Contract That Required $3 Million in Coverage Was All The Indemnity it Must Pay in the Event of Loss

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Posted on February 24, 2022 by Barry Zalma

The Texas Oilfield Anti-Indemnity Act (“TOAIA”) voids indemnity agreements that pertain to wells for oil, gas, or water or to mineral mines, unless the indemnity agreement is supported by, inter alia, liability insurance. Here, pursuant to TOAIA, CP Well Testing, LLC and Cimarex Energy Co. agreed in a Master Service Agreement (the “MSA”) to obtain a minimum amount of insurance coverage to indemnify one another. In Cimarex Energy Company; St. Paul Fire & Marine Insurance Company, as Subrogees of Cimarex Energy Company; American Guarantee & Liability Insurance Company, as Subrogees of Cimarex Energy Company v. CP Well Testing, L.L.C., No. 20-50892, United States Court of Appeals, Fifth Circuit (February 14, 2022) when a party bought more insurance protection than required by the contract it, and its insurer, refused to pay more than the amount required by the contract.

After an accident, Cimarex settled with the injured party for an amount above the minimum indemnity required by the MSA. In the wake of that settlement, a dispute arose between CP Well and Cimarex over CP Well’s indemnification obligation. At issue is how much insurance CP Well obtained for the benefit of the other party as indemnitee. The district court considered the terms of CP Well’s insurance policy to answer that question and granted summary judgment for CP Well based on the court’s conclusion that CP Well owed Cimarex no further indemnity beyond the MSA’s minimum.
FACTS

In 2010, CP Well and Cimarex entered into the MSA. Thereafter, Cimarex hired CP Well to work at an oil well in Oklahoma that was owned and operated by Cimarex. CP Well assigned Johnny Trent, an employee of one of its subcontractors, to work at the well. On April 25, 2015, a flash fire occurred at the well and Trent was severely burned.

Trent sued Cimarex, CP Well, and Cudd Energy Services, Inc. in Oklahoma state court for his injuries. Cimarex and its insurers, St. Paul Fire & Marine Insurance Company and American Guarantee & Liability Insurance Company, (collectively “Cimarex”) settled the underlying lawsuit with Trent for $4.5 million.

After the Trent settlement, Cimarex sought indemnity from CP Well. CP Well paid Cimarex $3 million, the minimum amount of insurance required by the MSA but it refused to indemnify Cimarex for the remaining $1.5 million.

The district court concluded that in the MSA, “the parties merely agreed to a floor” of indemnity insurance that CP Well agreed to obtain-general liability coverage of $1 million and excess liability coverage of at least $2 million-and did not set a specific level of coverage. Because the MSA does not limit the amount of coverage the parties agreed to obtain to support their indemnity obligations, the court then looked to TOAIA to determine the lowest common denominator of insurance coverage between the parties.

CP Well averred it only agreed to maintain $1 million in general liability insurance and $2 million in excess liability insurance to meet its indemnification obligation under the MSA. It claimed the remaining coverage in its excess liability coverage was thus not for the benefit of Cimarex.

The district court held that CP Well did not breach the MSA because CP Well was only required to indemnify Cimarex up to $3 million. Consequently, the district court granted CP Well summary judgment and denied Cimarex’s competing motion.
DISCUSSION

In Texas, contract terms are given their plain, ordinary, and generally accepted meanings unless the contract itself shows them to be used in a technical or different sense. The floor for each party was different: CP Well was required to obtain a minimum of $3 million in coverage. Cimarex was required to obtain a minimum of $26 million in total coverage. The language of the MSA is plain as far as what the parties were required to do. When CP Well obtained its $10 million policy, it clearly met the $3 million minimum coverage specified in the MSA and thus complied with its indemnity obligation under the agreement.

The MSA set the floor, not the ceiling of required insurance. While CP Well was free to obtain more than $3 million in liability coverage, voluntarily increasing its indemnification coverage for Cimarex’s benefit, it was not required by the MSA to do so.

The statute states that, “[w]ith respect to a mutual indemnity obligation, the indemnity obligation is limited to the extent of the coverage and dollar limits of insurance . . . each party as indemnitor has agreed to obtain for the benefit of the other party as indemnitee.” [Tex. Civ. Prac. & Rem. Code Ann. § 127.005(b).] The district court consulted CP Well’s excess liability policy language and concluded that none of the additional coverage was procured for Cimarex’s benefit as indemnitee, and therefore that CP Well was not required to pay more than $3 million to Cimarex.

The district court’s approach was not just logical; it was consistent with precedent that, applying Texas law, courts in this circuit routinely consider the terms of insurance policies to determine whether a party is entitled to coverage.

CP Well’s excess liability policy effectively set the indemnity coverage “ceiling” at the same level as the MSA’s “floor” by the wording of the policy. In TOAIA’s terminology, the remaining $8 million of CP Well’s excess liability coverage was not obtained for the benefit of Cimarex. CP Well was free to obtain additional coverage for its own purposes. CP Well’s excess liability policy fulfilled both the terms of the MSA and the requirements of TOAIA, to the extent that CP Well and Cimarex were mutually indemnified up to $3 million, coincident with CP Well’s minimum requirements under the MSA. Had Cimarex wanted CP Well to obtain more than the minimum coverage in the MSA, the parties could have so fashioned their agreement. The MSA was clear: Cimarex could expect nothing beyond the minimum coverage CP Well was required to obtain.

The parties in this case agreed to indemnify each other, consistent with TOAIA, by setting a “floor” of required insurance coverage each was to obtain. They were free to procure more. CP Well obtained a policy that expressly set the “ceiling” of coverage “for the benefit [of Cimarex] as indemnitee” at the minimum “floor” provided by the parties’ contract.

CP Well did not breach its contractual duties to Cimarex in doing so. And the district court did not err in construing either the parties’ agreement, or TOAIA, or the insurance policy to delimit CP Well’s indemnity obligation to Cimarex. It follows that the district court’s summary judgment in favor of CP Well was proper.
ZALMA OPINION

The parties entered into the MSA to avoid the consequences of the anti-indemnity statute. They drafted the contract with both parties promising to buy insurance that would be available to indemnify the other. For some reason one was only required to carry $3 million in coverage and the other was required to maintain $26 million. Just because one was prudent enough to protect itself and buy more than required did not change the terms of the contract and the minimum requirement was also the maximum. The Fifth Circuit interpreted the clear and unambiguous language of the contract and the insurance policies and enforced the contract exactly as the parties agreed.

© 2022 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

You can contact Mr. Zalma at https://www.zalma.com, https://www.claimschool.com, [email protected] and [email protected] . Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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