Hercules Offshore, Inc. and the Hercules Offshore Drilling Company, LLC v. Excell Crane & Hydraulics, Inc. ( 2014 )

Opinion issued November 20, 2014
In The
Court of Appeals
For The
First District of Texas
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NO. 01-13-00817-CV
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HERCULES OFFSHORE, INC. AND THE HERCULES OFFSHORE
DRILLING COMPANY, LLC, Appellants
V.
EXCELL CRANE & HYDRAULICS, INC., Appellee
On Appeal from the 133rd District Court
Harris County, Texas
Trial Court Case No. 2009-49993
OPINION
This dispute between Hercules Offshore, Inc. and The Hercules Offshore
Drilling Company, LLC (collectively “Hercules”) and Excell Crane & Hydraulics,
Inc. arises from the parties’ conflicting interpretations of indemnity and insurance
provisions in their Master Service Agreement (MSA). Hercules contends that the
“additional assured” language in the MSA’s insurance provision means that
Excell’s insurance must be exhausted before Hercules’s indemnity obligation is
triggered. Excell, on the other hand, argues that Hercules’s indemnity obligation is
primary, notwithstanding any other provision of the MSA, including the insurance
provision. The trial court granted summary judgment in favor of Excell and denied
Hercules’s motion for summary judgment.
There is an additional wrinkle. This case arises out of a personal-injury
lawsuit by Hercules employee Dennis Brunson, who sued Hercules and Excell in
Texas state court. Meanwhile, another Hercules employee, Kevin Currey, who
was injured in the same incident, sued Hercules and Excell in Louisiana state court.
Excell prevailed against Hercules in the Louisiana litigation. The Louisiana
judgment in Excell’s favor became final while this appeal was pending, and Excell
now argues that the Louisiana judgment precludes further litigation in this case and
that Excell is entitled to judgment based on principles of res judicata and collateral
estoppel.
We conclude that res judicata and collateral estoppel do not apply, and that
the trial court erred in granting summary judgment in favor of Excell and in
denying Hercules’s summary judgment on the contract interpretation issue.
Accordingly, we reverse the trial court’s summary judgment in favor of Excell,
render judgment granting Hercules summary judgment with respect to liability on
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its breach of contract claim, and remand for further proceedings consistent with
this opinion.
Background
In 2007, Hercules was serving as the drilling operator of a semi-submersible
drilling rig off the shore of Louisiana. Three Hercules employees, including
Brunson and Currey, were injured when the rig elevator in which they were riding
went into a free-fall. Excell had inspected and tested the elevator two months
earlier, and it performed this work under the terms of the MSA.
In August 2009, Brunson sued Hercules and Excell in Texas state court.
Hercules later settled Brunson’s claims against both, leaving only Excell and
Hercules’s dispute regarding the indemnity and insurance provisions of the MSA.
Excell’s cross-claim against Hercules was based upon Paragraph 15.B. of the
MSA:
[Hercules] shall defend, release, indemnify and hold harmless
[Excell], its parents, subsidiaries, affiliates, officers, directors,
employees and agents from and against all liens, claims, demands,
causes of action, costs, expenses or losses (including but not limited to
attorneys’ fees) pertaining to, for or on account of injury to, illness or
death of employees, or agents of [Hercules], or employees of the
“vessel” as used under 33 U.S.C. § 905(c), or its affiliates, or loss or
damage to property of [Hercules], or its affiliates which arise from,
are incident to or result directly or indirectly from the performance of
the Work, the presence of the above individuals at any job or work
site, or transportation to or from such locations, performance of this
Agreement, or breach hereof.
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Excell moved for summary judgment on its cross-claim, arguing that the indemnity
provision unambiguously required Hercules to defend and indemnify Excell
against Brunson’s claims.
Hercules counterclaimed for breach of the MSA, arguing that it was not
obligated to indemnify Excell under Paragraph 15.B. until the insurance that Excell
was obligated to provide Hercules under Paragraph 9 had been exhausted.
Paragraph 9 provided:
During the term of this Agreement, [Excell] shall maintain at its sole
expense the minimum insurance coverage specified in Exhibit “A”
with underwriters acceptable to [Hercules], and under the terms of
coverage specified, all of which is adopted herein. Except as provided
by law, the limits specified therein shall in no way limit liabilities or
obligations of Excell for claims arising from performance of this
Agreement and any applicable Work Order. . . .
Exhibit A provided that Excell shall maintain comprehensive general liability
insurance for overwater operations with a combined single limit of $1 million per
occurrence and excess umbrella liability coverage for overwater operations with a
combined single limit of $5 million. Exhibit A also provided:
All insurance policies shall contain a waiver of subrogation in favor of
[Hercules], its affiliated companies, and any third parties to whom or
for which [Hercules] is under contract or rendering services and/or its
and their employees and agents. All insurance policies, except
Worker’s Compensation, shall name all such parties as additional
assureds. All such policies shall be endorsed to provide that
additional assureds shall not be liable for premiums and that such
policies shall be primary as to additional assureds, regardless of any
“excess” or “other insurance” clauses therein. The coverage extended
an additional assured shall not be less than that provided to the
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Contractor. All policies will cover investigation and defense of
claims. All policies will include contractually assumed liability
coverage.
Thus, Hercules argued that the MSA required Excell to name it an
“additional assured” on all required insurance policies, and that the policies were to
be “primary” as to Hercules. Hercules further argued that the policies were
required to cover “contractually assumed liability coverage”— including any
liability assumed under the indemnity provisions of Paragraph 15 of the MSA. It is
undisputed that Excell obtained some insurance coverage, but Excell concedes that
it did not obtain coverage of the type Hercules argues that Paragraph 9 and Exhibit
A require.
Hercules moved for traditional summary judgment on Excell’s claim for
indemnity and on its own claim for breach of the MSA. Hercules relied on Ogea v.
Loffland Brothers Company, 622 F.2d 186 (5th Cir. 1980), and its progeny to argue
that, where a contract provides that “contractually assumed liability coverage”
must be covered under contractually-required insurance policies, and the coverage
is required to be primary as to additional assureds, the obligation to provide
insurance supersedes any indemnity obligation until the insurance coverage is
exhausted.
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Excell argued that this case was unlike Ogea and its progeny because
Paragraph 15.E. of the MSA provided that the indemnity provision superseded the
other provisions in the MSA:
The allocations of risk contained in this Paragraph 15 or elsewhere in
this agreement shall apply notwithstanding the simple, gross, sole,
joint or concurrent negligence of any person or party (regardless of
whether such person or party is an indemnitee or not), the
unseaworthiness or other fault of any vessel, “ruin,” or strict liability,
liability imposed by statute, defects in premises, equipment or
material, or any other event or condition whether anticipated or
unanticipated and regardless of whether pre-existing this agreement.
In support of this argument, Excell pointed to Paragraph 15.D. which required each
party to support its contractually-assumed indemnity obligations with its own
insurance.
The trial court initially denied both motions for summary judgment. After
both parties moved for reconsideration, the trial court granted Excell’s motion for
reconsideration, vacated its order denying Excell’s motion for summary judgment,
and granted Excell’s motion for summary judgment. The trial court entered a final
judgment, ordering Hercules to defend and indemnify Excell for Brunson’s claims
pursuant to the MSA. Hercules appealed.
Discussion
Hercules contends in a single issue that the trial court erred in granting
summary judgment for Excell and denying Hercules’s motion for summary
judgment as to the contract interpretation issue, because federal maritime law,
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which the parties agree applies here, dictates that the “additional assured” language
in the MSA’s insurance provision means that Hercules’s indemnity obligation is
triggered only after Excell exhausts the insurance it agreed to obtain. Excell
disagrees and argues that the facts of this case are distinguishable from those in
which “additional assured” insurance obligations were held to be primary to
indemnity obligations. Excell further argues that the doctrines of res judicata and
collateral estoppel bar Hercules from relitigating this issue because the Louisiana
judgment in Excell’s favor became final while this appeal has been pending.
A. Standard of Review
We review a trial court’s decision to grant or to deny a motion for summary
judgment de novo. See Tex. Mun. Power Agency v. Pub. Util. Comm’n, 253
S.W.3d 184, 192 (Tex. 2007). “When both sides move for summary judgment, as
they did here, and the trial court grants one motion and denies the other, reviewing
courts consider both sides’ summary-judgment evidence, determine all questions
presented, and render the judgment the trial court should have rendered.” Gilbert
Tex. Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 124 (Tex.
2010) (citing Embrey v. Royal Ins. Co. of Am., 22 S.W.3d 414, 415–16 (Tex.
2000)).
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B. Applicable Law
Both parties agree that federal maritime law governs the substantive dispute
in this case. Well-settled Fifth Circuit law, beginning with Ogea v. Loffland
Brothers Company, 622 F.2d 186 (5th Cir. 1980), holds that a party “who has
entered into a contractual indemnity provision but who also names the indemnitor
. . . as an additional assured under its liability policies, must first exhaust the
insurance it agreed to obtain before seeking contractual indemnity.” Tullier v.
Halliburton Geophysical Servs., Inc., 81 F.3d 552, 553 (5th Cir. 1996); see also
Klepac v. Champlin Petroleum Co., 842 F.2d 746, 747–48 (5th Cir. 1988).
In Ogea, the Fifth Circuit held that contractor Loffland Brothers’ insurance
obligation must be exhausted before Phillips Petroleum Company’s indemnity
obligation was triggered. 622 F.2d at 190. The Fifth Circuit noted that the
insurance and indemnity obligations in a maritime contract “must be read in
conjunction with each other in order to properly interpret the meaning of the
contract.” Id. The Ogea contract provided that Phillips would indemnify Loffland
Brothers from claims by Phillips’ employees or employees of other contractors.
Id. at 188. The contract also provided that Loffland Brothers was required to
procure a $500,000 insurance policy and name Phillips as a co-insured. Id. at 189.
Another contractor’s employee was injured on Phillips’ rig and sued
Loffland, who in turn asserted a third-party indemnity claim against Phillips. Id. at
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187. Phillips asserted a counter-claim against Loffland, alleging that Loffland was
obligated to obtain liability insurance covering Phillips and that Loffland’s
insurance obligation primed Phillips’ indemnity obligation. Id. The district court
rendered judgment in favor of Phillips, and the Fifth Circuit affirmed, holding that
“[t]he indemnity provisions do not come into play” because Phillips did not have
an obligation to indemnify Loffland until the $500,000 policy, on which Phillips
was required to be named a co-insured, was exceeded, and it was not. Id. at 189–
90. The Fifth Circuit held that if Loffland had failed to name Phillips as a co-
insured, then Loffland was liable for breach of contract up to $500,000 and Phillips
would be relieved of liability. Id. at 189.
Since Ogea, the Fifth Circuit has consistently held that a party “who has
entered into a contractual indemnity provision but who also names the
indemnitor . . . as an additional assured under its liability policies, must first
exhaust the insurance it agreed to obtain before seeking contractual indemnity.”
Tullier, 81 F.3d at 553; see Klepac, 842 F.2d at 747–48.
C. Analysis
This case is controlled by Ogea. The MSA provided in Paragraph 15.B. that
Hercules would indemnify Excell against claims by Hercules’s employees.
Paragraph 9 provided that Excell “shall maintain at its sole expense the minimum
insurance coverage specified in Exhibit ‘A,’” and Exhibit A provides:
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All insurance policies shall contain a waiver of subrogation in favor of
[Hercules], its affiliated companies, and any third parties to whom or
for which [Hercules] is under contract or rendering services and/or its
and their employees and agents. All insurance policies, except
Worker’s Compensation, shall name all such parties as additional
assureds. All such policies shall be endorsed to provide that
additional assureds shall not be liable for premiums and that such
policies shall be primary as to additional assureds, regardless of any
“excess” or “other insurance” clauses therein. The coverage extended
an additional assured shall not be less than that provided to the
Contractor. All policies will cover investigation and defense of
claims. All policies will include contractually assumed liability
coverage.
(Emphasis added.)
Here, “[t]he controlling fact . . . is the existence of the ‘additional assured’
coverage whereby [Excell] agreed to procure insurance coverage for the benefit of
[Hercules].” Tullier, 81 F.3d at 554. “The import of the additional assured clause
is emphasized here because [the MSA] also required that insurance procured by
[Excell] must afford primary coverage to [Hercules].” Id. It also made clear that
the policy must include contractually assumed liability coverage, and it did not
limit the insurance requirement to liability coverage assumed by Excell. Cf.
William W. Pugh, OIL AND GAS DRILLING CONTRACTS: A LOOK AT THE MAJOR
RISK ALLOCATION ISSUES, 2013 No. 3 ROCKY MTN. MIN. L. INST. Paper No. 10, 15
(2013) (under Ogea, “when there are conflicting indemnity and insurance
requirements, the insurance of the indemnitee must first respond up to the dollar
limit of coverage. Only then must the indemnitor honor its hold harmless
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obligation. In practice, this situation may be eliminated by the addition of a
sentence limiting the applicability of the additional assured requirement to the
risks and liabilities assumed by the party providing the insurance coverage.”)
(emphasis added).
Excell argues that this case is distinguishable from Ogea because there, the
parties specifically negotiated the additional assured provision and agreed that the
indemnity obligation would not come into play until after the additional assured
insurance was exhausted, while here the parties did not. But the Fifth Circuit has
rejected a nearly identical argument. In Tullier v. Halliburton Geophysical
Services, Inc., 81 F.3d 552 (5th Cir. 1996), the Fifth Circuit held that whether the
parties “directly negotiated [the] result . . . is not controlling,” because the “legal
imperative” is to “read the indemnity and insurance procurement provisions
harmoniously.” 81 F.3d at 554 (holding that insurance obligation was primary to
indemnity obligation).
Excell also argues that Hercules’s interpretation ignores key provisions of
the MSA, such as Paragraph 15.D., which requires the parties to carry their own
insurance for indemnity obligations. Specifically, Paragraph 15.D. provides: “[a]ll
indemnities under this Agreement [] shall be supported by equal amounts of
available liability (or other appropriate) insurance to be carried by the
indemnifying party at its own expense.” But again, Tullier considered and rejected
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a similar argument, concluding that the indemnitor’s obligation was to secure
coverage for liability in excess of the coverage under the additional assured
provision. The Tullier contract required the contractor to “supply primary
coverage up to $1,000,000 per incident, with [the company] as an additional
assured.” Id. at 554. The Fifth Circuit held that the company, therefore,
“contracted to insure liability over that amount in fulfillment of its indemnity
responsibility.” Id. Similarly, here, Paragraph 15.D. required Hercules to procure
insurance to support its indemnity obligation, but that insurance is not triggered
until after the limits of insurance that Excell agreed to purchase under Paragraph 9
and Exhibit A are exhausted. See id.
Excell further argues that Paragraph 15.E should be interpreted to mean that
the indemnity provisions apply notwithstanding anything else contained in the
MSA. Essentially, Excell argues that Paragraph 15.E means that indemnities
trump all other provisions of the MSA. But Paragraph 15.E does not say this. It
provides:
The allocations of risk contained in this Paragraph 15 or elsewhere in
this agreement shall apply notwithstanding the simple, gross, sole,
joint or concurrent negligence of any person or party (regardless of
whether such person or party is an indemnitee or not), the
unseaworthiness or other fault of any vessel, “ruin,” or strict liability,
liability imposed by statute, defects in premises, equipment or
material, or any other event or condition whether anticipated or
unanticipated and regardless of whether pre-existing this agreement.
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This provision gives effect to the indemnities regardless of whose negligence or
gross negligence caused the injury; it is designed to allow the indemnities to
survive the express negligence rule, not to trump every other provision of the
MSA. Moreover, several courts following Ogea and its progeny have rejected the
argument that this type of provision causes the indemnities to trump a party’s
obligation to procure primary insurance for an additional assured. See, e.g., Basin
Exploration, Inc. (Del.) v. Ocean Salvage Corp., No. Civ.A. 01-526, 2003 WL
943642, at *4–5 (E.D. La. March 7, 2003) (contractor was required to exhaust
insurance coverage required under parties’ MSA before seeking indemnity where
indemnity provision provided for indemnity “notwithstanding anything else in this
contract”); Sonat Exploration v. Falcon Drilling, Co., 85 F. Supp. 2d 649, 654
(W.D. La. Sept. 23, 1999) (contract providing for allocation of risk
“[n]otwithstanding said insurance provisions” did not abrogate insurance
requirements of contract; insurance requirements primed indemnity).
Excell relies primarily on three cases to support its interpretation of the
MSA: Spell v. N.L. Industries, Inc., 618 So. 2d 17 (La. App. 3rd Cir. 1993),
Helmerich & Payne International Drilling Company, 180 S.W.3d 635 (Tex.
App.—Houston [14th Dist.] 2005, no pet.), and Brusco Tug & Barge, Inc. v. St.
Paul Fire and Marine Ins. Co., 897 F. Supp. 2d 1048 (W.D. Wash. 2012). But, for
various reasons, none of these cases carries the day.
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The Fifth Circuit has determined that the analysis in the first of these, Spell,
“is inconsistent with that of the Fifth Circuit in Ogea . . . .” Tullier, 81 F.3d at 552
n.1. Spell was also decided under Louisiana law, not federal maritime law. It thus
is of little value to this case. Id. (“Spell was decided under Louisiana law, whereas
the case before us involves federal maritime law, Spell is not controlling and will
not be further discussed.”).
In Helmerich, the Fourteenth Court of Appeals held that an indemnity
provision was primary in a contract that provided that the indemnity provision
applied “[n]otwithstanding anything to the contrary contained herein.” Helmerich,
180 S.W.3d at 638–39. But the MSA at issue in this case contains no such
provision. Additionally, the Fourteenth Court applied Texas law, not federal
maritime law, as the parties acknowledge we are required to do here. See id. at
637.
In the third case Excell relies upon, Brusco Tug, the contract expressly stated
that certain types of indemnification applied, notwithstanding the contract’s
insurance requirements:
Notwithstanding the foregoing provisions as to insurance, liability and
indemnity, the parties agree that with respect to their employees, or
the employees of their subcontractors, each shall assume liability for,
indemnify and hold harmless (including legal costs and fees) from,
and procure contractual liability or other insurance with respect to,
any loss, damage, claim, liability and/or suit arising out of or relating
to bodily injury to their employees or the employees of their
subcontractors.
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Brusco Tug, 897 F. Supp. 2d at 1050. The MSA contains no analogous language.
Finally, at oral argument, Excell argued that Hercules’s interpretation of the
MSA is flawed because it would permit Hercules to claim coverage under Excell’s
insurance for incidents entirely unrelated to Excell’s work. We disagree. We note,
first, that in this instance, Hercules is seeking coverage for Brunson’s injuries,
which allegedly arose as a result of a free fall in an elevator that Excell had
certified for use only 50 days earlier. In any event, we do not agree that adopting
Hercules’s interpretation of the MSA would allow Hercules to seek coverage under
Excell’s policy for damages unrelated to Excell’s work, because the MSA limits
the scope of the agreement such that the insurance referenced in Paragraph 9 could
apply only to work by Excell, its affiliates, and its subcontractors for Hercules or
its affiliated companies.
Accordingly, following well-settled Fifth Circuit maritime law, we conclude
that Hercules is not obligated to indemnify Excell under Paragraph 15 of the MSA
until the limits of insurance coverage that Excell was obligated to purchase by
Paragraph 9 and Exhibit A of the MSA have been exhausted. See Ogea, 622 F.2d
at 189–90; Klepac, 842 F.2d at 747–48; Tullier, 81 F.3d at 553–54. We therefore
hold that the trial court erred in granting Excell’s summary judgment and denying
Hercules’s summary judgment as to the interpretation of the MSA.
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D. Res Judicata and Collateral Estoppel
After briefing in this appeal was complete, Excell sought leave to file a
supplemental brief in which it argued that the doctrines of res judicata and
collateral estoppel preclude further litigation and that Excell is entitled to judgment
in its favor. The basis of the argument is that a Louisiana state court adjudicated
the same issue presented in this case and entered a final judgment in Excell’s favor.
The Louisiana case arose from the same incident. Currey, who was injured in the
same elevator accident as Brunson, sued in Louisiana, and Excell and Hercules
litigated in Louisiana the very same insurance and indemnity issues presented in
this appeal.
No collateral estoppel or res judicata defense was raised in the trial court
below because the Louisiana judgment only became final while this appeal has
been pending. Nevertheless, Excell argues in its supplemental brief that it is not
too late for the preclusion principles to be applied and that, in fact, we are required
to enter judgment in its favor now that the Louisiana judgment is final. Hercules
responds that res judicata and collateral estoppel are affirmative defenses that must
be pleaded and proved and may not be raised for the first time on appeal, and that
applying these doctrines in this case would be unfair.
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1. Applicable Law
Because the final judgment upon which Excell relies was rendered by a
Louisiana court, Louisiana law governs its res judicata and collateral estoppel
effect. See Purcell v. Bellinger, 940 S.W.2d 599, 601 (Tex. 1997) (court of
appeals erred in applying Texas law in determining res judicata effect of New York
state court judgment; proper question was whether New York judgment would
have preclusive effect on Texas suit if it had been brought in New York);
Monsanto Co. v. Davis, 25 S.W.3d 773, 787 (Tex. App.—Waco 2000, pet. dism’d
w.o.j.) (because final judgment was rendered by Louisiana state court, Louisiana
law governed its res judicata effect); Villanueva v. Office of Atty. Gen., 935 S.W.2d
953, 956 (Tex. App.—San Antonio 1996, writ denied) (res judicata effect of
Indiana trial court order determined by applying Indiana law). While Louisiana
substantive law controls the effect of the Louisiana judgment, “Texas procedural
rules control how that effect is determined.” Monsanto, 25 S.W.3d at 787.
2. Analysis
We agree with Hercules that we should decline to apply res judicata and
collateral estoppel. While Louisiana substantive law controls the effect of the
Louisiana judgment, “Texas procedural rules control how that effect is
determined.” Monsanto, 25 S.W.3d at 787. In Texas, res judicata and collateral
estoppel are affirmative defenses that are waived if not raised in the trial court, and
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cannot be raised for the first time on appeal. See Sysco Food Servs., Inc. v.
Trapnell, 890 S.W.2d 796, 802 (Tex. 1994); Worldpeace v. Comm’n for Lawyer
Discipline, 183 S.W.3d 451, 458–59 (Tex. App.—Houston [14th Dist.] 2005, pet.
denied). It is undisputed that Excell did not plead and prove the defenses in the
trial court and that the trial court never considered Excell’s arguments regarding
res judicata or collateral estoppel: they were raised for the first time in Excell’s
supplemental brief, which it filed after briefing in this appeal was complete.
We recognize that Excell could not raise these defenses in the trial court
because the Louisiana judgment did not become final until the Louisiana Supreme
Court denied Hercules’s writ application in February 2014, when this case was
already on appeal. But we may not affirm a summary judgment on a ground not
included the motion. See Stiles v. Resolution Trust Corp., 867 S.W.2d 24, 26 (Tex.
1993) (trial court may not grant summary judgment on ground not included in
summary-judgment motion, and appellate court may not affirm summary judgment
on ground not included in motion). The trial court was not asked—nor could it
have been asked—to render a judgment based upon res judicata or collateral
estoppel. On the record it had before it at the time it granted summary judgment,
the trial court should have granted summary judgment for Hercules on the contract
interpretation issue. Accordingly, we decline to hold that the Louisiana judgment
has preclusive effect in this case. See Stiles, 867 S.W.2d at 26.
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Conclusion
We reverse the trial court’s summary judgment in favor of Excell and render
judgment granting Hercules summary judgment with respect to liability on its
breach of contract claim. Although Hercules requested rendition on all issues in its
brief, it conceded at oral argument that we cannot render judgment on damages
because it did not conclusively prove them. Accordingly, we remand to the trial
court to determine the amount of Hercules’s damages and whether Excell is
entitled to an offset, and to enter judgment accordingly.
Rebeca Huddle
Justice
Panel consists of Justices Massengale, Brown, and Huddle.
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