An imbroglio between energy giants over the extent of additional insured coverage required by a construction contract has landed in the Houston [14th] Court of Appeals.
TotalEnergies Petrochemicals & Refining USA, Inc. FKA Total Petrochemicals & Refining,USA, Inc. and Ace Property & Casualty Insurance Co. v. Kinder Morgan Petcoke LP and Kinder Morgan Petcoke GP LLC (No. 14-20-00061-CV) arose from the death of a Kinder Morgan employee who was performing work at Total’s Port Arthur refinery. The employee filed a wrongful death lawsuit against Kinder, Total, and certain Total employees. As the employee’s claims against Kinder were covered by workers’ compensation insurance, Kinder was nonsuited from the case. Total and its insurer, Chubb, together with Kinder, jointly funded a settlement with the employee’s family. A dispute then arose between the parties regarding Kinder’s obligation under the contract to provide defense and indemnity to Total and its employees. When Kinder refused, Total and Chubb sued to recover their defense costs and contribution to the settlement in the wrongful death action. Kinder counterclaimed to recover its contribution to the settlement. Both parties moved for summary judgment.
The issue in the case involved the construction of contract provisions that required Kinder to maintain CGL and excess liability coverage in minimum amounts of $1 million and $6 million, respectively, until full completion of the work, and to name Total and its employees as additional insureds. The contract further provided that the coverage provided to the additional insureds was primary and not contributory insurance. Finally, the contract required Kinder to give 30 days’ notice prior to any cancellation or material modification of the policies. Four years into the contract, Kinder allowed its policies to lapse and replaced them with a $25 million excess liability policy (with a $10 million self-insured retention) from Lloyd’s. The policy contained an additional insured provision, but limited coverage to “any indemnity given by the [Kinder] under [the contract] to Total.” The contract contained a reciprocal indemnification provision that obligated each party to indemnify the other party to the extent of Kinder’s negligence.
The problem occurred because the employee’s death occurred after Kinder had allowed its CGL and excess liability coverage to lapse. Consequently, Total asserted that Kinder had breached the contract and was liable for damages (curiously, however, Total never offered any summary judgment evidence of the amount of damages that Kinder allegedly owed). Kinder responded that it was not liable for anything because, although it admittedly let is original insurance lapse, it had replaced the coverage with the Lloyd’s policy. Under the Lloyd’s policy, however, Kinder’s liability was limited by the indemnification provision in the contract and further did not extend to Total’s employees. Because Kinder was not a party to the wrongful death action (by virtue of the exclusive remedy of workers’ compensation), it had no fault that could be the basis of the indemnity obligation. Alternatively, Kinder argued that in the event Total incurred any damages, they were consequential, not direct, damages and not covered by the policy in any event. The trial court found that Kinder breached its contract obligation to carry CGL and excess liability coverage in the minimum amounts and owed damages to Total up to the $6 million minimum coverage requirement. Total claimed that it was entitled to recover the $10 million of self-insured retention, but the trial court denied that. The trial court awarded Total $1 million after applying an offset.
The court of appeals affirmed in part and reversed in part. With respect to Total’s breach of contract claim, the court held that Kinder breached the contract by failing to maintain CGL and excess liability coverage. The Lloyd’s policy did not substitute for those coverages, contrary to Kinder’s assertion, because it was neither a CGL nor excess liability policy as required by the contract. Moreover, looking to the context of the entire agreement, the court determined that Kinder’s obligation to name Total and Total’s employees extended to “all insurance carried, except Workers’ Compensation and Employer[s]’ liability,” by Kinder in relation to the work, which included the Lloyd’s policy. If the parties had intended to exclude any coverage other than CGL or excess liability, they could have done so but did not. In making this determination, the court had to parse whether the qualifier “whether required hereby,” which immediately followed the workers’ comp and employer’s liability exception, referred only to the exception or to “all insurance carried.” It resolved this ambiguity in favor of the latter because to rule otherwise would render the phrase superfluous, since workers’ comp and employer’s liability were already excluded from the additional insured obligation in another section of the contract. The trial court thus erred in limiting Kinder’s additional insured obligation to the original CGL and excess liability coverage.
The court likewise rejected Kinder’s argument that it was free to narrow the scope of additional insured coverage under the Lloyd’s policy because the Lloyd’s policy still covered Total, just not its employees. Although the trial court did not reach the issue, the court of appeals decided it in favor of Total. Nothing in the contract expressed an intention to limit the additional insured obligation by tying it to the scope of the indemnity provision, as the Lloyd’s policy provided. In fact, the contract required the additional insured obligation to apply to “all occurrences,” not to the more limited universe of occurrences (those to which Kinder had an indemnity obligation) covered by the Lloyd’s policy. Kinder thus breached its contractual obligation to Total and to its employees by failing to maintain additional insured coverage. Finally, the court held that Kinder breached its obligation to give Total 30 days’ notice of a material change in its insurance coverage when it obtained a new policy with a narrow scope of coverage for additional insureds.
The court of appeals remanded the case back to the trial court for a determination of damages, which Total failed to conclusively prove at the summary judgment stage. Nevertheless, the court found that any such damages were covered “direct” damages because the “Contract’s insurance requirements were specifically designed to financially protect Total in the event of an incident such as the [employee’s] tragedy.” Kinder’s failure to maintain the required coverage thus resulted in direct damages, “those that the breaching party is conclusively presumed to have foreseen as a result of its breach because they are the necessary and usual result of, and flow naturally and necessarily from, that wrongful act” (citations omitted).
This is the type of case that might go to a specialized business court, if Texas had such a thing. It involves two sophisticated parties, the construction of a construction contract and an insurance policy, and competing motions for summary judgment on the basis of the documents alone. Even so, it is hard to see that a business court would have reached a different outcome or that the trial or appellate courts were not up to the task of deciding the case. Perhaps the difference some kind of business court might make in a case like this is shortening the time it takes to resolve the dispute. That nearly seven years passed between the wrongful death case and the appellate decision in the coverage dispute might not matter much to businesses as big as Total and Kinder, that might not be the case for smaller entities more financially dependent on the outcome of the litigation. In our view, the best argument for at least a pretrial specialty court for certain business disputes is not the lack of knowledge, capacity, or experience of trial and appellate judges, but getting the dispositive issues of contract interpretation adjudicated more quickly and efficiently. In this case, neither side established damages, so that issue had to go back to the trial court for trial anyway. A more streamlined pretrial process might have significantly sped up the process.
