Case law update: Indemnities in practice

February 2018

While the offshore industry has come a long way in terms of safety, unfortunately accidents still happen. On a pure numbers basis, personal injury claims still represent the largest share of offshore claims, representing roughly two-thirds of all claims reported to Skuld Offshore.

As it is standard for offshore service contracts to incorporate the knock-for-knock indemnity principle, P&I cover is predicated on that basis. However, in US personal injury cases, indemnity regimes contained in offshore contracts are scrutinized by courts and can be rejected. Given the notoriously high awards available in US personal injury claims, this lack of certainty is of concern to both assureds and insurers alike in the offshore industry.

However, in the recent case of In re Larry Doiron, Inc., the US Fifth Circuit Court of Appeals has provided some clarity to the situation.

In this article, Pamela Milgrim of Skuld North America, with the assistance of the law firm Murphy, Rogers, Sloss, Gambel & Tompkins, look at this decision and its impact on offshore P&I insurance.

A distinction with a difference

Generally speaking, clearly and unequivocally worded indemnity obligations are enforceable under maritime law. When an oilfield service contract is determined to be a maritime contract, maritime law controls and indemnity obligations are typically enforceable. However, where an oilfield contract is deemed "non-maritime", the state law generally controls it. This is significant because several states have "anti-indemnity" statutes, which either limit or, in the case of Louisiana, render void and unenforceable indemnity provisions in certain contracts that pertain to wells for oil and gas.

The Louisiana Oilfield Indemnity Act specifically voids any indemnity provision that "purports to or does provide for defense or indemnity, or either, to the indemnitee against loss or liability for damages arising out of or resulting from death or bodily injury to persons, which is caused by or results from the sole or concurrent negligence or fault (strict liability) of the indemnitee." This means that if a contract is considered "non-maritime", State law would apply and any indemnity set out therein would be void.

While time charter agreements are clearly maritime contracts, vessel owners may find themselves involved in a multi-party case where the plaintiff's tort-immune employer has contractually agreed to provide a broad indemnity to the "Company Group," the definition of which might include the vessel owner. If the plaintiff's injury occurred off the coast of Louisiana, the indemnity provision in the overarching services contract can only be of effect if that is deemed a maritime contract, since any defense and indemnity provision would be unenforceable if the services contract is governed by Louisiana law. Therefore, knowing whether those contractual rights are enforceable could be critical in determining the member's exposure.

Out with the "old" Fifth Circuit test(1)

For years, the waters surrounding the determination of whether a contract was maritime in nature were rather murky. In 1990, the Fifth Circuit attempted to change that and laid out in Davis & Sons, Inc. v. Gulf Oil Corp., a six-factor test to apply to the inquiry.

While well intentioned, the highly fact-intensive nature of the Fifth Circuit's Davis approach led to inconsistent results. Over time, this test led to more confusion than guidance, prompting judges and commentators to note that "Davis has not worn well" and its test "creates uncertainty, spawns litigation, and hinders the rational calculation of costs and risks." As such, the Fifth Circuit decided in its Doiron decision that it was time to clarify matters.

In with the "new" Fifth Circuit "Doiron test"(2)

Realising that change and clarity was needed, the Doiron Court adopted a simpler, more straightforward test of what constitutes a "maritime contract.", in line with an earlier US Supreme Court decision which broadly defined what characterised a contract as maritime.

The facts in Doiron are familiar ones. An oil company entered into a blanket master services contract ("MSC") with an industrial equipment company for services on a stationary platform in the Gulf of Mexico off the coast of Louisiana, and the MSC contained an indemnity provision that ran in favour of the production company and its contractors. The project ran into an unexpected issue that required a crane barge, so the oil company contracted with a barge operator to address it. While attempting to resolve the issue, the barge's crane operator struck and injured one of the equipment company's crewmembers. After a personal injury suit commenced, the barge company asserted an indemnity claim against the plaintiff's employer (the equipment company), which required the court to determine whether the MSC was a maritime contract with an enforceable indemnity obligation. To answer that narrow but critical question, the Fifth Circuit outlined a two-part test.

The court emphasized that its new test "places the focus on the contract and the expectations of the parties," and highlighted the importance of that focus specific to parties' liability under indemnification provisions.

After applying the case's facts, the Fifth Circuit found that the contract at issue was not a maritime contract, because the use of the vessel was unexpected and insubstantial.

The P&I impact

There are a number of reasons why the offshore industry so widely adopted the knock-for-knock – it is simple, prevents insurance duplication and, above all, provides certainty as to risk exposure. From an insurance perspective, all of those factors also make it an appealing choice. On the other side, if that approach is deviated from, the uncertainty it creates is unhelpful for both contractors and insurers.

As with any decision which helps to create more certainty, the Doiron casehas to be cautiously welcomed. With the potential exposure to substantial personal injury claims being a significant consideration in the underwriting of any vessel that is to operate in the US, the greater clarity as to the potential exposures the better. However, the Doiron decision also comes with the caveat that the previous Davis test can still be looked to for guidance, so we are not yet at the stage where the applicability of indemnity regimes is as clear as it is in other jurisdictions.

Skuld Offshore is grateful to Peter Tompkins and Tarryn Walsh of Murphy, Rogers, Sloss, Gambel & Tompkins for their assistance in preparing this article.