Fifth Circuit Twice-Addresses Impact of Master Services Agreement on Subrogation and Arbitrability Issues
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On Wednesday, the Fifth Circuit found that Lloyd’s syndicates may not subrogate against an additional insured and may not force that additional insured to arbitration. Lloyd’s Syndicate 457 v. FloaTEC, LLC, No. 17-20550 (5th Cir. Apr. 17, 2019).

The case arose out of an oil platform in the Gulf of Mexico called Big Foot, owned and operated by Chevron. Chevron contracted with FloaTEC to engineer steel tendons to moor Big Foot to the ocean floor. The contract between Chevron and FloaTEC contained an arbitration provision.

Chevron purchased insurance from Lloyd’s syndicates (“Underwriters”) to cover Big Foot, including loss or damage incurred in connection with design and engineering. The policy defined “Other Assureds” to include companies with which Chevron had “entered into written contract(s) in connection with the [Big Foot] Project.” The policy also expressly prohibited the Underwriters from subrogating against any insured or additional insured.

After some of the tendons failed and caused Chevron massive losses, Underwriters paid Chevron more than $500 million. Underwriters then sued FloaTEC to recoup those payments, alleging that the loss was caused by FloaTEC’s negligence and breach of its contract with Chevron. The district court refused to compel arbitration and dismissed Underwriters’ complaint, finding that FloaTEC’s was an “Other Assured” against whom subrogation would be barred. The Fifth Circuit affirmed.

With respect to arbitration, the Fifth Circuit agreed with the trial court’s conclusion that because Underwriters were not parties to the Chevron-FloaTEC contract, Underwriters could not benefit from that contract’s arbitration provision. Thus, the court rejected Underwriters’ argument that because the Chevron-FloaTEC contact contained a broad delegation provision that required arbitration of all “gateway arbitrability issues,” even the question of whether the policy’s subrogation waiver barred Underwriters’ claims should have been delegated to arbitration. As the Fifth Circuit explained, Underwriters ignored the district court’s initial function, which is to determine whether the parties entered into any arbitration agreement at all. Here, as the Fifth Circuit confirmed, they did not.

The court further found that FloaTEC qualified as an “Other Assured” under the policy, thereby triggering the policy’s subrogation waiver. Here, the Fifth Circuit confirmed that the plain language of the policy provided that any party entering into a written contract in connection with the Big Foot project would qualify as an “Other Assured.” The Fifth Circuit therefore affirmed that Underwriters’ subrogation claims were barred because Underwriters agreed in their policy to “waive rights of subrogation against any . . . Other Assured.”

The Fifth Circuit applied the same reasoning in a separate decision, also issued yesterday. See Halliburton Energy Services, Inc. v. Ironshore Specialty Insurance Co., No. 17-20678 (5th Cir. Apr. 17, 2019) (“The Court must determine whether Ironshore has subrogation rights in order to determine whether an arbitration agreement exists.”). There, however, the Fifth Circuit reversed the district court’s finding that the insurer waived its subrogation rights under the pertinent master services agreement. That case arose out of a contract between Statoil and Halliburton and Ironshore’s insurance of Statoil. After paying Statoil for losses arising out of an explosion at an oil rig, Ironshore asserted claims against Halliburton. Halliburton claimed that, under the master services agreement, Statoil had waived all relevant claims against Halliburton arising out of the explosion and that therefore Ironshore could not subrogate against Halliburton. After parsing the indemnification requirements in the master services agreement, the Fifth Circuit reversed because Statoil had not waived all relevant claims against Halliburton and, therefore, Ironshore had subrogation rights against Halliburton based on the non-waived claims. And, because the master services agreement contained an arbitration clause, Ironshore and Halliburton would be required to arbitratre their dispute.

The Fifth Circuit’s FloaTEC and Halliburton decisions are important examples of the significant interplay between service agreements and related insurance policies and, in particular, how the agreements will be read together when determining both substantive rights to insurance coverage, contractual indemnification and subrogation, and procedural matters, such as whether a dispute should be arbitrated or litigated. Policyholders, especially those in the oil and gas space and those participating in joint-ventures, should therefore pay particular attention to the interplay between their JV agreements, master service agreements, and the insurance policies issued to all participating entities.

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