Contractor’s Obligation to Provide Insurance Is Different From Indemnity

In many industrial construction or services contracts, contractors agree to provide insurance for the owners.  Additionally, contractors often agree to indemnify the owners, at least to some extent.  These provisions are sometimes congruent; that is, the indemnity and insurance provisions can be written so that each obligation corresponds exactly to the other.  However, Texas law makes no presumption of congruity.

The recent opinion by the U.S. Court of Appeals for the Fifth Circuit in ExxonMobil Corporation v. Electric Reliability Services makes clear that one obligation can extend beyond the other.  Parties must examine their contracts, closely, and should not assume that the insurance and indemnity obligations correspond to each other.  Moreover, parties may need to address the obligations separately, in the event of a claim.

Services Contract Had Separate Insurance and Indemnity Provisions

Electric Reliability Services (“ERS”) agreed, in a contract to provide services at an ExxonMobil refinery, to buy insurance that covered ExxonMobil for third party claims relating to ERS’s work.  The contract to provide services also required ERS to pay any deductible, in the event of a claim against ExxonMobil.  ERS complied with this obligation by naming ExxonMobil as an additional insured under ERS’s policy, which had a $3 million deductible.

The services contract had a separate provision where ERS and ExxonMobil gave mutual indemnities, agreeing that if the negligence of one led to a claim, the negligent party would indemnify the other.

Subcontractor’s Employee Seriously Injured, Sues ExxonMobil

An employee of an ERS subcontractor sued ExxonMobil for serious injuries sustained during ERS’s work.  ExxonMobil settled that underlying case for $2.5 million and sought from ERS and from ERS’s insurance carrier over $3 million in reimbursement for the settlement and defense costs.

ERS’s Responsibility for the $3 Million Deductible Was Not Limited by the Indemnity

A key issue before the Fifth Circuit was ExxonMobil’s demand that ERS reimburse it for the deductible amount.  ERS argued that its obligation to pay the deductible did not apply, because: (1) ExxonMobil’s negligence caused the third party’s injury, and (2) the indemnity language, which required ExxonMobil to indemnify ERS if ExxonMobil’s negligence caused the injury, relieved ERS of its responsibility to pay the deductible.

The Fifth Circuit rejected ERS’s argument, stating that the contract’s separate insurance and indemnity provisions established separate obligations.  ERS had to pay ExxonMobil the deductible amount, plus applicable attorneys’ fees.

The Court noted that ERS could have brought a separate claim against ExxonMobil for indemnity as to the deductible, but ERS failed to do so.  Essentially, the Court held that the insurance and indemnity provisions were separate, and needed to be addressed through separate claims.

Indemnity/Insurance Issues Are Challenging

Few legal issues are more difficult than insurance/indemnity issues that arise from construction and similar contracts, especially when injuries to third parties occur.  At every stage, beginning with negotiating the contract, to defending the underlying claim, and through asserting indemnity or seeking insurance coverage, owners and contractors need to review their obligations with competent counsel, to minimize and manage the risks that these projects create.

For a copy of the Fifth Circuit’s opinion click here.

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