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Web alert: Fifth Circuit ruling - additional insurance coverage capped by incorporating in the policy the $5m limit of the MSA
News & Insights 4 August 2015
Endeavour Energy Resources, well owner and operator, and Basic Energy Service entered into a master service agreement (MSA) that contained valid reciprocal indemnity provisions and insurance obligations, requiring each party to obtain at least $5m in insurance coverage.
The Fifth Circuit ruled that a master service agreement between two oilfield contractors requiring each to have $5m coverage limited the insurance liability to that amount.
Endeavour Energy Resources (Endeavour), well owner and operator, and Basic Energy Service (Basic) entered into a master service agreement (MSA) that contained valid reciprocal indemnity provisions and insurance obligations, requiring each party to obtain at least $5m in insurance coverage ($1m primary, $4m in excess). The MSA further stated that the insurance obligations were to support the indemnification provisions but were separate and independent obligations. The insurance policies obtained by Basic, with limits up to $51m, named Endeavour as additional insured but did not expressly limit additional insurance coverage to the terms of the MSA. The policies’ sole reference to the MSA was contained in an 'Insured Contract' clause that defined an 'Insurer' as 'any person or entity to whom Basic is obligated by a written Insured Contract'.
A dispute arose between the insurers of the two companies after a fire killed two Basic employees in 2010. Their families brought wrongful death suits in Texas State Court against Endeavour and made settlement demands in excess of $11m. Endeavour’s insurer, Ironshore Specialty Insurance Corporation, sued Basic’s excess insurers, Aspen Underwriting Ltd, for a declaratory judgment that it was entitled to Basic’s entire $51m in coverage. The trial court granted summary judgment in favour of Aspen, and limited Endeavor’s additional insured coverage to $5m. Ironshore appealed the ruling to the Fifth Circuit.
The court of appeals looked to the recent Texas Supreme Court decision in In re Deepwater Horizon to determine whether Basic’s policies sufficiently referenced and incorporated the limitations on coverage contained in the MSA. The court of appeals determined that the policy in In re Deepwater Horizon contained two clauses referencing the underlying drilling contract between Transocean and BP and that Basic’s policies contained an 'almost identical' clause – the 'Insured Contract' clause. The Fifth Circuit decided that the best reading of the In re Deepwater Horizon was that each clause was an independent basis for incorporating the underlying contract into the insurance policy.
The Fifth Circuit upheld the trial’s court ruling and help that the $5m insurance limit in the MSA was incorporated into Basic’s insurance policies based upon the 'Insured Contract' Clause.
More information can be found here.