In a ruling with grave implications to additional insured coverage and the risk transfer process, the Fifth Circuit overturned the Eastern District of Louisiana, broadening the application of the Louisiana Oilfield Indemnity Act (“LOIA”) to void indemnity and additional insured (“AI”) coverage.1
Vertex Services (“Vertex”) performed salvage work on a platform previously used on a decommissioned well for Tetra Technologies, Inc. (“Tetra”). Vertex agreed to indemnify Tetra for injuries sustained by Vertex’s employees, as well as list Tetra as an additional insured under its general liability insurance policy issued by Continental Insurance Co. (“Continental”) (“Agreement”).
An accident occurred when a bridge connecting two offshore platforms in the Gulf of Mexico collapsed. A Vertex employee fell 70-80 feet into the water. The employee sued Tetra, and Tetra subsequently settled the suit.
Tetra sought indemnity and AI coverage from Vertex and Continental to recover the settlement cost. The Eastern District of Louisiana found that LOIA did not void the indemnity or AI coverage, because there was no “functional nexus” between the Agreement and a well. On appeal the Fifth Circuit reversed.
Louisiana Oilfield Indemnity Act
LOIA is applicable to “agreements pertaining to wells for oil, gas, or water … to the extent those provisions apply to death or bodily injury to persons.”2 LOIA prohibits any provisions in agreements which provide defense or indemnity
to the indemnitee against loss or liability for damages arising out of or resulting from death or bodily injury to persons, which is caused by or results from the sole or concurrent negligence or fault (strict liability) of the indemnitee, or an … employee … who is directly responsible to the indemnitee.3
The term “agreement” in LOIA refers to any agreement “concerning any operations related to the exploration, development, production, or transportation of oil, gas, or water …including but not limited to … plugging, or otherwise rendering services in or in connection with any well....”4 Further, LOIA prohibits the use of additional insured endorsements, or any other form of insurance protection, which would act to “frustrate or circumvent the prohibitions of the statute.”5
The Fifth Circuit’s Analysis
The Fifth Circuit recognizes a two-part test to determine if LOIA applies to invalidate any indemnity provision contained in or collateral to that agreement: (1) the agreement must pertain to an oil, gas, or water well; and (2) the agreement is related to exploration, development, production, or transportation of oil, gas, or water. In determining whether an agreement pertains to a well, “the decisive factor in most cases has been the functional nexus between an agreement and a well or wells.”6
In making its determination, the Court relied upon the Louisiana District Court’s findings in Wilcox v. Max Welders, L.L.C.7 , Howell v. Avante Servs., LLC8 , and Teaver v. Seatrax of La9 . Each of these cases involved agreements to perform work in connection with “plugging and abandoning” wells. Tetra attempted to distinguish these cases by arguing that salvaging a decommissioned platform is one step removed from plugging or decommissioning a well. However, the Court rejected the argument because “it ignores the fact that regulations generally require the removal of an oil platform in connection with a decommissioning operation.”10 Accordingly, the Court concluded “that a contract for salvaging a platform from a decommissioned oil well has a sufficient nexus to a well under LOIA.”11
Although the matter was ultimately remanded to the District Court for a determination of whether Louisiana law applies, the Court affirmatively held that if Louisiana law is found to apply, Tetra cannot obtain indemnity or AI coverage as the Agreement would be voided by LOIA.12
Conclusion: Protecting AI Coverage
Although it is not discussed in the Court’s recent decision, the Fifth Circuit has previously recognized an exception to LOIA, allowing for additional insured coverage under limited circumstances.13 Often referred to as the “Marcel Exception,” the exception prevents an agreement which names a party as an additional insured from being voided by LOIA, even if the agreement requires additional insured coverage for a party’s sole or concurrent negligence, if the additional insured pays the additional cost associated with being named as an additional insured on the indemnitor’s policy.14 To fulfill the requirements of the Marcel Exception, the agreement to pay the additional premium is expressed in the service agreement.15
Accordingly, when entering into an agreement related to a well, whether operational or otherwise, it is prudent to conduct a choice of law analysis to determine if LOIA will potentially void any indemnity or insurance provision included therein. Further, carefully drafting your agreement to avoid LOIA from voiding your AI coverage should be considered. Agreements should be carefully drafted to avoid the harsh consequences of LOIA on the risk transfer process.
For more information about the policyholder implications of this case, please contact Celia B. Keniry at email@example.com or 203-287-2126; Tracy Alan Saxe at firstname.lastname@example.org or 203-287-2101; or Richard W. Brown at email@example.com or 203-287-2115.
1 On February 24, 2016, the Court in Tetra Techs., Inc. v. Cont’l Ins. Co., No. 15-30446, 2016 U.S. App. LEXIS 3214 (5th Cir. Feb. 24, 2016) overturned the District Court’s holding in Armijo v. Tetra Techs., Inc., 936 F. Supp. 2d 675 (E.D. La. 2013).
2 La. R.S. 9:2780 (A).
3 La. R.S. 9:2780 (B).
4 La. R.S. 9:2780 (C).
5 La. R.S. 9:2780 (G).
6 Opinion, pg. 13 citing Verdine v. Ensco Offshore Co., 255 F.3d 246, 252 (5th Cir. 2001).
7 969 F. Supp. 2d 668, 680–83 (E.D. La. 2013).
8 Nos. 12-293 & 12-2448, 2013 WL 1681436, at *3–7 (E.D. La. Apr. 17, 2013).
9 No. 10-1523, 2012 WL 5866042, at *4–5 (E.D. La. Nov. 19, 2012).
10 In the Opinion on pg. 18, the Court Footnotes to: 30 C.F.R. § 250.1703 (listing general requirements for decommissioning) (“When your facilities are no longer useful for operations, you must . . . [r]emove all platforms and other facilities, except as provided in §§ 250.1725(a) and 250.1730. . . .”).
11 Opinion pg. 18.
12 The 5th Circuit remanded the issue on whether Louisiana law applies as surrogate federal law under the Outer Continental Shelf Lands Act.
13 See Marcel v. Placid Oil Co.11F.3d 563 (5th Cir. 1994).
14 Id. at 569-70.
15 In Marcel, the agreement to pay towards the additional costs was an amendment to the agreement that stated how much the additional insured would pay towards the indemnitor’s policy premiums.