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J. Kent Holland, Jr.

Insurance coverage was provided to a third-party (project owner) as an additional insured under a contractor’s excess insurance policy.  Where the additional insured endorsement excluded coverage for the additional insured’s sole negligence, the court determined that contract language such as indemnification requirements had no bearing on the scope of the coverage because only the insurance policy and endorsement would determine the extent of coverage.

In Evanston Insurance Company v. ATOFINA Petrochemicals, Inc. (No. 03-0647, Texas – 2005), Triple S Industrial Coporation (Contractor) was hired to perform maintenance and construction work for ATOFINA Petrochemicals (Owner) at ATOFINA’s Port Arthur oil refinery.  An employee of the Contractor was killed at the owner’s facility while performing work.  Relatives of the employee sued Owner for wrongful death and received a favorable settlement for $6.75 million.  ATOFINA then sought indemnification for the settlement from the Contractor’s insurance carriers.  The primary commercial general liability (CGL) carrier tendered its $ million policy limit to ATOFINA.  The excess carrier (Evanston Insurance Company), however, denied the claim and refused to contribute toward the settlement.

ATOFINA was named as an additional insured on both the Admiral CGL policy and on the Evanston excess policy.  The Admiral CGL policy specifically excluded from coverage any liability arising from ATOFINA’s sole negligence.  The Evanston excess policy was a “follow form” policy so that it covered only the same liabilities covered by the underlying policy.  In addition, the Evanston policy contained two relevant definitions of who is an insured under the policy.  Under section III.B.5 it stated that an insured is “any … 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.”   The policy contained an additional provision stating that an insured may also be “a person or organization for whom [Contractor] has 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 [Contractor] or on [Contractor]s] behalf, or facilities owned or used by [Contractor].   ATOFINA qualifies as an insured under both provisions of the policy.

As an initial matter, the Texas Supreme Court noted that the indemnity clause in the contract between the Contractor and ATOFINA would not limit the scope of the insurance provided by the carriers because the additional insured provisions stand separately from the indemnity provision.   Next, the court found that regardless of what insurance coverage the Contractor may have been required by contract to purchase for the benefit of ATOFINA, it was only the terms of the actual policies that would determine the coverage provided and, therefore, the extent of responsibility of the carriers.

Looking at the terms of the excess policy, the court held that the two definitions quoted above had to be read holistically rather than independently.  Since the one section clearly stated that ATOFINA would not be covered for its sole negligence, ATOFINA could not avoid that restriction by arguing that it was covered under the other section which did not contain that same limitation.  The sole negligence restriction had to be read into both definitions of the contract to make sense of the policy as a whole.

The court determined that ATOFINA has no coverage under the Evanston policy for its own sole negligence.  But because the wrongful death claim was settled with no admission of liability by either party, it was impossible for the court to determine whether ATOFINA’s responsibility for the accident was “sole.”  The court, therefore, remanded the case to the trail court for a determination of the respective liabilities of the parties.

Comment: The court in this case addressed an argument by Evanston that its coverage was limited in scope by the indemnity agreement between ATOFINA and the Contractor.  The indemnity agreement in the contract specifically excluded indemnity for any acts of ATOFINA’s sole negligence.  The court rejected Evanston ’s argument in this regard, holding that the additional insured provision was not limited to covering only the liabilities reflected in the indemnity agreement.  As explained by the court, “While the indemnity agreement is relevant to determining what the parties intended with respect to the scope of the indemnity obligation, an insurance policy secured to insure that obligation stands on its own.   To the extent the insurance policy fails to satisfy the indemnity obligation, the obligor [contractor] remains exposed.”

When reviewing a contract to determine whether risk allocation is appropriate, it is important to understand that parties are free to negotiate terms that shift risk from one party to another in a manner that creates uninsured liability for the party that assumes the risk.  In the case at issue, the indemnity clause of the contract did not limit Evanston ’s insurance obligations, but nor did it increase those obligations.  The policy speaks for itself and coverage scope is neither increased nor decreased by the terms of a construction contract.

Another point for consideration in drafting contracts is what dispute resolution mechanism will be utilized.  This case was resolved by a settlement agreement that did not assign any responsibility or liability to any party.  Many cases are resolved by arbitration proceedings which generally do not set forth any factual or legal reasoning for decisions granting monetary damages to one of the parties.   If insurance is at issue it may be prudent to require that arbitration decisions include findings of fact and conclusions of law so that an insurance carrier may determine whether the liability is covered in a situation like this one under an additional insured endorsement or other provision of the policy.  Without such information, the carrier might be justified in declining coverage.  With the remand to the trial court in the instant case, the parties will end up back in trial court with the time and expense of proving the extent of responsibility for the injuries in order to prove entitlement to insurance coverage.

About the author: Kent Holland is a construction lawyer  in Tysons Corner, Virginia, and is a risk management consultant for environmental and design professional liability insurance and contracts.   He is also publisher of ConstructionRisk.com Report.  He may be reached at Kent@ConstructionRisk.com.  This article is published in ConstructionRisk.com Report, Vol. 8, No. 6.