Indemnity Agreements The

Document Sample
Indemnity Agreements The Powered By Docstoc
					           The University of Texas School of Law




                      Presented:
              2009 Insurance Law Institute

                 October 15-16, 2009
                  San Antonio, TX




Update on Contractual Indemnity Agreements
 And the Insurance Obligation They Create


            Sandra Cockran Liser




                                              Author contact information:
                                              Sandra Cockran Liser
                                              Naman Howell Smith & Lee, L.L.P.
                                              Fort Worth, TX

                                              817-870-1976
                                              sliser@namanhowell.com




                               Continuing Legal Education • 512-475-6700 • www.utcle.org
  Update on Contractual Indemnity Agreements and the Insurance
                    Obligations They Create

         Presented by Sandra Liser at University of Texas – Advanced Insurance Seminar
                                      October 15 – 16, 2009


       Your insurance company Client calls you with a new coverage assignment. Client asks

you whether it must defend and/or indemnify ABC Construction Company who has entered into

a contract with Client’s insured, XYZ Subcontractor. What must you consider to reach your

ultimate opinion on client company’s duties? What documents should you review? Where do

you begin? Where does your analysis end?

A.     Analysis of the Insurance Procurement Requirement Provision

       Before the recent Texas Supreme Court decision in Evanston, your analysis would likely

begin, and perhaps end, with the indemnity provision of the contract. Now, you should look first

at any requirement in the contract between your insured, XYZ Subcontractor, and ABC

Construction Company to determine if your insured agreed to procure liability insurance for

ABC Construction Company and, if so, the precise terms of that contractual obligation.

Depending upon the results of that analysis, you may never actually review the indemnity

agreement.

       In Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex.

2008), ATOFINA entered into a service contract with Triple S Industrial Corporation to perform

maintenance at ATOFINA’s Port Arthur refinery. The service contract contained an indemnity

provision and a separate requirement that Triple S carry certain minimal levels of liability

insurance coverage. Triple S agreed to indemnify ATOFINA from all personal injuries and

property losses sustained during the performance of the contract “except to the extent that any

such loss is attributable to the concurrent or sole negligence, misconduct or strict liability of


UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                              PAGE 1
ATOFINA.” Triple S also agreed to carry at least $500,000 of primary comprehensive general

liability (“CGL”) insurance, “including coverage for contractual liability insuring the indemnity

agreement” and an excess or “umbrella” liability policy “following form for the CGL policy” of

at least $500,000. Triple S complied with these contract obligations by purchasing a $1 million

CGL policy from Admiral Insurance and a $9 million commercial umbrella policy from

Evanston.

       A Triple S employee died while working at the ATOFINA facility pursuant to his

employer’s contract. His survivor sued Triple S and ATOFINA for wrongful death. Admiral

tendered its $1,000,000 policy limits. ATOFINA then demanded coverage from Evanston as an

additional insured under the umbrella policy. Evanston denied the claim and ATOFINA brought

Evanston into the case as a third-party defendant. The coverage portion of the lawsuit was

severed and both ATOFINA and Evanston filed motions for summary judgment. While the

motions were pending, ATOFINA settled the personal injury lawsuit for $6.75 million and then

sought to recover $5.75 million from Evanston, the amount in excess of the Admiral policy. The

trial court granted summary judgment in favor of Evanston but the judgment was reversed by the

Beaumont Court of Appeals. The Texas Supreme Court issued an original opinion then granted

the motion for rehearing and issued its new opinion on June 13, 2008. In the original opinion,

the Supreme Court analyzed the same policy provisions and determined ATOFINA was not

entitled to coverage under the Evanston policy for ATOFINA’s own negligence and referred the

matter back to the trial court to determine the respective liabilities of the parties. This decision

received negative commentary because of its potential effect to increase litigation. However, in

the substituted opinion, the Court held that the Evanston umbrella policy provided coverage for

ATOFINA’s sole negligence because of the terms of the agreement, that Evanston was bound by




UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                              PAGE 2
the settlement agreement and obligated to pay the $5.75 million but that ATOFINA was not

entitled to statutory penalties for untimely payment of claims.

       Evanston initially argued that it had no coverage because both the terms of the

indemnification provision of the contract and the language of the Evanston policy excluded

coverage for losses caused by ATOFINA’s own negligence. The Court stated that ATOFINA

was not seeking indemnity from Triple S but was rather claiming it was entitled to

indemnification from Evanston by virtue of its status as an additional insured under the umbrella

policy. Therefore, the Court based its analysis solely on the language of the insurance policy and

did not analyze the indemnity provision in the contract.

       ATOFINA relied on Section III.B.6 in support of its allegations of insured status, which

states that an “insured” includes:

       A person or organization for whom you have agreed to provide insurance as is
       afforded by this policy; but that person or organization is an insured only with
       respect to operations performed by you or on your behalf, or facilities owned or
       used by you.

ATOFINA claimed that it was fully covered because it is a “person or organization for whom

Triple S has agreed to provide insurance” and because the loss “respected operations performed

by Triple S.” Evanston countered that the language of Section III.B.6 does not cover an

additional insured for its own negligence and that, because the death was caused solely by

ATOFINA’s negligence, the death did not “respect operations performed by Triple S.” Please

see Section B of this paper for a more detailed analysis of these contractual terms.

       In reaching its decision, the Supreme Court analyzed and compared three prior decisions

from three separate courts of appeal: Granite Construction Co. v. Bituminous Insurance Cos.,

832 S.W.2d 427 (Tex. App.—Amarillo 1992, no writ); Admiral Insurance Co. v. Trident NGL,

Inc., 988 S.W.2d 451 (Tex. App.—Houston [1st Dist.] 1999, pet. denied) and McCarthy Brothers

Co. v. Cont’l. Lloyds Ins. Co., 7 S.W.3d 725 (Tex. App.—Austin 1999, no pet.). The Court
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                             PAGE 3
followed the reasoning of McCarthy and Admiral. The Court stated that Granite relied on the

underlying service contract but that the Supreme Court had made it clear that a liability insurer

should determine its duty to defend solely from the terms of the policy and the pleadings of the

third party claimant. Note that the Court stated later that the duty to defend was not triggered in

this opinion so this statement seems somewhat inconsistent. The Supreme Court went on to say

that, even if it examined the service contract, the contract did not assign responsibility for the

storage tank where the accident occurred to ATOFINA but rather gave Triple S the exclusive

“power and authority to select the means, method and manner of performing” the operation. The

Court went on to reject a “fault-based” interpretation of this type of additional insured

endorsement which was contrary to the result in the first opinion and instead interpreted “with

respect to operations” under a broader theory of causation which requires only a causal

connection or relation and not a proximate cause or legal causation. The Court stated that, even

though the pleadings in the underlying suit did not indicate whether Jones was performing a

Triple S operation at the precise time of the accident, it was clear that the deceased worker was

present at ATOFINA’s facility for the purposes of Triple S’s operations. Therefore, because the

accident “respected operations performed by Triple S” the Evanston policy provided coverage,

regardless of the party who was actually at fault.

       The Court further distinguished Fireman’s Fund v. Commercial Standard Ins. Co., 490

S.W.2d 818 (Tex. 1972) because the service contract in Fireman’s Fund included only an

obligation to purchase insurance to secure the indemnification agreement, not a requirement that

General Motors be added as an additional insured. Instead, the Court stated that the decision

before it was more analogous to its 1992 decision in Getty Oil Co., v. Insurance Co. of North

America, 845 S.W.2d 794 (Tex. 1992) in which the Court held that the Texas Oil Field Anti-

Indemnity Statute did not apply to the insurance requirement in the underlying contract because

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                              PAGE 4
the insurance procurement provision was separate from the indemnity provision. The Court

noted that the insurance provision in the Triple S contract was not as clear as the one in Getty,

but the Court believed it was clear enough.

       Evanston next argued that the coverage provided by its excess policy could be no broader

than the underlying CGL policy. Both Evanston and ATOFINA relied on Section III.B.5 of the

policy to support their positions on coverage. Section III.B.5 says an insured can be:

       Any other person or organization who is insured under a policy of “underlying
       insurance.” The coverage afforded such insureds under this policy will be no
       broader than the “underlying insurance” except for this policy’s Limit of
       Insurance.”

It was undisputed that the underlying Admiral policy excluded coverage for ATOFINA’s sole

negligence. The Court noted they were unable to determine as a matter of law based on the

record before them whether the accident was caused by ATOFINA’s sole negligence and,

therefore, that it was impossible to determine if Section III.B.5 of the Evanston policy excluded

ATOFINA from coverage. The Court then analyzed Section III.B as a whole and concluded that

each “who is an insured” clause operated to grant coverage independently. The Court

determined that no language in Section III.B.5 led the Court to believe that this paragraph

restricted coverage available under Section III.B.6 because that would render portions of the

Evanston policy meaningless or useless.

       After the Court determined coverage was provided under the Evanston policy, the Court

went on to hold that Evanston could not collaterally attack the settlement and that Evanston was

therefore bound to pay the $5.75 million that remained of the settlement amount. The Court

determined that Evanston had wrongfully denied coverage throughout the litigation and,

therefore, had waived the right to contest the settlement amount. Evanston argued this was

inappropriate because Evanston, as the excess carrier, had no duty to defend and the cases that

hold a carrier who wrongfully refuses to defend its insured waives its right to contest the
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 5
settlement were inapplicable. In one of its briefs, Evanston cited, to no avail, the long line of

cases which allow a carrier to challenge the reasonableness of the settlement even when the

carrier did owe a duty to defend. Stumph v. Dallas Fire Ins. Co., 34 S.W.3d 722, 732 (Tex. App.

– Austin 2000, no pet.); Texas Property & Cas. Ins. Guar. Ass’n v. Boy Scouts of America 947

S.W.2d 682, 692 (Tex. App. – Austin 1997, no writ); Texas United Ins. Co. v. Burt Ford Enters.,

Inc., 703 s.W.2d 828, 835 (Tex.App. – Tyler 1986, no writ); Rhodes v. Chicago Ins. Co., 719

F.2d 116, 120 (5th Cir. 1983).   Evanston further argued that not allowing it to challenge the

settlement was a violation of the concepts set forth in State Farm Fire & Casualty Co. v. Gandy,

925 S.W.2d 696, 714 (Tex. 1996). In the only ruling favorable to Evanston, the Court held that

the case presented a classic third-party claim in which ATOFINA was seeking coverage for

injuries sustained by a third party, not a first party claim. Therefore, the “prompt payment of

claims” statute, Tex. Ins. Code §§ 542.051-061 did not apply and ATOFINA was not entitled to

damages and attorneys fees awarded by the trial court under that statute.

       In Aubris Recourses LP v. St. Paul Fire and Marine Insurance Co., 566 F.3d 483 (5th Cir.

2009), the Court applied the decision in Evanston. In that decision, Aubris Resources, formerly

known as United Oil and Minerals Limited Partnership (“United”), filed a declaratory judgment

action in the Southern District of Texas seeking a declaratory judgment that St. Paul Fire and

Marine Insurance Company had a duty to defend United in state court lawsuits arising from an

explosion at an oil field that was serviced by St. Paul’s insured, J & R Valley Oil Services.

       United hired J & R Valley to service its oil field operations in April 2002. The service

agreement required J & R Valley to carry commercial general liability insurance and to name

United as an additional insured under the policy. The agreement also contained a general

indemnity provision whereby United agreed to indemnify J & R Valley for causes of action

arising from United’s own negligence. On October 20, 2003, an explosion at one of United’s oil

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                             PAGE 6
fields severely injured two J & R Valley employees, one of whom ultimately died from their

injuries. Thereafter, the employees and their representatives sued J & R Valley and United,

alleging negligence. J & R Valley was ultimately dismissed from the lawsuits after J & R Valley

settled the gross negligence claim with the estate of the deceased employee. The lawsuit against

United continued. St. Paul denied additional insured coverage, citing the general indemnity

provision in the services agreement whereby United agreed to indemnify J & R Valley for causes

of action arising from United’s own negligence. St. Paul argued that this general indemnity

provision of the contract limited the scope of United’s additional insured coverage under the

service agreement and, because United was being sued for its own negligence, it was not an

additional insured. The District Court agreed and granted a motion for summary judgment in

favor of St. Paul. However, the Fifth Circuit, analyzing Evanston, vacated the summary

judgment and rendered judgment in favor of United.

       The Fifth Circuit recognized that the practical question presented to it was who will pay

for United’s expense in the underlying litigation, or who had the duty to. The Court also pointed

out that its review of the summary judgment was de novo, applying the same legal standards as

the district court. Furthermore, because federal jurisdiction was based on diversity of

citizenship, the Fifth Circuit applies the substantive law of the forum state.

       The Fifth Circuit set forth the guidelines under which it interpreted the contract between J

& R Valley and United, using Texas Law. The same general rules apply to the interpretation of

contracts and insurance policies. See, e.g. Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 155,

157 (Tex. 2003). The contract should be “considered as a whole” and each part of the contract

should be given affect,” Forbeau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994). The

Court stated its primary concern was to ascertain the parties’ true intent, as expressed in the

language of the policy. Kelley–Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 464 (Tex.

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                             PAGE 7
1998). A court cannot adopt a construction that renders any portion of a policy meaningless,

useless, or inexplicable. Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660,

668 (Tex. 2008). However, when interpreting an insurance policy, if a provision has more than

one reasonable interpretation, a court must interpret it in favor of the insured, provided that

interpretation is not unreasonable, and even if the insurer’s interpretation is more reasonable.

Nat’l Union Fire Ins. Co. of Pittsburg, Pa. v. Hudson Energy Co., 811 S.W. 2d 552, 555 (Tex.

1991). In particular, exceptions or limitations on liability are strictly construed against the

insurer and in favor of the insured. Id. Based on these rules of construction, the Fifth Circuit

determined it must adopt United’s interpretation if the Court ultimately concluded that

interpretation was at least reasonable.

        The Fifth Circuit looked first to the insurance policy issued by St. Paul, which included

the following additional insured endorsement:

        “Any person or organization that you agree in a written contract for insurance to
        add as an additional protected person under this agreement is also a protected
        person for the following if that written contract for insurance specifically
        requires such coverages for that person or organization…(Emphasis added).”

The Fifth Circuit then turned to the services agreement with United to determine whether the

written contract for insurance required coverage for the underlying personal injury litigation.

The services agreement contained an additional insured provision in Section 10.2 which stated,

in relevant part:

        “UNITED and its subsidiaries, affiliated companies, co-owners, partners and joint
        venturers (if any), and their respective members, managers, officers, directors,
        agents and employees shall be named as additional insureds in each of
        Contractor’s policies, except Workers’ Compensation; however, such extension
        of coverage shall not apply with respect to any obligations for which
        UNITED has specifically agreed to indemnify Contractor (emphasis added).”

        The Fifth Circuit recognized that Section 10.2 plainly required J & R Valley to name

United as an additional insured. The dispute, however, arose from the stipulation in Section 10.2

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                              PAGE 8
that there will be no additional insured coverage for “any obligations for which UNITED has

specifically agreed to indemnify [J & R Valley].” St. Paul argued that this exclusionary

language in Section 10.2 refers to United’s agreement in Section 11.1 to indemnify J & R Valley

for causes of action arising from the negligence of United. Section 11.1, which was entitled

“GENERAL INDEMNITY” states, in relevant part:

       “UNITED SHALL PROTECT, DEFEND, INDEMNIFY, AND HOLD
       HARMLESS J & R AND ITS OFFICERS, DIRECTORS, AGENTS, AND
       EMPLOYEES FROM AND AGAINST ALL CLAIMS, DEMANDS, AND
       CAUSES OF ACTION ASSERTED BY ANY PERSON (INCLUDING BUT
       NOT LIMITED TO EMPLOYEES OF J & R AND UNITED) THAT ARISE
       OUT OF OR ARE RELATED TO WORK AND ARE CAUSED BY OR ARISE
       OUT OF UNITED’S NEGLIGENT ACTS OR OMMISSIONS…”

The Fifth Circuit determined that its decision would then turn upon the relationship, if any,

between Section 10.2 and Section 11.1 of the services agreement. St. Paul argued that the two

provisions must be read together while United, relying primarily on Evanston, disputed the

existence of any relationship between Sections 10.2 and 11.1 under the present state of Texas

case law. Relying upon Evanston, the Fifth Circuit agreed with United and determined it must

only look to Section 10.2 to determine whether St. Paul provided coverage to United.

       The Fifth Circuit stated that, from its analysis of Evanston, when a court determines

whether there is coverage, a court looks only to the additional insured provision itself and that

indemnity is a separate, and later arising, question from coverage. The Fifth Circuit

acknowledged that the additional insured coverage must be specifically required by the contract

and that the services agreement in question included, in a separate section, a general indemnity

provision. However, based upon the Court’s interpretation of Evanston, it was not material

whether the additional insured provision is finally determined in the policy or in the service

contract. The separate indemnity provision could not be applied to limit the scope of coverage




UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 9
required in the insurance procurement provision. The Fifth Circuit quoted the Texas Supreme

Court, stating that Court could not have been clearer:

       “We have noted that where an additional insured provision is separate from an
       additional to an indemnity provision, the scope of the insurance requirement is not
       limited by the indemnity clause.” 256 S.W.3d at 664.

The Fifth Circuit acknowledged that United was not seeking indemnity from J & R Valley but

was, instead, seeking to enforce St. Paul’s duty to defend it on the basis that it was J & R

Valley’s additional insured. Therefore, applying Evanston, the Fifth Circuit held that it could

only consider the additional insured coverage provision in making that determination.

       Once the Fifth Circuit excluded Section 11.1 as a factor in its decision, it then decided

that United’s interpretation of Section 10.2 was at least reasonable. United argued that 10.2

excluded coverage only in the event United separately and extra-contractually agreed to

indemnify J & R Valley. The Fifth Circuit noted that Section 10.2 excludes obligations for

which United has specifically, not generally, agreed to indemnify J & R Valley. The Fifth

Circuit stated that it did not believe this exclusionary language reasonably can be read to exclude

from coverage all incidents for which United could possibly owe J & R Valley indemnity.

Having determined that United’s argument was not unreasonable, the Fifth Circuit concluded

that United was an additional insured under the circumstances presented and that the general

indemnity provision in the services agreement did not limit the scope of United’s additional

insured coverage and that St. Paul was required to defend United. You should note, however,

that in Evanston, while the Court held that the insurance clause of the contract created a duty to

indemnify and to reimburse ATOFINA for the settlement it paid, the Court specifically stated

that the duty to defend was not implicated in the case before it, presumably because the Evanston

policy was an excess policy.




UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 10
       In The Lubrizol Corporation v. The Gray Insurance Company, 2009 U.S. App. LEXIS

2807 (5th Cir. – February 12, 2009) unpublished, the U.S. District Court in the Southern District

of Texas entered a summary judgment in favor of the Lubrizol Corporation (“Lubrizol”) over

interpretation of a contract, which was affirmed by the Fifth Circuit. Lubrizol contracted with

Pat Tank, Inc. to repair a storage tank. The contract between Pat Tank and Lubrizol contained an

indemnity clause, capped at $2,000,000, in which Pat Tank promised to indemnify Lubrizol for

any injuries Pat Tank intentionally or negligently caused its employees. A separate insurance

clause obligated Pat Tank to purchase a comprehensive general liability insurance policy and add

Lubrizol as an additional insured. Two of Pat Tank’s employees were injured and sued Lubrizol

in what the Court referred to as the Ashworth litigation. Lubrizol sought indemnity from Pat

Tank and Pat Tank’s CGL carrier, The Gray Insurance Company. The Court stated that, because

the Ashworth plaintiffs do not allege that Pat Tank caused their injuries, Lubrizol could not use

the indemnity provision of the contract to force Pat Tank to pay the expenses for the Ashworth

litigation. Note that this factual scenario will exist whenever the indemnitor is a subscribing

employee of the underlying plaintiff. Instead, Lubrizol attempted to invoke the insurance clause,

arguing to the Court that this provision required Pat Tank’s CGL provider to cover the Ashworth

litigation expenses. The Fifth Circuit ultimately agreed and determined the insurance clause

obligated Gray to pay Lubrizol its legal expenses in the Ashworth litigation.

       The relevant language of the insurance clause stated:

               INSURANCE. [Pat Tanks] shall maintain insurance policies…in amounts
               of at least $1,000,000…for each of the following insurance coverages….:

                       a)   Worker’s Compensation (statutory)
                       b)   Employer’s Liability
                       c)   Comprehensive General Liability…
                       d)   Automobile Liability
                       e)   Include Lubrizol as additional insured on c) and d) above
                                …

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 11
                           [Pat Tank],…to the extent necessary to provide coverage under
                           [its] insurance for liabilities assumed by [it] under the
                           indemnity provisions of this Agreement, shall designate
                           Lubrizol as an additional insured on Contractor’s
                           Comprehensive General Liability Insurance….

Before you attempt to include this provision into your clients’ contracts, you should note that the

U.S. District Court for the Southern District characterized the contract as “a model of

bureaucratic opacity,” which the Fifth Circuit agreed was an accurate description. Both Courts

agreed, however, that “[b]ad form… is not necessarily ambiguity…”

       The Fifth Circuit agreed that the first half of the insurance clause was unambiguous and

required Pat Tank to obtain several different types of insurance in at least the amount of

$1,000,000 and that Pat Tank must add Lubrizol as an additional insured on the CGL and

automobile liability coverage. According to the Court, the potential ambiguity was created by

the final paragraph of line (e) which Lubrizol argued added to Pat Tank’s obligations and which

Gray argued merely clarified those obligations. Lubrizol argued that line (e) stands alone and

obligates Pat Tank to acquire at least $1 million of CGL insurance and add Lubrizol as an

additional insured. Lubrizol further argued that line (e) obligated Pat Tank, if it chose to

purchase more than the minimum $1 million of CGL insurance, to add Lubrizol as an additional

insured on the extra CGL insurance coverage to the extent of Pat Tank’s indemnity obligations

which were capped at $2,000,000. According to the Court, if the contract is read that way,

Lubrizol would be an additional insured for all purposes up to $1 million of coverage and an

additional insured for indemnity purposes only from $1 million to $2 million. Conversely, Gray

argued that the final paragraph of line (e) clarifies that Lubrizol needed to be added as an

additional insured only to the extent necessary to provide coverage under the indemnity

provision. The Fifth Circuit reasoned that if Lubrizol’s interpretation was correct, Gray was

required to insure Lubrizol for up to $1 million in the Ashworth litigation. If Gray’s

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 12
interpretation was correct, Gray would not have to pay for any expenses in the Ashworth

litigation. The District Court rejected Gray’s interpretation of the contract. The Fifth Circuit

disagreed with the reasoning of the District Court but reached the same conclusion and held that

Gray was required to insure Lubrizol up to $1 million for the Ashworth litigation.

        The Fifth Circuit held that Gray’s interpretation read the final paragraph as clarifying line

(e) when the final paragraph contains no such language. The Fifth Circuit interpreted the final

paragraph as a stand alone obligation, completely divorced from the prior discussion of the CGL

insurance. The Fifth Circuit pointed out that it was required to strive to give meaning to every

provision of the contract and that, only under Lubrizol’s interpretation do both line (e) and the

final paragraph serve a role.

        Gray argued that Texas law foreclosed Lubrizol’s interpretation, citing Emery Air Freight

Corp. v. Gen. Transp. Sys., Inc., 933 S.W.2d 312 (Tex. App.—Houston [14th Dist.] 1996, no

pet.). The Fifth Circuit resoundedly rejected that reliance. The Fifth Circuit pointed out that the

Texas Supreme Court rejected the Emery test in Evanston, and specifically recognized that the

Texas Supreme Court in Evanston determined that the direct contractual provision requiring

ATOFINA to be named as an additional insured was sufficient to create a general additional

insured obligation rather than one for indemnity only. The Fifth Circuit further rejected Gray’s

argument that the insurance clause required an express reference to negligence before it could be

invoked by an additional insured for coverage for its own negligence, or that it must comply with

the express negligence test, pointing out that an essentially identical provision in Evanston was

interpreted to require just that.

        Obviously, the opinion in The Lubrozol Corporation is not published and its precedential

use is limited by F.R.A.P. 32.1. However, it is certainly instructive as one of the first round of

cases to interpret Evanston. Based on the few cases which have interpreted Evanston, it appears

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 13
the limitations of the indemnity agreement may become irrelevant and the obligations of your

Client will be determined solely by the “additional insured” provision.

B.     Judicial Interpretation of Specific Contractual Terms

       The interpretation of the scope of the insurance procurement requirement, or the

indemnity agreement, depends greatly upon the specific terms of the agreement. The terms are

usually interpreted by the courts to be broader than common sense would imply. Several courts

have recognized no material difference between the common term “arising out of operations”

and the typical insurance policy term “with respect to operations.” See McCarthy Bros. Co. v.

Cont’l Lloyds Ins. Co., 7 S.W.3d 725, 730 n. 8 (Tex. App.- Austin 1990, no pet.); Miller v.

Superior Ship Yard & Fabrication, Inc., 2001 - 2097, p. 5-6 (LA. App. 1 cir. 8/20/03), 859 So.

2d 159, 162-64; Acceptance Ins. Co. vs. Syufy Enters., 69 Cal. App 4th 321, 81 Cal. Rptr. 2d 557,

561-62 (Cal. Ct. App. 1999); Lim v. Atlas-Gem Erectors Co., 225 A.D. 2d 304, 638 N.Y.S. 2d

946, 946-8 (N.Y. App. Div. 1996); Fla. Power & Light Co. v. Penam. Ins. Co., 654 SO. 2d

276,279 (Fla. Dist. Ct. App. 1995). The Texas Supreme Court in Evanston characterized “with

respect to operations” as the broader term and that it necessarily included arising out of

operations.” Evanston 256 S.W.3d at 666.

       “With respect to operations” is typically interpreted as a broader theory of causation.

Generally an event “respects” operations if there exists “a causal connection or relation” between

the event and the operations. Proximate cause or legal causation is not required. Evanston 256

S.W.3d at 666. The result when you are analyzing the effect and scope of the indemnity

agreement is that the injury respects an operation if the operation brings the person to the

premises for the purpose of that operation. The particular attribution of fault between insured

and the additional insured does not change the outcome. Evanston 256 S.W. 3d at 666.




UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 14
        A number of cases have interpreted “with respect to operations.” Mid-Century Ins. Co. of

Tex. v. Lindsey 997 S.W.2d 153, 155-56 (Tex. 1999) (determining whether “injuries were caused

by an accident arising out of the use of a truck”); accord, Admiral Ins. Co. v. Trident NGL, Inc.,

988 S.W.2d 451, 454-56 (Tex. App.—Houston [1st Dist.] 1999, pet. denied); McCarthy Bros. Co.

v. Cont’l. Lloyds Ins. Co., 7 S.W.3d 725, 729-31; See also Utica Nat. Ins. Co. of Tex. v. Am.

Indem. Co., 141 S.W.3d 198, 201-03 (Tex. 2004) (contrasting “arising out of” with “due to,”

which requires a more direct type of causation that could tie the insured’s liability to the manner

in which the services were performed.)

        In Admiral 988 S.W.2d at 454-56, the Houston Court of Appeals held it was sufficient

that the named insured’s employee was injured while present at the scene in connection with

performing the named insured’s business, even if the cause of the injury was the negligence of

the additional insured. See also Highland Park Shopping Village v. Trinity Universal Ins. Co.,

36 S.W.3d 916, 918 (Tex. App.—Dallas 2001, no pet.). Therefore, most contractual provisions

and most “additional insured” definitions will be triggered if the plaintiff was doing the work

covered by the agreement or on the job site because of the work covered by the agreement.


C.      Analysis of Indemnity Obligations in the Agreement – The “Express Negligence”
        Test

        If you analysis of Client’s obligations is not complete by analyzing the insurance

procurement requirement, or if there is no obligation for XYZ Subcontractor to purchase

additional insured coverage for ABC Construction Company, you must analyze the indemnity

provision itself.   You must employ the typical rules for contract construction to determine your

client’s obligations. However, indemnity agreements that attempt to partially or completely shift

the risk of the indemnitee’s own negligence must meet certain strict requirements.

        1.      The Judicially Imposed Requirements.

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 15
       The Texas courts determine that an agreement requiring a party to be indemnified for its

own negligence is an extraordinary risk-shifting clause which must satisfy two requirements:

       (1)     The substantive “express negligence” rule; and
       (2)     Conspicuousness or the fair notice requirement.

       An excellent review of the express negligence rule and an analysis of whether the rule is

being eroded by recent decisions described above can be found at 60 Baylor Law Review, 941

(2008) “When the Extraordinary Becomes Ordinary: Is the Express Negligence Rule Under

Attack in Texas?, written by Ryan C. Hudson, Aimee M. Minick and Andrew B. Ryan. As these

authors point out, under the express negligence rule, the intent to indemnify a party for its own

negligence must be expressed in unambiguous terms within the contract, the substantive express

negligence requirement. . Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex.

2004). Under the express negligence doctrine, the 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.” Id., quoting Ethyl Corp. v. Daniel Construction, Co., 725 S.W.2d 705, 707 (Tex.

1987). In order to comply with the conspicuousness requirement, the language, type face and/or

appearance of the indemnity provision must attract the attention of a reasonable person. Ling &

Co. v. Trinity Sav. & Loan Ass’n, 482 S.W.2d 841, 843 (Tex. 1972). Language is conspicuous if

it appears in larger type, contrasting colors, or otherwise calls attention to itself. Dresser

Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993). The Texas Supreme

Court has also determined that the decision on whether an indemnity agreement complies with

the express negligence rule is a question of law for the court and is, therefore, appropriate for a

motion for summary judgment. Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d

505 (Tex. 1993).




UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                             PAGE 16
       The controlling case is Ethyl Corp. v. Daniel Construction Co., 725 S.W.2d 705, 708

(Tex. 1987) in which the following contractual provision did not, in the Court’s opinion,

expressly indemnify Ethyl for its own negligence:

       “Contractor [Daniel] shall indemnify and hold Owner [Ethyl] harmless against
       any loss or damage to persons or property as a result of operations growing out of
       the performance of this contract and caused by the negligence or carelessness of
       [Daniel], [Daniel’s] employees, subcontractors, and agents or licensees.”

       The Court in Ethyl recognized the common practice of creative drafters to hide the intent

of the parties to require indemnification for its own negligence, a practice criticized by the Court.

The Court in Ethyl also specifically stated that the parties could have contracted for comparative

indemnity but that “indemnitees seeking indemnity for the consequences of their own negligence

which proximately causes injury jointly and concurrently with the indemnitor’s negligence must

also meed the express negligence test.” Id. at 708-09.

       The vast majority of the litigation arises over the substantive requirement that the

language must specifically state the parties’ intent. It is very helpful for your analysis to find a

judicial interpretation of a similar or identical indemnity provision. Therefore, I have included

some examples for your review.

       2.        Judicial Interpretation of Specific Indemnity Provisions

                 a. Indemnification Agreements that do not comply with the express
                    negligence test

       In Cabo Construction, Inc. v. R.S. Clark Construction, Inc., 227 SW.3d 314 (Tex. App.-

Houston [1st Dist.] 2007, no pet.) the following language was determined to be ambiguous and

unenforceable:

       “4.6 INDEMNIFICATION

       4.6.1 To the fullest extent permitted by law, the subcontractor [Cabo] shall
       indemnify and hold harmless the owner [Randalls], Contractor, Architect,
       Architect’s Consultants, and agents and employees of any of them from and
       against future claims, damages, losses and expenses, including but not limited to
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                             PAGE 17
       attorney’s fees, arising out of or resulting from performance of the
       Subcontractor’s Work under this Subcontract, provided that any such claim,
       damage, loss or expense is attributable to bodily injury, sickness, disease or death,
       or to injury to or destruction of tangible property (other than the Work itself), but
       only to the extent caused by the negligent acts or omissions of the Subcontractor,
       the Subcontractor’s Sub-Subcontractors, anyone directly or indirectly employed
       by them, or any one for whose acts they may be liable, regardless of whether or
       not such claim, damage, loss or expense is caused in part by a party indemnified
       hereunder. Such obligation shall not be construed to negate, abridge, or otherwise
       reduce other rights or obligations of indemnity which would otherwise exist as to
       a party or person described in the Paragraph 4.6.”

       In Adams v. Spring Valley Construction Co., 728 S.W.2d 412, 414 (Tex. App.- Dallas

1987, writ ref’d n.r.e.), the following indemnity agreement was held to not expressly state that

the contractor was to be indemnified for its own negligence and, therefore, was unenforceable.

       “The subcontractor shall indemnify and hold harmless the contractor…against all
       claims, damages, losses and expenses, including attorney’s fees, arising out of or
       resulting from the performance of the Subcontractor’s Work under the Contract
       Documents, provided that any such claim, damage, loss or expense (a) is
       attributable to bodily injury, sickness, disease or death,…and (b) is caused in
       whole or in part by [a] negligent act or omission of the Subcontractor or anyone
       directly or indirectly employed by him or anyone for whose acts he may be liable,
       regardless of whether it is caused in part by a party indemnified hereunder…”

       In DDD Energy, Inc. v. Veritas DGC Land, Inc. 60 S.W.3d 880 (Tex. App. _

Houston [14th Dist.] 2001, no pet.) the following indemnity agreement was

unenforceable:

       Section X – Liability Indemnity:
       Veritas shall protect, indemnity, defend and save [DDD], …harmless from and
       against all claims, … and cause of actions …asserted by third parties on account
       of … damage to property of such third parties, which … damage is the result of
       the negligent act of omission, breach of this Basic Agreement or the Supplemental
       Agreement, or willful misconduct of Veritas … Likewise, [DDD] shall protect,
       indemnify, defend and save Veritas, … harmless from and against all claims, …
       causes of action … asserted by third parties on account of … damage to property
       of such third parties, which … damage is the results of the negligent act or
       omission or willful misconduct [DDD}…


       In Gilbane Building Company and Zurich American Insurance Co., v. Keystone

Structural Concrete, Ltd., 263 S.W.3d 291 (Tex. App.—Houston [1st Dist.] 2007, no
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                          PAGE 18
pet.), the following indemnity provision did not meet the substantive requirement of the

express negligence test and could be not be enforced for the concurrent negligence in the

indemnitee:

       “5.2 For ten ($ 10.00) dollars and other good and valuable consideration, the
       receipt whereof is hereby acknowledged, and to the fullest extent permitted by
       law, the Trade Contractor (Keystone) agrees to indemnify and hold harmless,
       [Gilbane], the Owner, the Architect/Engineer and all of their agents and
       employees from and against claims, damages, losses and expenses, including
       but not limited to attorneys' fees arising out of or resulting from the
       performance or failure in performance of [Keystone's] work under this
       Agreement provided that any such claim, damage, loss, or expense (1) is
       attributable to bodily injury, sickness, disease, or death, or to injury to or
       destruction of tangible property including the loss of use resulting therefrom,
       (2) is caused, in whole or in part, by any negligent act or omission of
       [Keystone] or anyone directly or indirectly employed by [Keystone], or
       anyone for whose acts [Keystone] may be liable, regardless of whether caused
       in part by a party indemnified hereunder. Such obligations shall not be
       construed to negate, abridge, or otherwise reduce any other right or obligation of
       indemnity which would otherwise exist as to any party or person described in this
       paragraph. In any and all claims against the Construction Manager (Gilbane), or
       any of its agents or employees, by any employee of [Keystone], or anyone
       directly or indirectly employed by [Keystone], or anyone for whose acts he may
       be liable, the indemnification obligation under this paragraph 5.2 shall not be
       limited in any way by any limitation on the amount or type of damages,
       compensation, or benefits payable by or for [Keystone] under worker's
       compensation acts, disability benefit acts, or other employee benefit acts.”


               b. Indemnity Provisions Which Do Pass the Express Negligence Test.

       In Enserch Corp. v. Parker, 794 S.W.2d 2 (Tex.1990), the following indemnity

agreement sufficiently defined the parties’ intent that Christie (the contractor) would indemnify

Enserch (the owner) for the consequences of Enserch’s own negligence:

       “[Christie] assumes entire responsibility and liability for any claim or actions based on or
       arising out of injuries, including death, to persons…alleged to have been sustained in
       connection with or to have arisen out of or incidental to the performance of this contract
       by [Christie], its agent and employees, and its subcontractors, their agents and employees,
       regardless of whether such claims or actions are founded in whole or in part upon alleged
       negligence of [Enserch], [Enserch’s] representatives, or employees, agents, invitees, or
       licensees thereof.”



UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                          PAGE 19
The Supreme Court held that this contract was sufficient to define the parties’ intent and was

therefore enforceable.

       In ARD v. Gemini Exploration Co., 894 S.W.2d 11 (Tex. App.—Houston [14th Dist.]

1994, writ denied), the Houston Court of Appeals held that the following indemnity agreement

expressly provided for indemnity for the company’s own negligence:

       “[s]uch obligation of the contractor to indemnify the Company Indemnified Parties shall
       be without regard to the cause or causes (including preexisting conditions or conditions
       of the workplace or equipment provided by the Company) or the negligence of the
       company Indemnified Parties, whether the negligence be active or passive, sole or
       concurrent, simple or gross, comparative, contractual, or any other degree or type of
       negligence.”

       3.        Conspicuousness or Fair Notice Requirement

       As noted, to satisfy the fair notice requirement, the indemnity agreement must satisfy the

conspicuousness requirement. Storage and Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex.

2004). Both are questions of law for the court and thus can be resolved on a motion to dismiss or

motion for summary judgment. The Daneshjou Co., Inc. v. Goergen & CNA Construction, Inc.,

No. 03-04-00730, et al., 2008 Tex. App. LEXIS 6036, 2008 WL 3171256, *9 (Tex. App.—Austin,

Aug. 8, 2008) ("Compliance with the express negligence requirement is a rule of contract

interpretation and, thus a question of law for the court."), citing Fisk Elec. Co. v. Constructors &

Assocs., Inc., 888 S.W.2d 813, 814 (Tex. 1994); id. ("Whether an agreement meets the

conspicuousness requirement is a question of law for the court."), citing Dresser, 853 S.W.2d at

509. If an agreement does not satisfy either the express negligence doctrine or the conspicuous

requirement, it is unenforceable as a matter of law; it must satisfy both. Id., citing Reyes, 134

S.W.3d at 192.

       In Dresser, 853 S.W.2d at 511, the Texas Supreme Court held that indemnity clauses

must satisfy the criteria for conspicuousness in the Texas Uniform Commercial Code, Texas



UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 20
Business & Commerce Code Annotated § 1.201(10)(Vernon 2005) to promote "certainty and

uniformity" valid indemnity provisions:

        "Conspicuous" . . . means so written, displayed or presented that a reasonable
        person against which it is to operate ought to have noticed it. Whether a term is
        "conspicuous" or not is a decision for the court. Conspicuous terms include the
        following:
                (A) a heading in capitals equal to or greater in size than the surrounding
                text, or in contrasting type, font, or color to the surrounding text of the same
                or lesser size; and
                (B) language in the body of a record or display in larger type than the
                surrounding text, or in contrasting type, font, or color to the surrounding
                text of the same size, or set off from the surrounding text of the same size
                by symbols or other marks that call attention from surrounding text of the
                same size by symbols or other marks that call attention to the language.

         Comment 10 to § 1.201(10) states in part, "Although these paragraphs indicate some of

the methods for making a term attention-calling, the test is whether attention can reasonably be

expected to be called to it." The Texas Supreme Court has concluded that the test is an objective

one. Cate v. Dover Corp., 790 S.W.2d at 560-61. See also, e.g., Amtech Elevator Services Co. v.

CSFB 1998-P1 Buffalo Speedway Office, Ltd., 248 S.W.3d 373, 377-78 (Tex. App.--Houston [1st

Dist.] 2007) (citing § 1.201 (10) criteria for conspicuousness); Dresser, 853 S.W.2d at 511

("When a reasonable person against whom a clause is to operate ought to have noticed it, the

clause is conspicuous. For example, language in capital headings, language in contrasting type or

color, and language in an extremely short document, such as a telegram, is conspicuous.");

Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex. 2004)("Language may satisfy

the conspicuousness requirement by appearing in large type, contrasting colors, or otherwise

calling attention to itself.").

        The requirement for conspicuousness also depends upon the length and complexity of the

agreement. In Sydlik V. REEIII, 195 S.W.3d 329 (Tex. App. - Houston [14th Dist.] 2006, no pet.)

the release language was contained in a one page document with only three paragraphs. The


UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                             PAGE 21
Court determined this language was sufficiently conspicuous, even though there is no indication

in the opinion that the release language was any more conspicuous then the rest of the document.

Id. at 333. See generally Coastal Transportation Co. v. Crown Cent. Petroleum Corp., 20

S.W.3d 119, 126 (Tex. App. – Houston [14th Dist.] 2000 pet. denied)

       4. The “Actual Notice or Knowledge” Exception

       The Texas Supreme Court did create a broad exception to the express negligence rule in a

footnote in Dresser which states: “The fair notice requirements are not applicable when the

indemnitee establishes that the indemnitor possessed actual notice or knowledge of the indemnity

agreement.” 853 S.W.2d at 508. Several courts have applied this actual notice or knowledge

exception to both of the fair notice requirements, the substantive requirement and the

conspicuousness requirement. Ayres Welding Co., Inc. v. Conoco, Inc., 243 S.W.3d 177, 181

(Tex. App.—Houston [14th Dist.] 2007, pet ref’d); Cabo Construction, Inc. v. R.S. Clark

Construction, Inc., 227 S.W.3d 314, 317 (Tex. App.—Houston [1st Dist.] 2007, no pet.);

Millennium Petrochemicals, Inc. v. Brown & Root Holdings, Inc., 390 F. 3d 336, 345 (5th Cir.

2004); Cleere Drilling Co. v. Dominion Exploration and Production, Inc., 351 F. 3d 642, 647

(5th Cir. 2003); Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex. 2004); Cate v.

Dover Corp., 790 S.W.2d 559 , 561 (Tex. 1990); American Home Shield Corp. v. Lahorgue, 201

S.W.3d 181, 184 (Tex. App. – Dallas 2006, pet denied).

       Conversely, some Texas appeals courts have applied the “actual notice or knowledge”

exception only to the procedural requirement for conspicuousness, but not for the substantive

requirement that the agreement expressly state the party’s intent to indemnify one for their own

negligence. Sydlik v. REE II, Inc., 195 S.W.3d 329, 333 (Tex. App.—Houston [14th Dist.] 2006,

no pet.). The Court in Sydlik held that a party’s actual knowledge of the contents of the release

was no more than parol evidence and that, pursuant to contract interpretation jurisprudence, the

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                          PAGE 22
Court was confined to interpret the contract by reviewing only the terms of the contract itself,

and not considering the knowledge of the parties to the contract. In Sydlik, the plaintiff had

initialed each paragraph of the release and stated that she knew about the release and believed all

of the three defendants were covered by it. The Court refused to allow this knowledge to relieve

the defendants of the requirement to meet the substantive express negligence requirement, sagely

noting that if plaintiff had stated she believed none of the defendants were released, defendants

would have not put much stock in her views, emphasizing how her “knowledge” was merely

extrinsic evidence not allowed in contract interpretation. The Court of Appeals in Beaumont

reached a similar conclusion in Silsbee Hospital, Inc. v. George, 163 S.W.3d 284 (Tex. App.—

Beaumont 2005, pet denied). In Silsbee, the issue was a pre-injury waiver signed by the

employee of a nonsubscribing employer. The Courts have determined that such agreements must

meet the same two requirements under the express negligence doctrine so the opinion is

completely applicable. In Silsbee, the only issue was the substantive express negligence

requirement, not conspicuousness. The hospital tried to argue that the plaintiff’s actual

knowledge of the affect of the waiver relieved the hospital of the requirement to show that its

waiver expressly stated the intent of the parties. The Court held that the contract was not

ambiguous and that, therefore, it must be interpreted by reviewing its “four corners” without

consideration of the extrinsic evidence of Mr. George’s understanding of the meaning of the

release.

       Although, as noted above, the Fourteenth Court of Appeals in Houston, not to mention

others, has concluded that demonstrating that the indemnitor had actual notice or knowledge of

the indemnity provision relieves an indemnitee of showing only conspicuousness, but not of the

express negligence doctrine, other courts, including the Texas Supreme Court and the Fifth

Circuit applying Texas law, have held that both fair notice requirements become irrelevant with

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 23
actual notice. "[T]he fair notice requirements are not applicable when the indemnitee establishes

that the indemnitor possessed actual notice or knowledge of the indemnity agreement." Dresser,

853 S.W.2d at 508 n.2, quoted in American Shield, 201 S.W.3d at 186. Although the statement in

Dresser was dictum, the Texas Supreme Court has since reiterated the rule. See Storage &

Processors, Inc. v. Reyes, 134 S.W.3d at 192 (2004) ("[I]f both contracting parties have actual

knowledge of the plan's terms, an agreement can be enforced even if the fair notice requirements

were not satisfied."). The Fifth Circuit has expressly accepted that rule. Cleere, 351 F.3d at 647

& n.11. The Fifth Circuit concluded, "[W]e are convinced that the requirement of fair notice--

both elements, i.e., express negligence and conspicuousness--is irrelevant in the face of

Dominion's actual knowledge of the subject provisions of the Contract," citing Dresser, 853

S.W.2d at 508 n.2, Ethyl Corp., 725 S.W.2d 705, and Enserch Corp., 794 S.W.2d at 8.

       This conflict among courts about whether the actual notice or knowledge exception

applies to the procedural requirement (conspicuousness), but not the substantive requirement (the

express negligence doctrine) is also discussed by Ryan C. Hudson, Aimee M. Minick, and

Andrew B. Ryan in When the Extraordinary Becomes Ordinary: Is the Express Negligence Rule

Under Attack in Texas; (60 Baylor Law Review 941, 947-53 (Fall 2008)). The authors argue that

the express negligence rule should not be subject to the actual notice or knowledge rule for

several reasons: (1) the long established four corners rule of contract interpretation should

control when the contract is unambiguous (Ethyl Corp., 725 S.W.2d at 708 (Indemnity

provisions that do not unequivocally state the intent of the parties within the four corners of the

instrument are unenforceable as a matter of law)); (2) despite the dictum in Dresser footnote 2,

the Texas Supreme Court has never applied the actual knowledge exception to the express

negligence requirement, while the court in Sydlik v. REE III, Inc. found no Texas decision that

applied it, noting that "such as approach would fly in the face of our contract interpretation

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 24
prudence" (195 S.W.3d at 333-34); (3) the express negligence rule is a rule of contract

interpretation by the court as a matter of law, but the affirmative defense of actual notice or

knowledge "transforms an issue of law into an issue of fact." See Fisk Electric Co. v.

Constructors & Associates, Inc., 888 S.W.2d 813, 814 (Tex. 1994) ("[t]he express negligence

test was established by this court in Ethyl in order 'to cut through the ambiguity of indemnity

provisions, thereby reducing the need for satellite litigation regarding interpretation of indemnity

clauses': [t]he express negligence requirement is not an affirmative defense but a rule of contract

interpretation . . . determinable as a matter of law.").

        Because the actual knowledge exception is in the nature of an affirmative defense to a

claim of lack of fair notice, the burden is on the indemnitee to prove actual notice or knowledge.

U.S. Rentals, Inc. v. Mundy, 901 S.W.2d 789, 792-93 & n.8 (Tex. App.--Houston [14 Dist.]

1995, writ denied); Interstate Northborough Partners v. Examination Management Serv., Inc.,

No. 14-96-00335-CV, 1998 Tex. App. LEXIS 2824, 1998 WL 242448, *3-4 (Tex. App.--

Houston [14 Dist.] 1998); Douglas Cablevision, 992 S.W.2d at 510. The indemnitee might meet

that burden with evidence of specific negotiation of those contract terms (e.g., by prior drafts),

through prior dealings of the parties (e.g., evidence of similar contracts over a number of years

with a similar indemnity provision), proof that the provision had been brought to the indemnitor's

attention (e.g., by a prior claim). Whether an indemnitor had actual notice or knowledge of an

indemnity provision is a question of fact, usually making a motion for summary judgment

inappropriate unless knowledge is admitted. Interstate Northborough, 1998 Tex. App. LEXIS

2824, 1998 WL 242448, *4.

        In Alcoa v. Hydrochem Industrial Services, Inc., No. 13-02-00531-CV, 2005 Tex. App.

LEXIS 3367, 2005 WL 608232, *10 (Tex. App.--Corpus Christi, Apr. 14, 2005) the court stated

actual knowledge can result from prior dealings of the parties or if the indemnitee specifically

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 25
brings the inconspicuous waiver to the indemnitor's attention, citing Cate v. Dover Corp., 790

S.W.2d 559, 561-62 (Tex. 1990). However, proof that the party merely read the release is not

sufficient to trigger the exception to the fair notice requirements. American Home Shield Corp.

v. Lahorgue, 201 S.W.3d 181, 184 (Tex. App. – Dallas 2006, no pet.)

       In Enron Corp. Savings Plan v. Hewitt Associates, L.L.C., 611 F. Supp.2d 654 (S.D. Tex.

– 2009). Hewitt has argued that Enron had actual notice of the indemnity agreement because its

signatory read the contract when he signed it. "Something more is required to do away with the

fair notice requirements than mere evidence a party read the agreement before signing it." Am.

Home Shield, 201 S.W.3d at 186.. Additional circumstances may support the actual notice or

knowledge requirement. See Coastal Transp. Co. v. Crown Cent. Petroleum Corp., (20 S.W.3d

119, 126-27 (Tex. App.--Houston [14th Dist.] 2000, pet. denied)(court found facts sufficient to

establish actual notice where president of Coastal who signed the agreement on behalf of

Coastal, read the agreement when he signed it, the agreement was less that two and a half pages

and contained eight paragraphs, with the indemnity provision constituting the largest paragraph

in the agreement, and where the indemnity provision was referenced in two other paragraphs of

the agreement). Since "by signing an agreement, the party is presumed to have read it," "[t]o

hold that reading the agreement is enough to by-pass the fair notice requirements would allow

the exception to swallow the rule and render the fair notice requirements ineffectual in all but the

most rare instances." Id.

       5.      Indemnification for Concurrent Negligence Must Also Pass the Express
               Negligence Test

       The Court of Appeals in Houston refused to enforce an indemnity agreement which did

not meet the “express negligence” test, even though the party was not seeking indemnification

for its own negligence. In Gilbane Building Company and Zurich American Insurance Co., v.

Keystone Structural Concrete, Ltd., 263 S.W.3d 291 (Tex. App.—Houston [1st Dist.] 2007, no
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 26
pet.), Gilbane and Keystone contracted for Keystone to act as a subcontractor on a construction

project at Rice University. During construction, an employee of Keystone was injured. The

employee subsequently brought suit against Gilbane only since the employee was prohibited

from suing his employer for negligence. The underlying lawsuit was ultimately settled for

$2,000,000, with Admiral Insurance, Keystone’s primary carrier, paying the first million.

Gilbane’s primary carrier, Zurich, paid the second million of the settlement. After the settlement

was funded, Gilbane filed suit against Keystone and Royal Insurance Company, Keystone’s

excess carrier, seeking to recover the $1 million paid by Zurich. It is important to note that

Keystone’s primary carrier, Admiral Insurance, provided a defense to Gilbane in the underlying

suit. Based upon the Court’s opinion, it appears that this was done voluntarily and, therefore, the

question of whether Admiral Insurance could have been forced to defend Gilbane is not

answered.

       The trial court granted a motion for partial summary judgment in favor of Keystone, from

which Gilbane appealed. Gilbane first argued that the indemnity provision of the contract clearly

expressed the agreement of the parties that Keystone would indemnify Gilbane when Gilbane

was subjected to a claim that arose in whole or in part by any negligent act or omission of

Keystone which Keystone committed during the performance of its work under the contract.

Gilbane relied upon the following provision within the contract:

        “5.2 For ten ($ 10.00) dollars and other good and valuable consideration, the
       receipt whereof is hereby acknowledged, and to the fullest extent permitted by
       law, the Trade Contractor (Keystone) agrees to indemnify and hold harmless,
       [Gilbane], the Owner, the Architect/Engineer and all of their agents and
       employees from and against claims, damages, losses and expenses, including
       but not limited to attorneys' fees arising out of or resulting from the
       performance or failure in performance of [Keystone's] work under this
       Agreement provided that any such claim, damage, loss, or expense (1) is
       attributable to bodily injury, sickness, disease, or death, or to injury to or
       destruction of tangible property including the loss of use resulting therefrom,
       (2) is caused, in whole or in part, by any negligent act or omission of
       [Keystone] or anyone directly or indirectly employed by [Keystone], or
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 27
          anyone for whose acts [Keystone] may be liable, regardless of whether caused
          in part by a party indemnified hereunder. Such obligations shall not be
          construed to negate, abridge, or otherwise reduce any other right or obligation of
          indemnity which would otherwise exist as to any party or person described in this
          paragraph. In any and all claims against the Construction Manager (Gilbane), or
          any of its agents or employees, by any employee of [Keystone], or anyone
          directly or indirectly employed by [Keystone], or anyone for whose acts he may
          be liable, the indemnification obligation under this paragraph 5.2 shall not be
          limited in any way by any limitation on the amount or type of damages,
          compensation, or benefits payable by or for [Keystone] under worker's
          compensation acts, disability benefit acts, or other employee benefit acts.”


          Gilbane did not assert that this provision complied with the express negligence doctrine

but argued, instead, that it was not seeking to be indemnified for its own negligence but rather

for Keystone’s sole negligence in causing the injuries. Keystone responded that Gilbane should

not be allowed to now seek a determination regarding the possible negligence of Keystone which

would simply retard rather than advance the policy of preventing satellite litigation regarding the

interpretation of contracts. The Court agreed with Keystone’s argument, comparing this case to

the earlier decision in Fisk Electric Co. v. Constructor’s & Associates, 888 S.W. 2d 813 (Tex.

1994). The court stated that an indemnity contract is either enforceable or it is not and that this

determination should be established as a matter of law and not depend on the outcome of the

underlying suit.

          In a footnote, the Court of Appeals addressed the concept of “comparative indemnity.”

The Court confirmed that parties can contract for comparative indemnity but, if they do so, the

indemnity provision must still comply with the express negligence doctrine citing Ethyl Corp. v.

Daniel Construction Co., 725 S.W.2d 705, 708-09 (Tex. 1987); Lee Lewis Construction, Inc. v.

Harrison, 64 S.W.3d 1 (Tex. App.—Amarillo 1999, aff’d on other grounds, 70 S.W.3d 778 (Tex.

2001)).

          Lastly, the Court addressed the “Insurance Specifications” portion of the contract which

stated:
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 28
               “Gilbane Building Company and William Marsh Rice University are each
               to be named as an "Additional Insured" on all Liability Insurance.

               Provide Waiver of Subrogation on all divisions of Liability Coverage in
               favor of Gilbane Building Company and William Marsh Rice University

               Commercial General Liability to be provided on an 'occurrence' basis, with
               coverage to include explosion, collapse and underground hazards . . .
               Blanket Contractual, Products Independent Contractors, Completed
               Operations, Personal Injury, and employees as additional insured.

               Bodily Injury Limits: $ 1,000,000 each occurrence. $ 1,000,000 aggregate.

               Personal Injury Limits: $ 1,000,000 each occurrence. $ 1,000,000
               aggregate.

               Aggregate shall apply to this project only . . . and must be identified as such
               on the certificate of insurance.

               Excess Umbrella Liability, to provide insurance in excess of Employers'
               Liability, Commercial General Liability, and Automobile Liability policies
               required hereunder: $ 5,000,000 each occurrence and $5,000,000 general
               policy aggregate.”


Gilbane contended that the overall intent of this provision required insurance for Gilbane “up to

the minimum amount of $6,000,000 before Gilbane or its insurance carrier should have to

respond to claims asserted against Gilbane for accidents arising out of Keystone’s performance

or lack of performance of their contract.” The Court also rejected this argument, pointing out

there was no provision in the Insurance Specification which stated that Keystone’s umbrella

policy would be primary insurance above any and all additional insurance. The Court then held

that Keystone had not breached its contract to provide certain insurance coverage.

D.     Indemnification from Employers for Compensable Injuries

       First, compliance with the “express negligence” doctrine is also required for any

indemnity agreement involving a worker’s compensation injury. In addition, Section 417.004 of

the Texas Labor Codes provides:



UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 29
               In an action for damages brought by an injured employee, a legal
       beneficiary, or an insurance carrier against a third party liable to pay damages for
       the injury or death under the chapter that results in a judgment against the third
       party or a settlement by the third party, the employer is not liable to the third party
       for reimbursement or damages based on the judgment or settlement unless the
       employer executed, before the injury or death occurred, a written agreement with
       the third party to assume the liability.

The Texas Supreme Court has confirmed that indemnity from a subscriber/employer in a

workers’ compensation context is prohibited unless there was an express indemnity agreement in

Enserch v. Parker, 794 S.W.2d 2, 7 (Tex. 1990).

       In Energy Service Company of Bowie, Inc. v. Superior Snubbing Services, Inc., 236 S.W.

3d 190 (Tex. 2007), the Court examined the long standing obligation that a subscribing employer

is not liable to indemnify others against an employee’s personal injury claim unless it agreed to

do so in writing before the injury occurred and added a controversial twist on statutory

construction. In this case, Energy Service Company of Bowie and Superior Snubbing Services

both provided oil field services to Mitchell Energy Corporation. In 1996, Superior and Mitchell

signed an industry-standard “Master Service Agreement” which provided, in part, that they

would indemnify each other and each other’s contractors against their respective employees’

personal injury claims arising out of work performed under the agreement or at the job site, even

if the indemnitee was at fault. The specific provision of the Master Service Agreement contained

the following language:

      5    Paragraph 7(b) of the "Master Service Agreement" provided: "Contractor
      [Superior] shall protect, defend, indemnify and hold Company [Mitchell], its
      employees, partners, agents, representatives, invitees, contractors and their
      employees (hereinafter "Company's group") harmless from and against all claims,
      demands, causes of action, suits or other litigation of every kind and character for
      injury to or illness or death of and for all damage to, loss or destruction of property
      of Contractor, its employees, partners, agents, representatives, invitees, contractors,
      subcontractors and their employees (hereinafter "Contractor's group") which is
      incident to, arising out of, within the scope of, or in connection with the work to be
      performed, services to be rendered or materials to be furnished by Contractor's
      group under this Agreement, or occurring on the worksite(s), regardless of how,
      when or where such injury, illness, death, damage, loss or destruction occurs;
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 30
      including the sole or concurrent NEGLIGENCE or FAULT of Company or
      Company's group . . . and regardless of whether contractual liability for indemnity
      or LIABILITY WITHOUT FAULT (including claims arising from premises or
      worksite liability) is sought to be imposed on Company's group. Likewise
      Company shall protect, defend, indemnify and hold Contractor's group harmless
      from and against all claims, demands, causes of action, suits or other litigation of
      every kind and character for injury to or illness or death of and for all damage to,
      loss or destruction of property of Company's group which is incident to, arising out
      of, within the scope of, or in connection with the work to be performed, services to
      be rendered or materials to be furnished by Company's group under this Agreement
      or occurring on the worksite(s) regardless of how, when or where such injury,
      illness, death, damage, loss or destruction occurs; including the sole or concurrent
      NEGLIGENCE or FAULT of Contractor's group . . . and regardless of whether
      contractual liability for indemnity or LIABILITY WITHOUT FAULT (including
      claims arising from premises or worksite liability) is sought to be imposed on
      Contractor's group. Contractor and Company specifically intend that the foregoing
      obligation to protect, defend, indemnify and hold the other harmless shall cover but
      not be limited to and shall apply even in the event of (i) the NEGLIGENCE,
      whether sole, comparative, contributory or concurrent, of Company's group or
      Contractor's group; (ii) any obligation of either party arising from contractual
      liability for indemnity or LIABILITY WITHOUT FAULT (including claims
      arising from premises or worksite liability); and (iii) the sole, comparative,
      contributory, concurrent, NEGLIGENCE or contractual liability for indemnity or
      LIABILITY WITHOUT FAULT (including claims arising from premises or
      worksite liability) of any third party."


Superior and Energy did not have a mutual indemnification agreement between each other nor

was either a party to the other’s agreement with Mitchell but each was covered, as a Mitchell

contractor, by the terms of the agreement with Mitchell. An employee of Superior suffered

injuries in 2000 while working at a Mitchell well site where Superior and Energy were both

performing services for Mitchell. The employee sued Mitchell and Energy and ultimately

reached a settlement with both. Mitchell and Energy then sued Superior for indemnity.

Superior, a subscribing employer, contended that Energy’s claims were barred by Section

417.004 of the Texas Labor Code. The dispute between the parties arose because of a change in

the language of Section 417.004 during the revisions in 1989.

       With the 1989 change which was carried forward into Section 417.004, the new provision

precluded liability “unless the employer executed, before the injury or death occurred, a written
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                         PAGE 31
agreement with the third party to assume the liability (Emphasis added).” Prior to 1989, the

relevant provision stated that a subscribing employer could not be liable to indemnify a person

against an employee’s personal injury claim “in the absence of a written agreement expressly

assuming such liability, executed by the subscriber prior to such injury or death.” Based upon

this change in language, the Fort Worth Court of Appeals determined that, since Superior’s

indemnification agreement with Mitchell was not executed by Energy, it was not executed with

Energy, and therefore Superior could not be liable to indemnify Energy.

       The Texas Supreme Court acknowledged that common law allows parties to contract for

the benefit of others – in effect with others – if they do so explicitly and when they do, the

beneficiary can enforce the promisor’s obligation in his favor as if he himself were a party. 236

S.W.3d at 194. The Court stated that, because of the common law, the Court must look carefully

at the revisions to Section 417.004 to determine what the Legislature intended. After significant

analysis, the Court stated that, because there was no identifiable reason for a substantive change

or any extra-textual indication that a substantive change was intended, the Court believed the

most reasonable construction of Section 417.004 is the same as its pre-1989 predecessors and

held that the indemnity provision, even though it was not executed by Energy, was binding upon

Superior. Justice Johnson, joined by Justice Wainwright, Justice Green and Justice Willett

dissented, reaching the conclusion that the Court’s construction of Section 417.004 (1) does not

comport with the literal, plain meaning of the statute; (2) dilutes subscribing employer’s

immunity from common-law damages, claims of employers’ injured employees which is a key

concept underlying the workers’ compensation statutes; and (3) does not square with one of the

main reasons for the 1989 revisions of the worker’s compensation statutes – reducing costs to

subscribing employers.


E.     Is there a Duty to Defend?
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 32
       Assuming that your analysis determines that ABC Construction Company is not an

additional insured or is entitled to direct coverage under your policy. Does the indemnity

agreement itself, assuming it is enforceable, require your insured, XYZ Subcontractor, to defend

ABC Construction Company? Must you abide by the Eight Corners Rule to make this

determination? If XYZ Subcontractor owes a contractual duty to defend, does your insurance

company Client owe a duty to defend or should your Client assume that duty voluntarily?

   “An insurer's duty to defend and its duty to indemnify are distinct and separate." Quorum

Health Res., L.L.C. v. Maverick County Hosp. Dist., 308 F.3d 451, 468 (5th Cir. 2002) (citing

Farmers Tex. County Mut. Ins. v. Griffin, 955 S.W.2d 81, 82, (Tex. 1997); E&L Chipping Co. v.

Hanover Ins. Co., 962 S.W.2d 272, 274 (Tex. App. -- Beaumont 1998, no pet.); Argonaut Sw.

Ins. Co. v. Maupin, 500 S.W.2d 633, 636, (Tex. 1973)). The duty to defend is broader than the

duty to indemnify. Primrose Operating Co. v. Nat'l Am. Ins. Co., 382 F.3d 546, 552 (5th Cir.

2004) (citing Potomac Ins. Co. v. Jayhawk Med. Acceptance Corp., 198 F.3d 548, 551 (5th Cir.

2000)). "The duty to indemnify arises from the actual facts that are developed to establish

liability in the underlying suit." Quorum Health Res., L.L.C., 308 F.3d at 468 (citing Trinity

Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 821,(Tex. 1997) (additional citations omitted)).

An insured may have a duty to defend but, ultimately, no duty to indemnify. Id. (citing Griffin,

955 S.W.2d at 82).

   Under the Texas "eight corners" or "complaint allegation" rule, this court must compare the

allegations in the most recent amended petition filed in the underlying suit against the insured

with the provisions of the insurance policy to determine if the allegations "fit within the policy

coverage." Quorum Health Res., L.L.C., 308 F.3d at 468. "The duty to defend analysis is not

influenced by facts ascertained before suit, developed in the process of litigation, or by the

ultimate outcome of the suit." Id. This court may look to extrinsic evidence only if the relevant
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                         PAGE 33
pleading in the underlying case "'does not contain sufficient facts to enable the court to determine

if coverage exists.'" Id. (quoting W. Heritage Ins. Co. v. River Entm't, 998 F.2d 311, 313 (5th Cir.

1993)). In an insurance coverage dispute analyzed under the eight corners rule, the insured party

-- here, Motiva -- bears the initial burden of showing that there is coverage, while the insurer --

United National -- bears the burden of showing that any exclusion in the policy applies. If any

allegation in the complaint is even potentially covered by the policy and not excluded, the insurer

has the duty to defend. Id. Conversely, an insurer is not required to defend if the complaint only

alleges facts excluded by the policy. Id.; Lafarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389,

393 (5th Cir. 1995).


       The confusions arises over whether these rules, which clearly apply to an insurance

company, also apply to an indemnitor when interpreting its obligations under a valid and

enforceable indemnity agreement. David Clay Wilkerson addressed this question well in his

article “Are Contractual Indemnity Agreements Contracts of Insurance?” Journal of Texas

Insurance Law, Volume 9, Number 3, Winter 2008-2009. Mr. Wilkerson analyzed the opinions

of the Texas Supreme Court in Fisk Elec. Co. v. Constructors & Assoc. 888 S.W. 2d 813 (Tex.

1994) and Payne & Keller, Inc. v. P.P. G. Industries, Inc., 793 S.W. 2d 956 (Tex. 1990). The

Texas Supreme Court in Fisk was very clear that only one duty was created under an indemnity

agreement and that the duty to defend was not a separate duty but was merely a subpart of the

duty to indemnify. If there was no duty to indemnify, according to the Court, there was no duty

to defend. In Fisk, the Court determined that the indemnity agreement did not comply with the

express negligence test and, therefore was unenforceable for all purposes. The Court ceased its

analysis once it determined that the agreement was unenforceable.

       Mr. Wilkerson went on to contrast these two decisions to three post-Fisk decisions from

the Texas Courts of Appeal addressing the “duty to defend”: English v. BGP Intern., Inc., 174
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 34
S.W. 3d 366 (Tex. App.—Houston [14th Dist.] 2005, no pet.); MRO Southwest, Inc. v. Target

Corp., 2007 Tex. App. LEXIS 9831*9 (Tex. App.—San Antonio, December 19, 2007, pet

denied); and Coastal Mart, Inc. v. Southwestern Bell Telephone Co., 154 S.W. 3d 839 (Tex.

App.—Corpus Christi, 2005 pet. granted, jdgmt. set aside w/o ref. to merits, 2006 Tex. LEXIS

874 (Tex., September 15, 2006)).

       In English, BGP contracted with English to provide seismic exploration services on land

located in Hidalgo County. The land was owned by approximately 15,000 different parties.

Before BGP could commence their exploration activities, each of the affected landowners had to

consent. BGP, however, began operations before all of the Hidalgo County landowners gave

permission. 2 Subsequently, 43 of the owners filed suit in Hidalgo County against BGP, English,

and their affiliated entities for trespass and various negligence actions.

   Pursuant to an indemnity provision in the contract, English asked BGP to defend it in the 43

underlying lawsuits. The provision specifically required BGP to:


        Protect, defend, indemnify and hold harmless [English] . . . against loss or damage
      arising out of any claim or suit, including trespass (whether geophysical or surface),
      property loss or damage, or any civil fines or penalties imposed . . . resulting from
      operations when BGP . . . commences field operations without the permit
      acquisition of 100% of the mineral owners and 100% of the surface owners, or any
      claim or suit arising out of the negligent actions or omissions of BGP . . . .


   When BGP refused to provide a defense, English filed suit in Harris County seeking a

declaratory judgment that BGP was required to defend and indemnify English against the

Hidalgo County actions.      Subsequently, both parties moved for summary judgment. The trial

court denied English's motion and granted BGP's motion. Accordingly, the court dismissed

English's suit without prejudice and explained that English's request for indemnification was



UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                         PAGE 35
premature and not ripe for adjudication until after the conclusion of the underlying Hidalgo

County lawsuits.

   BGP argued that its duty to defend, if any, was part of the same duty to indemnify and could

not be determined until the Hidalgo lawsuits were resolved and the liabilities of the parties

determined. Generally, when parties include an indemnity provision in a contract, the duty to

indemnify includes the duty to pay for all costs and expenses associated with defending suits

against the indemnitee. See, e.g., Fisk Elec. Co. v. Constructors & Assoc., Inc., 888 S.W.2d 813,

815, (Tex. 1994) ("[An] obligation to pay attorney's fees arises out of [a] duty to indemnify.");

Keystone Equity Mgmt. v. Thoen, 730 S.W.2d 339, 340 (Tex. App.--Dallas 1987, no writ) ("The

ordinary and commonly accepted meaning of the phrase 'indemnify, defend, and save harmless' .

. . encompasses attorney's fees. . . . We hold that [the] contractual promise to 'defend. . . all suits

in connection with the premises' includes the obligation to pay for the defense of such suits.")

(emphasis added). However, "absent a duty to indemnify, there is no obligation to pay attorney's

fees." Fisk Elec. Co., 888 S.W.2d at 815. BGP relied on this latter principle to assert that because

there has been no determination that it must indemnify English, BGP had no responsibility to

bear the costs of providing a defense for English. Instead, BGP claimed its duty to defend, or pay

costs of defense, only arises if and when BGP is determined to owe a duty of indemnification.

Therefore, BGP concluded the duty to defend is not a justiciable question until a determination

has been made on the issue of liability. However, numerous courts have held that the duty to

defend, unlike the duty to indemnify, is, in most situations, a justiciable issue.

   The Court went on to analyze BGP’s duty to defend English using the exact rules insurance

carriers use to determine their duty to defend this insureds. The Court stated

      We recognize that most of the cases addressing this issue, and many of the cases we have
      cited, involve the duty to defend in the insurance context. However, we find little reason
      why the principles regarding an insurer's duty to defend should not apply with equal force

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                             PAGE 36
      to an indemnitor's contractual promise to duty defend its indemnitee. See generally Gen.
      Motors Corp. v. Am. Ecology Envtl. Svcs. Corp., 2001 U.S. Dist. LEXIS 13560, No.
      Civ.A.399CV2625L, 2001 WL 1029519, at *6-8 (N.D. Tex. Aug. 30, 2001) (applying the
      same principles regarding the duty of an insurer to defend in the insurance context to the
      duty of an indemnitor who has contractually agreed to defend its indemnitee); Fisk Elec.
      Co., 888 S.W.2d at 815 ("The standard for determining whether a contractual indemnitor
      has a duty to defend is the same as in cases involving an insurer's duty.").

The Court analyzed the petition in the Hidalgo litigation and determined that the allegations fell

within the terms of the agreement and that, therefore, BGP had the duty to defend.

       The Court next addressed the express negligence doctrine and determined that the

agreement did not meet the requirements. However, English was being sued for non-negligence

causes of action for which the express negligence doctrine did not apply. Because some of the

causes of action fell within the enforceable portion of the agreement, BGP had the clear duty to

defend English against some of the causes of action and therefore had the duty to defend English

against all of the causes of action, just like an insurance company would.

       Much care must be exercised when analyzing the case law to determine if Client must

defend ABC Construction Company under the terms of the contractual indemnity agreement.

Many of the court decisions occur after the underlying lawsuit has been decided when the duty to

indemnify necessarily includes the reimbursement of defense costs. Many other decisions do not

make a clear distinction between the duty to defend and the duty to indemnify in their holdings.

Furthermore, a distinction must be drawn between whether the indemnitor owes a duty to defend

or the indemnitor’s CGL carrier also owes that duty. At least one out of state decision holds that

a duty to defend is not owed to a contractual indemnitee by the indemnitor’s insurance carrier

unless the indemnitee is endorsed as an additional insured. Penn. Nat’l Ins. V. HN1 Corp., 482

F.Supp.2d 568 (M.D. Pa. 2007).

F.     Recent Decisions Interpreting or Applying Indemnity Agreements



UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 37
       In Enron Corp. Savings Plan v. Hewitt Associates, L.L.C., 611 F. Supp.2d 654 (S.D. Tex.

– 2009). This dispute arose between Enron Creditors Recovery Corp (“Enron”) and Hewitt

concerning whether Hewitt was entitled to indemnity from Enron. The dispute was presented to

the Court in Enron’s Rule 12(b)(6) Motion to Dismiss. The court interpreted the following

indemnification agreement contained in the ASA:

      Section 10, composed of six subsections, is entitled in bold type, "Liability and
      Indemnification":

              § 10.1 Limitation of Liability. Hewitt will furnish services at no charge to
            identify, correct or re-perform any defective or non-conforming service as
            described in Section 2.5. In addition to its obligations under Section 2.5, if
            Client or the Plan(s) suffers Losses as a result of Hewitt's negligence, Hewitt
            will be liable for up to $ 1,000,000 of such Losses incurred by Client or the
            Plan(s) during any Agreement Year after the first $ 100,000 of such Losses.
               § 10.2 Exclusions from Limitation on Liability. Notwithstanding
            anything to the contrary contained here, the limitations on Hewitt's liability
            contained in Section 10.1 shall not apply to Losses arising from (a) Hewitt's
            gross negligence, willful, fraudulent or criminal misconduct . . . .
               § 10.4 Indemnification.
                       (a) By Hewitt. Subject to Sections 10. 1, 10. 2, and 10.3. and
                   10.4(c), Hewitt shall indemnify, defend and hold Client and Plans
                   harmless from and against any Claims and shall pay all Losses
                   (including reasonable attorneys' fees and expenses): (i) arising out
                   of any breach by Hewitt of any of its material obligations,
                   representations or warranties contained in this Agreement; (ii)
                   arising out of Hewitt's negligence, gross negligence or willful,
                   fraudulent, or criminal misconduct . . . .
                       (b) By Client. Client shall indemnify, defend, and hold Hewitt
                   harmless from and against any claims, and pay all losses and related
                   expenses (including reasonable attorneys' fees and expenses)
                   suffered by Hewitt: (i) arising out of any breach by Client of any of
                   its material obligations, representations, or warranties contained in
                   this Agreement; (ii) arising from Client's negligence, gross
                   negligence or willful, fraudulent, or criminal misconduct . . . [or]
                   (v) arising from Losses for which Hewitt is not liable under this
                   Section 10 . . . .
                     (c) Defense of Third Party Claims. Hewitt will defend all Claims
                   brought against Client or Hewitt by any third party relating to this
                   Agreement or the Services to the extent such Claims relate to or arise
                   out of Losses described in Section 10.2(b)-(d). Client will defend all

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                        PAGE 38
                     other Claims brought against Client or Hewitt by any third party
                     relating to the Agreement or the Services. . . . Included among third
                     parties are the Plans, any trustees, the Participants and affiliates of
                     Client. . . .


        Enron contended that §10.4(a) states the circumstances under which Hewitt is obligated

to indemnify Enron. Enron argued to the Court that it was not required to indemnify Hewitt, as

Hewitt asserted in its Third Party Complaint against Enron. After significant analysis of Texas

law, the Court agreed with Enron and granted Enron’s Motion to Dismiss. The Court cited the

following rulings in Texas cases with significantly more specific provisions than any in the ASA

make clear that a party cannot be indemnified for its own negligence absent an unmistakable,

unambiguous and explicit statement within the four corners of the contract that such is the intent

of the parties. Citing the same cases, Enron insists that the indemnification clause in the ASA

clearly does not satisfy the strictures of the express negligence test under Texas law. See, e.g.,

Quorum Health Resources, L.L.C. v. Maverick County Hosp. Dist., 308 F.3d 451, 460 (5th Cir.

2002)(an indemnity provision promising to indemnify the plaintiff for "any pending or

threatened medical malpractice or other tort claims asserted against [the indemnitee]" held not

sufficiently specific to satisfy the express negligence test because it did not state that the

indemnitee would be responsible for losses caused by its own negligence); Ethyl Corp. v. Daniel

Constr. Co., 725 S.W.2d 705, 705 (Tex. 1987)(rejecting indemnity provision that "did not clearly

and unequivocally require the subcontractor to indemnify the company for its own negligence");

Delta Airlines, 164 S.W.3d at 675 (no indemnity under provision "ARC will indemnify Delta

regardless of whether the injury or damage . . . arises out of . . . the negligence . . . of . . . Delta"

because "nowhere is there language that directly or indirectly says that ARC will indemnify

Delta if Delta is solely at fault."); Glendale, 902 S.W.2d at 538 (rejecting as insufficient to

indemnify the contractor for his own negligence a provision requiring subcontractor to indemnify

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                                PAGE 39
contractor for "any negligent act or omission . . . arising out of or resulting from the performance

of the Subcontractor's Work . . . regardless of whether it is caused in part by a party indemnified

hereunder"); Jobs Bldg. Servs., Inc. v. Rom, Inc., 846 S.W.2d 867, 870 (Tex. App.--Houston [1st

Dist.] 1992, writ denied)(indemnity provision insufficiently specific to require the contractor to

be indemnified for damage caused by the contractor's own negligence where the clause stated

that the subcontractor would indemnify for "damage . . . caused by the subcontractor's negligent

act or omission or by the negligent act or omission of anyone employed by the subcontractor or

for whose acts [or omissions] the contractor or subcontractor may be liable . . . . [emphasis in

original]").

        The Court incorporated the law on the express negligence doctrine stated previously and

succinctly stated: "Ambiguous indemnity provisions are unenforceable." Cabo Const., Inc. v.

R.S. Clark Const., Inc., 227 S.W.3d 314, 318 (Tex. App.--Houston [1st Dist.] 2007 no pet.),

citing Ethyl, 725 S.W.2d at 707-08.

        The Court further concluded that the indemnity provisions at issue here are not

conspicuous because a reasonable person, in this case Enron, against whom it would operate,

might well not have noticed them. The ASA is lengthy, with multiple sections and subsections, all

uniformly set in the same font, typeface, and manner, with bold headings, so that the indemnity

agreement "is no more visible than any other provision in the agreement and does not appear to

be designed to draw attention of a reasonable person against whom the clause was to operate."

American Shield, 201 S.W.3d at 185.

        Consistent with its determination that there is no contractual basis for Hewitt's

indemnification claim, the Court concluded that the ASA failed to satisfy the express negligence

doctrine. As the party that drafted the ASA and the party seeking indemnification from the

consequences of its own negligence, Hewitt had failed to express clearly and in specific terms

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 40
within the four corners of the contract the intent of the parties to the ASA to include a viable

agreement to indemnify Hewitt for the results of its own negligence.

       In Reece Albert, Inc. v. Contractor’s Service Company, 2007 Tex. App. LEXIS 1908

(Tex. App.—Houston [1st Dist.] December 13, 2007, pet. den’d.) not published, the Court found

that an indemnity provision was enforceable but only after it allowed one of the parties to the

agreement to correct a scrivener’s error. Reece and CSC entered into a contract whereby CSC

agreed to act as a subcontractor for Reece on a road construction project. During the project, an

automobile accident occurred. The driver involved in the collision sued Reece and CSC.

Pursuant to the indemnity agreement, Reece made a demand on CSC for defense and indemnity,

but CSC did not respond. Reece settled with the injured driver and then sued CSC, alleging

breach of contract and seeking declaratory relief regarding CSC ‘s defense and indemnity

obligations. The indemnity provision in question is as follows:

       9.9 INDEMNIFICATION AND HOLD HARMLESS CLAUSE:

       “[CSC] assumes entire responsibility for any claim or actions based on or arising
       out of injuries, including death, to persons or damages to or destruction of
       property sustained or alleged to have been sustained in connection with or to
       have arisen out of Reece Albert, Inc., their agents and employees, and their
       subcontractor, their agents and employees, whether such claim or actions are
       founded in whole or in part upon liability or any degree of alleged negligence,
       whether sole or concurrent of Reece Albert, Inc. it’s [sic] representatives, or the
       employees, agents, invitees, or licensees [sic] thereof. [CSC] further agrees to
       indemnify and hold harmless Reece Albert Inc., AND [sic] it’s [sic]
       representatives, and the employees, agents, invitees and licensees thereof in
       respect of any such matters and agrees to defend any claim or suit or action
       brought against Reece Albert, Inc., it’s [sic] representatives, and employees,
       agents, invitees, and licensees thereof. (emphasis added)”

The trial court found that the indemnity provision was ambiguous and therefore unenforceable,

based upon the language contained in italics. Reece conceded that there are admittedly one or

more words missing from the quoted indemnity “trigger” that should appear right before the

words “Reece Albert, Inc.” Nonetheless, Reece argued it was clear, reviewing the entire

UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                            PAGE 41
indemnity agreement, that the parties intended CSC to indemnify Reece for Reece’s own

negligence. The agreement expressly provided that CSC “assumes entire responsibility for any

claims or actions…whether such claims or actions are founded in whole or in part upon liability

or any degree of alleged negligence, whether sole or concurrent, of Reece Albert, Inc.” The

Court held that the missing words in the indemnity “trigger” are the result of a scrivener’s error

and remanded the matter to the trial court to reform the written contract to conform to the terms

of the agreement which, according to the Court, was clear from the agreement in its entirety.



       In Ayres Welding Company, Inc. v. The Conoco, Inc. 243 S.W.3d 177 (Tex. App.—

Houston [14th Dist.] 2007, no pet), the Court read several provisions of the contract together to

find that the indemnity provision met the express negligence test, that it extended to employee

injuries that were not work related, and that the indemnity cap contained within the agreement

did not apply. The Court construed the following indemnity provisions:

       14.1 APPLICATION OF INDEMNITIES. EXCEPT AS OTHERWISE
      PROVIDED IN THIS CONTRACT, ANY INDEMNIFICATION AND
      DEFENSE OBLIGATION IN THIS CONTRACT APPLIES REGARDLESS
      OF (1) THE CAUSE OF OR REASON FOR ANY COVERED LOSS OR
      LIABILITY; (2) THE SOLE, JOINT OR CONCURRENT NEGLIGENCE OR
      OTHER FAULT, WHETHER ACTIVE OR PASSIVE, OF THE
      INDEMNIFIED PARTY; AND (3) WHETHER THE LOSS OR LIABILITY
      RESULTS FROM ACTIONS OF [CONOCO], ITS AGENTS OR
      EMPLOYEES.
          14.2 GENERAL INDEMNIFICATION. [AYRES] shall INDEMNIFY AND
      HOLD [CONOCO] HARMLESS from loss or liability . . . arising from any claim
      or cause of action for . . . injury to . . . persons, caused by, arising from, or
      incidental to the Work. However, such indemnification shall not apply to claims for
      . . . injury . . . caused by [CONOCO's] sole negligence. [AYRES's] indemnity
      obligations under this provision shall be limited to $ 1,000,000 per occurrence . . . .
          14.4 EMPLOYEES OF [AYRES]. Notwithstanding anything to the contrary in
      this Contract, [AYRES] shall INDEMNIFY AND HOLD [CONOCO]
      HARMLESS from any loss or liability . . . arising from any claim or cause of
      action for injury to . . . [AYRES's] employees. (emphasis added).



UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                           PAGE 42
The “work” was defined in the contract as the welding and general maintenance services and

materials requested by Conoco and provided by Ayres.

       In 2001, an Ayres employee suffered injuries in a collision while riding in a vehicle being

driven by a Conoco employee. The Ayres employee sued Conoco and Conoco, in turn,

requested indemnity from Ayres, which Ayres declined. After the underlying suit was settled,

Conoco sued Ayres and both parties moved for summary judgment on the indemnity issue. The

trial court denied Ayres’ motion and granted Conoco’s. On appeal, Conoco first argued that the

automobile accident was not caused by or incidental to the work under the contract and,

therefore, the indemnity provision did not apply. The Court agreed that § 14.2 was limited to

incidents “caused by, arising from or incident to the Work.” However, § 14.4 required Ayres to

indemnify and hold Conoco harmless from any loss or liability arising from any injury to an

employee of Ayres. The Court read the two sections together and held that § 14.4 required

indemnity in the case of the non-work related accident.

       Ayres next complained that the agreement did not meet the express negligence test unless

the Court read §§ 14.4 and 14.1 together, which should not be allowed since neither section

referred to the other. The Court pointed out that the Texas Supreme Court has held that an

indemnity agreement need not be confined to one sentence and that the contract, taken as a

whole, can be sufficient to define the parties’ intent to indemnify a company for that company’s

own negligence, citing Enserch Corp. v. Parker 794 S.W.2d 2, 8 (Tex. 1990). The Court went

on to hold that, although the express negligence language in § 14.1 was not contained in § 14.4,

the section which provided the indemnity obligation, the contract, taken as a whole, was

sufficient to demonstrate Ayres’ intent to indemnify Conoco for the consequences of Conoco’s

own negligence.




UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                         PAGE 43
       Lastly, Ayres argued that the indemnity cap contained in § 14.2 of $1 million applied and

that the Court erred in requiring Ayres to reimburse Conoco for the entire $1.7 million judgment.

The Court again pointed out that, although there was a limit on indemnity in § 14.2, there was

not such limit in § 14.4 and, in the Court’s opinion, the language of § 14.4 over rode the

language limiting liability.

       The Court in E.I. Du Pont v. Shell Oil Company, 259 S.W.3d 800 (Tex. App.—Houston

[1st Dist.] pet denied) addressed, in the relevant portion of its opinion, the allocation of defense

costs between those covered under an indemnification agreement and those not covered by it.

In the case in question, Du Pont shipped over 12 million pounds of Waste Materials to an

injection well in Bayou Sorrell, Louisiana. The injection well subsequently became the subject

of multiple lawsuits ultimately consolidated into a class action suit against both Du Pont and

Shell. The parties agreed that Shell and Du Pont were sued, in part, for their roles in generating

and transporting Waste Materials to the injection well but that both were also sued for claims

unrelated to the Waste Materials which were the subject of the indemnity agreement between

Shell and Du Pont. The plaintiffs and defendants eventually settled the underlying litigation.

Thereafter, Du Pont filed suit, asserting that Shell breached its duty to defend and indemnify it in

the underlying litigation. The agreement in question provided, in relevant part:

       “Section 15.2 [Shell] shall defend and indemnify Du Pont…against all claims,
       suits, actions, liabilities, losses and expenses (including reasonable attorney’s
       fees) including but not limited to injury, disease, or death of persons or damage to
       property including environmental damage (hereinafter referred to as “Claims”)
       related to the materials…

       Section 15.4 [Shell] shall defend and indemnify Du Pont…against all Claims
       related to Waste Materials…”

Shell contended that the plain meaning of the indemnity provision established Shell owed Du

Pont indemnity only for litigation costs which were actually related to the Waste Materials which

were the subject of the agreement. In essence, Shell argued that it was only obligated to
UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                             PAGE 44
reimburse Du Pont for defense costs incurred solely in defending against covered claims. Du

Pont segregated defense costs solely related to non-Waste Materials and did not seek recovery

for that amount. Du Pont then segregated its defense costs expended in defense of claims solely

related to the Waste Materials and did seek recovery of that amount. Lastly, Du Pont was left

with a remaining pool of defense costs that related to Waste Materials, even though such defense

costs also advances the defense of claims related to non-Waste Materials. The Court suggested

that Du Pont might have been entitled to recover this entire amount, citing Tony Gullo Motors I,

L.P. v. Chapa, 212 S.W.3d 299, 314 (Tex. 2006), in which the Texas Supreme Court confirmed

that “it is only when discreet legal services advance both a recoverable and unrecoverable claim

that they are so intertwined that they need not be segregated.” Du Pont sought a percentage of

these intertwined defense costs, which the Court awarded against Shell. Lastly, Du Pont sought

$242,620.90 for fees and costs expended in prosecuting its indemnity claim against Shell. The

Court rendered judgment in favor of Du Pont in that amount for the fees and expenses incurred

in prosecuting this action.




UPDATE ON CONTRACTUAL INDEMNITY AGREEMENTS                                        PAGE 45

				
DOCUMENT INFO
Description: Indemnity Agreements document sample