Coverage Exists for Master Services Contract Reformed Midlitigation
Michael Orlando | June 23, 2017
In Richard v. Anadarko Petrol. Corp., 830 F.3d 701 (5th Cir. La. Mar. 2, 2017), the Fifth Circuit Court of Appeals analyzed the validity of granting maritime insurance coverage when the insured was allowed to reform its underlying contractual indemnity duties in the middle of the insurance coverage litigation. 1
An employee of Offshore Energy Services (OES), Raylin Richard, was injured while working as a casing supervisor offshore on an Anadarko Petroleum Corp. project. Richard sued Anadarko, Dolphin Drilling, Ltd., and Smith International, Inc. (Dolphin and Smith were other contractors of Anadarko working on this project). OES and Anadarko were operating under a master services contract 2 that contained reciprocal indemnity provisions whereby each company agreed to defend and indemnify the other party (as well as the other party's "indemnitees") for claims relating to their own employees' work-related accidents—commonly referred to as knock-for-knock indemnity.
Dolphin and Smith sought indemnity from Anadarko for Richard's claims; Anadarko looked to OES to indemnify it, as well as Dolphin and Smith. OES agreed to defend and indemnify all of the defendants and ultimately paid Richard a $2.5 million settlement.
OES turned to Liberty Mutual Insurance, its insurer, for its costs to defend Anadarko, Dolphin, and Smith, as well as for coverage of the Richard settlement. Liberty Mutual denied coverage for OES's expenditures related to Dolphin and Smith. Coverage suits were filed in the US District Court for the Western District of Louisiana.
The Initial Coverage Suits
At first, the court found that, under the master services contract, there was no coverage for Dolphin's and Smith's portions of the Richard settlement. The district court reviewed the indemnity language in the OES-Anadarko contract that protected Anadarko and its "[a]ffiliates, its joint owners and venturers, if any, and its and their directors, agents, representatives, employees, and insurers and its subcontractors and their employees" (emphasis added) from suits brought by OES's employees. Liberty Mutual argued, and the district court initially agreed, that Dolphin and Smith were Anadarko's contractors, which the OES-Anadarko master services contract did not cover, as opposed to Anadarko's covered subcontractors.
After granting a motion to reconsider this finding, the district court allowed OES and Anadarko to reform their master services contract to reflect their mutual intention to include "contractors" in the reciprocal indemnity provisions. The district court denied Liberty Mutual's challenge to this reformation.
After reviewing the reformed OES-Anadarko contract, the district court ultimately found that Liberty Mutual owed coverage to OES for the settlement as well as OES's attorney fees in defending all of the parties. Liberty Mutual appealed, and the Fifth Circuit affirmed the district court's award of coverage to OES. 3
Fifth Circuit's Ruling
The Fifth Circuit first held that the district court correctly applied maritime law to the master services contract. The court held that maritime law allows for contract reformation when a mutual mistake is made by the contracting parties. The court cited its own maritime precedent that held reformation is a proper remedy to correct errors or mistakes in contracts. Courts permit, and the district court correctly allowed, parol evidence to be introduced to demonstrate the contracting parties' mutual mistake in failing to accurately record a contract.
Liberty Mutual argued that the parties should not be able to reform the master services contract since, as an interested third party, it would be adversely affected by the reformation. The Fifth Circuit used Louisiana law to fill a gap in maritime law for determining whether a potential adversely affected third party prevents parties from reforming a contract. 4
Under Louisiana law (and Texas law) the fact that a third party might be affected by a contract reformation does not, itself, bar reformation. Liberty Mutual stated that it did not rely on or review the unreformed master services contract before placing coverage. The Fifth Circuit held that, even though a reformed contract would negatively affect Liberty Mutual, the insurer was not unfairly surprised by the outcome of the reformation. The language in the unreformed contract strongly suggested that contractors and subcontractors were to be included in the indemnity agreement, and Anadarko's and OES's conduct following the contract's signing pointed to that intention as well.
The fact that Liberty Mutual did not rely on the unreformed contract in determining whether to insure OES and the fact that Liberty Mutual was not unfairly surprised by the reformation further persuaded the Fifth Circuit to affirm the district court's decision.
Conclusion
The Fifth Circuit reaffirmed its own precedent in allowing parties to reform their contract if a mutual mistake can be proven through parol evidence. As Liberty Mutual could not show the court that it relied on the unreformed contract and that it would not be unfairly surprised by the reformed contract's outcome, its position that reformation was improper failed.
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