that the underlying policy excluded the sole negligence of the additional insured, and the Evanston policy, following form, contained the same exclusion.  Since Atofina was the only defendant in the underlying suit, only sole-negligent liability was being alleged.  The high court disagreed, reasoning:

On the record before us, we are unable to determine as a matter of law whether the accident was the product of Atofina's sole negligence.  The Jones family originally sued both Atofina and [the contractor], alleging both parties were negligent.  There were allegations in Atofina's pleadings that Jones himself was contributorily negligent.  [Emphasis added]

The Court held that, without a determination of liability, it was impossible to say whether the exclusion should apply.

The significance of this reasoning is that arguably an insurer's duty to defend must now be determined not simply by an "8 corner" rule (reading the policy and complaint), but also by reading the defendant's answer and perhaps other pleadings.  Courts are not supposed to look at extrinsic evidence (i.e., anything except the 8 corners of the policy and the complaint)  See discussion of this rule, 8 Corner Rule in Texas).  Up until now, if the complaint fails to allege some fact necessary to trigger coverage, then the insured may be denied an otherwise merited defense.  Now it seems the insured is master of its own fate.  By answering that the plaintiff contributed to his own death, Atofina provides the allegation necessary to avoid the sole-negligence exclusion.  Insureds and additional insureds may provide missing allegations in their answers and expand the strict 8 corner to 12 or more corners, so to speak.  The expansion is potentially very significant.

Third, the Atofina Court appears to reaffirm its earlier holding in Employers Cas. Co. v. Block, 744 S.W.2d 940 Tex. 1988), that an insurer that wrongfully refuses to defend may not challenge a subsequent settlement as unreasonable.  This is the only portion of the opinion that drew a strong dissent.  Justice Hecht agreed that Evanston was obligated to cover the additional insured but would have remanded the case to allow Evanston to challenge the amount of the settlement.  The problem that the dissent finds is that Block involved a primary insurer that breached its duty to defend.  Evanston, as an excess insurer, had no duty to defend, at least until the primary policy was exhausted.  Justice Hecht criticized the majority for applying the Block rule when an excess insurer refuses to accept a demand to participate in settlement negotiations.

However, in this case, the primary insurer had already tendered its policy limits, apparently from the very beginning.  While it may be technically true that Evanston's duty to defend was not yet triggered, it may be that both Atofina and the primary insurer were asking Evanston to take over the defense.  The facts are not clear.  Still, the lesson here for policyholders is to invite excess carriers to the negotiation table.  After this decision, they probably will be hard put to refuse, knowing that they may be stuck with whatever settlement is reached in their absence.

Court Finds Indemnity's Express-Negligence Language Enforceable

XL Specialty Ins. Co. v. Kiewit Offshore Services, LTD, No. 06-41785 (5th Cir. January 2, 2008).  See XL Specialty Decision

The legal issue in this case is whether an indemnification clause in a construction contract is enforceable under Texas law, thus requiring the subcontractor's insurer to defend the indemnitee general contractor.  Both the lower court and the Fifth Circuit held that it is enforceable.  The wonder is why the insurer challenged coverage in the first place.  I suspect that indemnification law is so tricky and misunderstood in Texas that XL thought its denial was worth a shot.  Thus, this case presents yet another teachable moment about the arcane operation of the "express negligence" rule under Texas law.

Kiewit was the general contractor performing welding services on the Skyway Bridge San Francisco Bay Project and hired a subcontractor to do the welding.  An employee of the sub was killed in an explosion when working in a closed space.  The families of the deceased sued both Kiewit and the sub.  The subcontract required the sub to purchase insurance, add Kiewit as an additional insured to the liability policy, and indemnify Kiewit against liability.  The sub's insurer refused to defend or indemnify Kiewit against the lawsuit.  The case does not say why the insurance failed to cover Kiewit as an additional insured.  Instead, the courts focused on whether the insurer had a duty to defend Kiewit by virtue of the indemnity clause in the subcontract.  (General liability policies typically cover its insured's enforceable indemnification obligations)

The indemnification required the sub: "To defend and indemnify [and save harmless Kiewit] against any and all claims . . . on account of acts or omissions of [Sub] whether or not caused in part by the active or passive negligence or other fault of [Kiewit]; provided however ... not if such claims . . . are caused by the sole negligence of [Kiewit]."  [Emphasis added.  Actually the original clause is all-capped to meet a requirement under Texas law that indemnifications must be conspicuous.]

Texas law is almost unique in requiring that indemnifications must meet the "express-negligence" test, that is, must expressly state that the indemnitor [sub] will indemnify the indemnitee [Kiewit] against the indemnitee's negligence, or words that that effect.  Several Texas courts, including at least one Texas Supreme Court, have held that the language quoted above meets the express negligence test.  In other words, it is enough for me to agree to defend and indemnify you against [all claims arising from the contract operations, or the premises, or whatever else we are contracting about] whether or not you are negligent.

XL tried to distinguish other cases by arguing that this subcontract used different causal language than that approved by the Texas courts.  This contract covered liability "on account of" the sub's acts or omissions.  The other cases approved clauses covering liability "arising out of" the indemnitor's conduct.  However, the Fifth Circuit refused to accept this reasoning.  It is true that in other contexts, the Texas Supreme Court has held that "arising out of" connotes much broader causality than other causal phrases, like "due to," but Texas courts have never judged indemnification clauses on the breadth of the causal phrase used to link the liability to the conduct.  And in this case, because the sub's employee was performing the welding, no reasonable judge will quibble over whether accident arose out of the welding operation or was on account of the welding operation. 

There might have been an issue if a Kiewit employee had been doing the welding that the sub should have been doing.  Would the accident then have been "on account of" the sub's conduct?  Probably the answer is yes, simply because the courts do not appear to look very closely at causation.  It is hard enough to evaluate the express-negligence language.

Given that most of the indemnification clauses I review in my practice do not meet the express-negligence test (because most rational indemnitor's do want to cover the indemnitee's negligence), this case is a good illustration of what the courts are looking for.  Really and truly, under Texas law, if the indemnity does not explicitly include the indemnitee's own negligence, it is not enforceable.

 

California Supreme Court Strikes Down Contractual Exculpation of Gross Negligence: Texas Is Still On the Fence

City of Santa Barbara v. Superior Court (Janeway), 161 P.3d 1095 (Cal. 2007).  See case at Janeway Decision.

In July of this year, the California High Court held that contractual releases of future claims for gross negligence in the context of sports and recreational programs were unenforceable as against public policy.  The case is well worth reading not only because of the court's thorough analysis of competing legal principles under California law (the freedom to contract vs. maintaining a reasonable standard of care in community life requiring wrongdoers to recompense injured parties), but also for its wide-ranging examination of the law of other states.  However, the court had little to say about Texas law on this issue because the Texas Supreme Court has never addressed the issue, and Texas state courts are divided. (A good analysis of this issue under Texas law is provided in Ryan S. Holcombe, "The Validity and Effectiveness of PreInjury Releases of Gross Negligence in Texas," 50 Baylor L. Rev. 233 (Winter 1998).

In Texas, as in most other states, a contract involving recreational or sports activities may contain a release or indemnity clause (a release voids liability entirely; an indemnity shifts liability to another) that is enforceable against ordinary negligence if it meets Texas's peculiar "Fair Notice" requirements. (For a discussion of these requirements, see Risk Shifting Agreements).  In effect, the release (indemnity) must expressly state that it releases (indemnifies against) the releasee's own negligence, and the release must be stated in boldface or other conspicuous language.

"Ordinary negligence" is the failure to use that degree of care that a reasonable person would exhibit under the same or similar circumstances.  "Gross negligence," under Texas's (again) peculiar standard is defined in Sec. 41.001 of the Texas Civil Practice and Remedies Code as:

conduct (A) which when viewed objectively from the standpoint of the actor at the time of its occurrence involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and (B) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with conscious indifference to the rights, safety, or welfare of others.

California and most other states define gross negligence as either a "want of even scant care" or "an extreme departure from the ordinary standard of conduct."  In the Janeway case, a girl drowned while participating in a county summer camp for developmentally disabled children.  Camp counselors were aware of the girl's propensity to seizures, and the girl's designated mentor was aware that the girl had suffered a mild seizure a short time before the incident, but she was allowed to dive into a pool and drowned when the counselor's attention was diverted for a few seconds.  The Court held that the parents' release was effective to release ordinary negligence but not gross negligence.

Some courts in Texas reason that negligence and gross negligence are not separate torts, and a release that is effective against ordinary negligence should also release gross negligence.  See Newman v. Tropical Visions, Inc., 891 S.W.2d 713 (Tex. App. --San Antonio 1994, write denied).  At least one other court has held that a release from gross negligence is against public policy and should not be enforced.  See, e.g., Smith v. Golden Triangle Raceway, 708 S.W.2d 574 (Tex. App.--Beaumont 1986, no writ).  The Texas High Court has yet to decide the issue.

My best guess is that Texas will follow California on this issue.  Cases like Newman that put negligence and gross negligence in the same bucket rely on pre-1990's thinking before the Texas Supreme Court decided Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 23 (Tex. 1994), which established a brighter line between negligence and gross negligence.  The Moriel court observed that juries were not given a sufficient criterion for deciding when punitive damages for gross negligence were appropriate.  Logically, the reasoning in Moriel suggests that negligence and gross negligence should be considered separate categories.

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.

Texas's Express Negligence Rule Strikes Again

Gilbane Building Co. v. Keystone Structural Concrete, Ltd. (Tex.App.—Houston, July 2007)

Once again, Texas courts’ hostility to contractual indemnities and strict adherence to the “express negligence” rule defeat the probable intentions of parties to a construction contract to allocate risk.  In this case, Gilbane, the general contractor, required Keystone, a subcontractor, to (1) indemnify Gilbane for injuries arising out of Keystone’s work, and (2) procure $6 million of liability insurance (a $1 million primary policy and a $5 million umbrella) covering Gilbane as an additional insured.  During construction, Keystone’s employee was hurt and sued Gilbane for negligence. The employee was barred from suing Keystone by the worker’s compensation bar. The case settled for $2,000,000, of which Keystone’s primary carrier paid only the first million. Gilbane and its insurer paid the second million.

Gilbane and its insurer then filed suit against Keystone and Keystone’s umbrella carrier to recover the million dollars it paid arguing: (1) Keystone breached the indemnity agreement in the Gilbane-Keystone contract; and (2) Keystone’s $5 million umbrella policy should have paid first before Gilbane’s coverage kicked in.  The trial court granted summary judgment to Keystone on all allegations asserted by Gilbane, and Gilbane appealed.

The Express-Negligence Rule

The Gilbane-Keystone contract contained a contractual indemnity provision requiring Keystone to indemnify and hold harmless Gilbane for all claims resulting from Keystone’s performance failures “regardless of whether caused in part by a party indemnified hereunder.” Gilbane argued that this language expressed the parties’ agreement that Gilbane should be indemnified by Keystone if a claim arose in whole or part during Keystone’s work under the contract.  Keystone countered by arguing that the contractual indemnity was not enforceable because the employee sued Gilbane solely for its own negligence, not Keystone’s, and the indemnity did not expressly indemnify Gilbane for its own sole negligence.  Therefore, it did not comply with the express negligence test mandated by Texas law.

The Court agreed with Keystone.  Under the express negligence rule, an intent to indemnify one of the parties from the consequences of its own negligence, must be specifically stated in the four corners of the document.  Here, the court pointed out, only Gilbane was sued for negligence; Keystone was not sued. Therefore, the court concluded that the contractual language did not meet the express negligence test because it did not expressly provide that Keystone will indemnify Gilbane for Gilbane’s own negligence in the absence of any allegation that Keystone was negligent.

The court would not listen to Gilbane’s entreaties that the employee would have sued Keystone if the workers’ compensation laws had not barred suit against the employer.  Citing Fisk Electric Co. v. Constructors & Associates. 888 S.W.2d 813 (Tex. 1994), the court noted that the Texas Supreme Court instructed courts to look only at the allegations in the pleadings, not actual facts, to determine the indemnitor’s obligation to defend an indemnitee.  End of story.

Umbrella Policy

Gilbane also argued that the overall intent of the contract required Keystone to protect Gilbane with at least $6 million in coverage before Gilbane or its insurance carrier would be involved.  Keystone responded that Gilbane failed to specify that Keystone’s umbrella insurance would be primary to Gilbane’s insurance.  Again, the court agreed with Keystone.  Although the insurance specifications required Keystone to maintain an umbrella policy in the amount of $5 million, the court noted that the contract did not specify the priorities between Keystone’s insurance and any other insurance.  To interpret the contract under Gilbane’s analysis, the court would have to add a provision stating that the umbrella policy would be primary to Gilbane’s insurance. The court declined to do so pointing out that parties should be held to the contract that they drafted.

Parties drafting indemnification and insurance procurement provisions under Texas law should be aware of these restrictions.