Indemnity and Insurance Claims Do Not Always Rise and Fall Together
The United States Court of Appeals for the Fifth Circuit recently determined that a third party was not obligated to provide contractual indemnity for damage caused by negligent tortfeasors, but left open the question of whether the third party’s insurance policy covered its liability in International Marine, L.L.C. v. Integrity Fisheries, Inc.
The underlying marine casualty claim arose out of an allision in the Gulf of Mexico involving a submerged mooring line of a Mobile Offshore Drilling Unit (MODU) during survey operations. A jury awarded damages to the MODU operator, allocating fault between the survey company and a vessel owner.
In a separate proceeding, the at-fault parties sought indemnity from another party involved in the survey operation. The at-fault parties also sought insurance coverage from the third-party’s underwriters as additional insureds.
The Fifth Circuit found that the at-fault parties were not entitled to indemnity under applicable Master Service Agreements, but ultimately found that there remained an issue for remand with respect to the additional insured status of the at-fault parties. The Court examined the Master Service Agreements (MSAs) between all parties to determine whether it was within their contemplation to indemnify against their negligent performance causing third party property damage. The indemnity clauses required that the property damage to the MODU “relate to or arise out of” the indemnitor’s operation for an indemnity obligation to arise. The Fifth Circuit found that the party against whom indemnity was sought did not contribute to the negligent act causing the third party property damage and thus, according to the Fifth Circuit, did not trigger the indemnity provision that required the claims to “relate to or arise out of the operation” of the chase vessel.
The insurance coverage issues, however, were not so clear and were distinct from the indemnity obligations. On appeal, the Fifth Circuit found that indemnity and insurance claims do not always rise and fall together. Rather, the language of the insurance policy governs the scope of insurance coverage. The insurance policies were not in the record, so the Court could not determine whether the insurance policies at issue provided more coverage for the at-fault parties as additional insureds than what was included in the MSAs. Therefore, the Court remanded the case for further proceedings.
The Fifth Circuit’s decision in International Marine, L.L.C. v. Integrity Fisheries, Inc. is significant for parties allocating risk by contract, whether in a charter party or a master service agreement. The Fifth Circuit revisited what it means to “arise out of” a party’s operations and the Court ultimately applied a narrow reading to the scope of the indemnity obligations in the MSAs at issue, which may warrant further review of parties’ existing indemnity obligations in other contracts. The decision also highlights the principle that indemnity and insurance coverage do not necessarily rise and fall together. It also recognizes the distinct obligations to indemnify and to name as an additional insured where the insurance obligations are not limited to the scope of the indemnity.