On June 21, 2017, the United States Court of Appeals for the Fifth Circuit issued a decision regarding whether contractual indemnity is owed when the damages caused by a third party’s negligent act were independent of one party’s contractual performance.

The case arose from an allision that occurred while Tesla Offshore, LLC, performed an archeological sonar survey in the Gulf of Mexico. To conduct the survey, Tesla contracted with International Marine, LLC and International Offshore Services, LLC for a towing vessel and with Integrity Fisheries, Inc. to provide a chase vessel. The tow vessel was responsible for towing a “towfish” that was towed close to the ocean bottom where it emitted sonar signals transmitted to equipment onboard the chase vessel. Significantly, Integrity’s chase vessel developed mechanical issues, which required it to substitute a different chase vessel owned and operated by Sea Eagle Fisheries, Inc.

During the survey, the International tow vessel navigated near a mobile offshore drilling unit used by Shell Offshore, Inc. Upon noticing the tow vessel’s course, the captain of the chase vessel informed Tesla personnel that the tow vessel was too close to the drilling unit. Despite the warning, the International tow vessel continued on its route, and the towfish cable ultimately allided with the mooring line of the drilling unit, causing significant damage. As a result, Shell sued both Tesla and International for negligence. After a jury trial, Shell was awarded damages. The jury found Tesla 75% at fault and International 25% at fault. Thereafter, Tesla and International sued Integrity and Sea Eagle. Tesla and International alleged that (1) they were entitled to indemnity from Integrity and Sea Eagle because the allision related to the operation of the chase vessel as provided in the contracts between the parties; and (2) they were entitled to additional insured coverage on Integrity’s and Sea Eagle’s policies.

Integrity and Sea Eagle subsequently filed motions for summary judgment. The district court granted Integrity’s and Sea Eagle’s motions and concluded that Shell’s claim for damages based on the drilling unit incident did not arise out of, and was not related to, the operation of the chase vessel. In addition, because it was found that there was no indemnity obligation, the district court concluded that no insurance was owed to either Tesla or International. Tesla and International subsequently appealed the district court’s holding. As to the insurance claim, the Fifth Circuit vacated the holding and remanded the case to the district court because of a lack of evidence on the record concerning the scope of the insurance policies. But the Fifth Circuit affirmed the district court’s holding that contractual indemnity was not owed.

The Fifth Circuit held that “when one party’s negligent contractual performance causes third party property damage independent of the alleged indemnitor’s contractual performance, indemnity is usually not required absent a clear indication that the parties agreed to such an unusual undertaking.” The Fifth Circuit held that Tesla and International’s negligence and the resulting damages to the mooring line were independent of the operation of the chase vessel. Further, the contracts clearly stated that damage must relate to or arise out of the operation of the chase vessel before an indemnity obligation arises. As a result, the Fifth Circuit concluded that indemnity was not owed under the contracts because the operation of the chase vessel did not contribute to the negligent act that caused the damage to the mooring line.

The Fifth Circuit noted that courts should abide by the general rule that indemnity agreements containing language such as “arising out of” are to be read broadly, but one limitation to this general rule occurs when “the alleged indemnitor’s contractual performance is completely independent of another party’s negligent act that caused damage.”

The case is International Marine, LLC v. Integrity Fisheries, Inc. Click here to read the entire decision.

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