Will Wisconsin Courts Interpret Indemnity Agreements and Additional-Insured Endorsements Differently in Light of Deepwater Horizon?
Two primary mechanisms for allocating risk in any business transaction are the indemnity agreements and additional-insured requirements contained in an underlying commercial contract. These agreements may trigger a third mechanism— the additional-insured endorsement. This trifecta is endemic to construction, real estate, manufacturing, distribution, engineering, and other enterprises where business relationships necessarily create potential liability to third parties. The indemnity agreement, additional-insured requirement, and additional-insured endorsement, often used in tandem and often designed to protect one of the parties to the contract, each provide a separate avenue for contracting parties to protect themselves and recoup losses sustained in the course of their business relationships.
Earlier this spring, the Fifth Circuit and the Texas Supreme Court tackled the interplay between additional-insured endorsements and indemnity agreements in a multi-million dollar loss arising out of the BP oil spill that occurred in 2010. The Texas Supreme Court decided that the two components can affect the interpretation of the other, leading to potential coverage disputes. In re Deepwater Horizon1 is the highest profile and highest stakes examination by any court of how indemnity and additional-insured agreements relate to one another. Its holding should inspire every party to indemnity and additional-insured contracts to scrutinize whether indeed they have the intended protection that was originally contemplated when the contract was first formed.
Ultimately, indemnity agreements and additional insured endorsements will usually be interpreted under state law. This article examines the intersection of these risk-allocating agreements under Wisconsin law and whether Wisconsin law is in agreement with the holding in Deepwater Horizon. Stated differently, this article attempts to address the hypothetical: If a Deepwater Horizon accident had occurred in Lake Michigan rather than the Gulf of Mexico, who would the Wisconsin Supreme Court leave holding the bag?
A. Indemnity Agreements
Under an indemnity agreement, one party (the "indemnitor") agrees to assume the liability of another (the "indemnitee"). In a typical commercial contract, the "downstream" party (such as a leasee, subcontractor, or distributor) will agree to indemnify an "upstream" party (such as a landlord, architect, or manufacturer).
An indemnity agreement might be so broad as to cover any loss, including loss caused by the indemnitee's own negligence (sometimes referred to as "broad-form indemnification") or so narrow as to cover only loss attributable to the contractor ("limited" or "narrow" indemnification). Indemnity agreements can also contain mutual indemnity obligations between the parties which require each party to indemnify the other for only certain risks or conduct.
In some jurisdictions, agreements to indemnify an indemnitee's own negligence are void in certain contexts as against public policy.2 Wisconsin courts, however, have consistently upheld the validity of both forms, but liberally construe narrow-form indemnity agreements and strictly construe broadform indemnity agreements.3 Where a loss is attributable solely to the indemnitee, for a broadform indemnity agreement to be given effect Wisconsin courts require that this intent be "clearly and unequivocally expressed in the agreement."4 But even absent express language, it may be sufficient that the agreement could serve no other purpose than to protect the indemnitee from its own negligent acts.5 For example, a well-known Wisconsin exception to the general rule requiring express language indemnifying an indemnitee for its own negligence exists if the contract itself contains an additional-insured requirement also naming the indemnitee as an additional insured.6
Once it is determined whether the parties intended the indemnitee to be indemnified for its own negligence, Wisconsin courts interpret the indemnity agreement based on ordinary rules of contract interpretation.7
B. Additional-Insured Endorsements
An additional-insured endorsement is a promise by an insurance company to a policyholder to extend coverage to liability incurred by specific third parties—in particular, third parties with whom the insured has an "insured contract." The endorsement is critical for securing coverage because the standard CGL policy otherwise excludes coverage for loss incurred "by reason of the assumption of liability in a contract or agreement." Additional insured endorsements can take a variety of forms, and certain ones in the context of a lessor-lessee or manufacturer-vendor relationship are issued as standard forms by the Insurance Services Office (ISO) and frequently make up part of a general liability insurance contract.
As with indemnity agreements, an increasing number of jurisdictions limit the amount of risk that can be transferred via additional-insured endorsements. For several states, the limit is the same as for indemnity agreements.8
interpreted according to the same rules of construction that govern contracts.9 Courts seek to determine and give effect to the intent of the contracting parties,10 and words will be given their ordinary meaning.11 As with other contracts, ambiguities are construed against the drafter.12 Because insurance contracts are drafted by insurance companies, ambiguities are construed in favor of coverage.13 These rules apply with equal force when interpreting additional-insured endorsements: additional-insured endorsements are given the effect intended by the parties as determined by the ordinary meaning of the words.
II. In re Deepwater Horizon
Before embarking on the course of business that led to the worst oil spill in U.S. waters, the predecessors of BP (an oil-field developer) and Transocean (owner of the oil-drilling rig Deepwater Horizon) set about allocating the risks of their endeavor. To do so, they employed these classic risk-allocating mechanisms—indemnity agreements and additional-insured endorsements.
Under the indemnity provision of the drilling contract, BP and Transocean agreed that Transocean would indemnify BP for above-surface pollution and BP would indemnify Transocean for subsurface pollution, without regard to fault. The drilling contract also required that Transocean name BP as an additional insured on Transocean's insurance policies.
As to the additional-insured endorsement, Transocean's policies extended coverage to "[a]ny person or entity to whom the 'Insured' is obligated by oral or written 'Insured Contract' ... to provide insurance such as afforded by [the] Policy."
Contract and policy in hand, Transocean went about its business of offshore drilling until an explosion sank the Deepwater Horizon, killing eleven crew members, pumping millions of gallons of oil into the Gulf of Mexico, and testing the scope of BP's and Transocean's risk allocation efforts. After the spill, BP sought coverage under Transocean's insurance policies, arguing it was an additional insured. Transocean's insurers agreed that BP was an additional insured, but sought a declaration that they were not liable for any subsurface pollution, per the drilling contract. BP insisted that, as an additional insured, it was entitled to the same unlimited coverage enjoyed by Transocean. The Fifth Circuit punted the issue to the Texas Supreme Court.14
The Texas Supreme Court held in favor of Transocean and its insurers, limiting BP's coverage to surface pollution caused by the spill.15 The court found that "an insurance policy may incorporate an external limit on additional-insured coverage" and that such was the case with Transocean's policies. Because Transocean's policies conferred coverage to BP as an additional insured only as "obligated" by the drilling contract, the court determined that the scope of coverage was determined by the drilling contract—in effect incorporating the drilling contract terms into the insurance policy by reference. Because the drilling contract limited additional-insured status to "liabilities assumed by [Transocean] under the terms of this contract," and the terms of the contract limited Transocean's indemnity obligations to above-surface pollution, the Texas Supreme Court applied these indemnity limits to cut off coverage.
III. Mikula v. Miller Brewing Co.
Back in 2005, the Wisconsin Court of Appeals faced a similar, lower-profile conundrum. Instead of offshore drilling, Mikula v. Miller Brewing Co. involved the installation of new windows in Miller Brewing Company's Milwaukee brewery.16 Like BP and Transocean, the parties sought to allocate risk using indemnity agreements and additionalinsured requirements. Selzer-Ornst (contractor) and J.F. Cook (subcontractor) agreed to add Miller as an additional insured on their policies. J.F. Cook further agreed to indemnify Miller for all liability "incidental to the execution of work under this contract."
When Mikula (a J.F. Cook employee) crushed his hand in an elevator on the job, he sued Miller for failing to maintain a safe premises. Miller sought coverage for Mikula's claims from Selzer-Ornst's insurers, coverage from J.F. Cook's insurers, and indemnity from J.F. Cook. Both insurers and J.F. Cook denied liability because Miller was the only party alleged to be at fault.
The Wisconsin Court of Appeals held for Miller on all three fronts. On the insurance side, Selzer- Ornst and J.F. Cook's policies extended coverage to organizations with whom Selzer-Ornst and J.F. Cook "agreed in writing in a contract" to add as an additional insured, but only for "liability arising out of your ongoing operations." Without reference to the underlying construction contracts, the court found that Mikula's injuries arose from ongoing operations and that Miller was an additional insured without regard to fault. In this way, the Mikula decision may suggest that, in contrast to Deepwater Horizon, Wisconsin Courts may only look to the additional-insured endorsement to determine coverage.
The court separately turned to the subcontract to determine the scope of J.F. Cook's duty to indemnify Miller. Recall that in Wisconsin, parties to an indemnity agreement must unequivocally express their intent that the indemnitor assume liability for the indemnitee's own negligence, unless it is clear that there was no other reason for entering into the agreement. The court found that, even though the subcontract did not expressly assume liability for Miller's own negligence, J.F. Cook's agreement to purchase insurance, taken together with its indemnity agreement, satisfied the exception by showing a clear intent to indemnify all liability, including Miller's own negligence. In this way, again, the Mikula decision may suggest that, rather than insurance provisions being controlled by indemnity provisions ala Deepwater Horizon, the reverse is true in Wisconsin. That is, the existence of an additional-insured requirement may actually affect the interpretation and scope of the indemnity provided.
IV. Implications for Contractors and Policyholders
The courts in Mikula and Deepwater Horizon straddled the intersection of indemnity agreements and additional-insured endorsements with dramatically different results: while BP's benefits as an additional insured were controlled by its narrow indemnity agreement with Transocean, Miller enjoyed the same insured status as its contractor and subcontractor. This outcome begs the question: What went wrong for BP in Texas?
The cases began similarly. Both the Texas Supreme Court and the Wisconsin Court of Appeals began their inquiry by examining the policies and using similar rules of construction (ascertaining the intent of the parties based on the plain language). All of the policies at issue conferred coverage by reference to the underlying contracts.
Here is where the courts diverged: On the one hand, the Texas Supreme Court used the condition precedent of a contractual additional insured requirement to leapfrog from the policy to the contract. It interpreted the phrases "where required by written contract" and "obligated by oral or written 'Insured Contract'" as an invitation to import the drilling contract wholesale into the policy. On the other hand, the Wisconsin Court of Appeals in Mikula confined its review to the policy language alone. It interpreted the phrase "agreed in a writing" as an invitation to merely look for such a contractual obligation. Having found such an agreement, the Wisconsin court ended the inquiry. That said, it is not clear that the written contracts would have limited the scope of coverage in fact, but the Mikula holding suggests that such an inquiry is unnecessary.
Admittedly, despite their similarities, Mikula and Deepwater Horizon form an imperfect analogy. A key distinction in the cases is the language of the additional-insured endorsements themselves. It can be argued that the scope of the indemnity agreement aligned with the scope of the additional insured coverage in Mikula much more closely than it did in Deepwater Horizon. All of the indemnity agreements in the underlying contracts applied without regard to the negligence of the indemnitee. But the scope of the indemnity agreements in Deepwater Horizon (indemnity for all above-surface pollution) diverged significantly from the scope of the additional-insured agreement (extending coverage where required by contract, but otherwise without limitation). Whereas, the scope of the indemnity agreement in Mikula (indemnity for "any and all liability ... incidental to the execution of work under this contract") was aligned with the scope of the additional-insured agreement (extending coverage "with respect to liability arising out of your ongoing operations").
However, this distinction may have only indirectly affected the holding in Mikula. Under Mikula, the scope of an additional-insured endorsement is considered independent of any restrictions on indemnity in the contract giving rise to coverage. So, even if the indemnity agreement in Mikula diverged wildly from the additional-insured endorsement, the outcome would be the same. In other words, if J.F. Cook's liability had been restricted to foot injuries, J.F. Cook's insurer would still owe Miller full coverage for Mikula's crushed hand. And, under Mikula, if Deepwater Horizon sank in Green Bay, BP would have full coverage as an additional insured.
In the ten years between Mikula and Deepwater Horizon, no subsequent Wisconsin case appears to have expanded Mikula's analysis beyond the language of the additional-insured endorsement. Ritter v. Penske Trucking Leasing Co., L.P., denied additional-insured status under Mikula, but still confined its inquiry to the policy.17 In Ritter, Penske (a truck leasing company) was sued for injuries sustained in a truck it was renting to Chambers & Owens. Penske sought coverage as an additional insured from Chambers & Owens' insurer. The additional insured endorsement in the Chamber & Owens' insurance policy extended coverage to lessors only for injuries caused by the acts of Chambers & Owens, its employees, and anyone operating the leased auto with permission. Because the complaint only alleged negligence by Penske, the court denied coverage. Consistent with Mikula, Ritter did not look beyond the policy to determine the scope of the additional-insured endorsement.
Despite whatever comfort Mikula may offer Wisconsin indemnitees, it should not be interpreted as a fail-safe entrée to additional-insured status. While the indemnity agreement may not restrict coverage, as seen in Ritter, the policy itself may do so. This outcome is even more likely in light of the 2013 changes to the ISO occurrence commercial general liability insurance forms, CG 00 01 and CG 00 02. In the 2013 additional-insured endorsement, coverage "will not be broader than that which you are required by the contract or agreement to provide for such additional insured." It remains to be seen whether this language would lure Wisconsin courts beyond the confines of the policy language, and if so, what the outcome would be. If a court were to look to the underlying contract, would its review be limited to the additional-insured requirements? Or would a court define coverage based on indemnity limits?
The threat of conflicts between additional-insured provisions and indemnity agreements is not limited to indemnitees. Indemnitors may be equally exposed. In a Ritter scenario where a policy limits the scope of additional-insured coverage, the indemnitor may still be at risk for having breached the additionalinsured requirements in the underlying contract. In other words, indemnitors could face subsequent breach of contract claims for failing to procure the required insurance.
Even though Mikula may be a lifejacket, it is critical that Wisconsin contractors and policyholders check and double-check that the indemnity agreements and additional-insured requirements in their commercial contracts align with additional-insured endorsements in their insurance policies.
Patrick Nolan represents companies and individuals in product liability, toxic tort, professional liability, and personal injury claims throughout the United States and Canada. His multi-jurisdictional experience extends to all phases of the litigation process, from initial claim and fact investigation to civil discovery, trial, and appeal.
Although a substantial portion of Mr. Nolan's work involves the defense of product liability and personal injury claims, he also devotes a significant portion of his practice to indemnification and insurance coverage claims for firm clients. His insurance practice involves litigating various insurance coverage issues arising from general liability, directors and officers, errors and omissions, employment practices, and property-casualty insurance policies.
Alexandra W. Shortridge is an associate in the firm's Litigation & Dispute Resolution Practice Group.
Her practice includes a variety of subjects in general civil and commercial litigation with a recent focus on insurance coverage matters.
She is also involved in multiple pro bono commitments, including criminal appellate work, the Marquette Volunteer Legal Clinic, and domestic abuse and truancy prevention.
Prior to joining the firm, Alex was a summer associate at Quarles & Brady where she conducted multistate surveys on a wide variety of insurance litigation issues, prepared and participated in presentations on various aspects of class action litigation, and researched and wrote memoranda on emerging issues in Wisconsin litigation practice. Before her time at the firm, she served as judicial intern to the Wisconsin Supreme Court.
1 No. 13-0670, 2015 WL 674744 (Tex. Feb. 13, 2015) (slip opinion).
2 See, e.g., Ind. Code § 8–2.1–26–5.
3 Bialas v. Portage County, 70 Wis. 2d 910, 912, 236 N.W.2d 18 (1975).
4 Spivey v. Great Atlantic & Pacific Tea Co., 79 Wis. 2d 58, 63, 255 N.W.2d 469 (1977).
5 Herchelroth v. Mahar, 36 Wis. 2d 140, 146, 153 N.W.2d 6 (1967).
6 See id.
7 Dysktra v. Arthur G. McKee & Co., 100 Wis. 2d 120, 125, 301 N.W.2d 201 (1981).
8 See, e.g., Cal. Ins. Code. § 11580.04 (1996); Tex. Ins. Code 151.101–105 (2013).
9 Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 2004 WI 2, ¶ 23, 268 Wis. 2d 16, 673 N.W.2d 65.
11 Danbeck v. Am. Family Mut. Ins. Co., 2001 WI 91, ¶ 10, 245 Wis. 2d 186, 629 N.W.2d 150.
14 In re Deepwater Horizon, 728 F.3d 491 (5th Cir. 2013).
15 Deepwater Horizon, No. 13-0670, 2015 WL 674744 (Tex. Feb. 13, 2015) (slip opinion).
16 2005 WI App 92, 281 Wis. 2d 712, 701 N.W.2d 613.
17 2013 WI App 13, 345 Wis. 2d 846, 826 N.W.2d 122.