Tenth Circuit Affirms Indemnification Award Involving Incident At Wyoming Well

In 2001, an owner and operator of oil and gas wells entered into a master services agreement with a contractor for work on a Wyoming well.  The agreement contained an indemnity provision whereby the contractor agreed to indemnify the owner “from and against all claims, damages, losses …” resulting from either the contractor’s or the owner’s negligence.  Under the contractor’s commercial general liability insurance policy, its insurer agreed to insure the contractor against damages because of bodily injury “assumed in a contract or agreement that is an ‘insured contract,’” including “reasonable attorney fees and necessary litigation expenses incurred by or for a party other than the insured” as long as certain conditions were met.

In July 2001, one of the contractor’s employees sustained injuries while working on the Wyoming well and filed a negligence suit against the owner in Wyoming state court.  Pursuant to the master services agreement, the owner wrote to the contractor requesting indemnification for its defense costs, attorneys’ fees, and any award that be recovered, but the contractor refused to defend or indemnify the owner because of Wyoming’s Anti-Indemnity Statute, which invalidates agreements related to oil or gas wells that “indemnify the indemnitee against loss or liability for damages for … bodily injury to persons.”  See Wyo. Stat. Ann. § 30-1-131.  The owner brought a federal declaratory relief suit against the contractor’s insurer, but in February 2005, the federal district court granted summary judgment to the insurer after determining that the indemnity provision in the master services agreement, when invoked with respect to claims of the owner’s own negligence (the only claims being made by the injured worker at the time), was unenforceable under Wyoming law.

In March 2005, however, the plaintiff worker amended his original state court complaint to include an allegation of vicarious liability against the owner for the negligence of the contractor; the owner immediately filed a third-party complaint against the contractor for indemnification.  The contractor’s insurer brought a federal declaratory judgment action seeking a similar result from the federal case, but the federal district court granted the owner summary judgment after distinguishing between indemnification for its own negligence (prohibited by the Wyoming statute) and indemnification for vicarious liability for the contractor’s negligence (not prohibited by the Wyoming statute).  The federal court then stayed the proceeding pending the completion of the state court litigation, which involved the third-party action between the owner and the contractor.

Just prior to the trial date, the owner settled with the plaintiff for $500,000 and although the contractor did not participate in the settlement negotiations, it stipulated to the reasonableness of the settlement.  Following a bench trial in 2008, the state court concluded that the contractor breached its contract with the owner and owed damages of $500,000.  The state court also ordered the contractor to pay the owner’s attorneys’ fees from the time the complaint had been amended in 2005.  On appeal, the Wyoming Supreme Court affirmed the damage award, finding that by stipulating to the reasonableness of the settlement, the contractor supported the owner’s “potential liability” for the contractor’s negligence, and also extended the entitlement to attorneys’ fees from the beginning of the state court action (in 2001).  The federal district court, consistent with the outcome of the state court litigation, awarded the owner $500,000, and attorneys’ fees from 2001 onward.

Last week, the Tenth Circuit affirmed the decision.  Echoing the district court’s reasoning, the court explained that the contractor agreed to indemnify the owner in the master services agreement, and coverage for this agreement is provided for by the contractor’s liability insurance policy.  Wyoming law invalidated the indemnity agreement only to the extent that it purported to relieve the owner for damages for its own negligence.  “The agreement providing for indemnification from all claims and damages caused by the negligence of others, which would include the claims of vicarious liability in this case, is valid and enforceable under applicable Wyoming law.”  The Tenth Circuit also affirmed the expanded attorneys’ fees award on the grounds that the contractor assumed liability for the attorneys’ fees the owner paid to defend itself against the claims for which, as it turned out, the contractor was 100% responsible; as a result, the fees are covered by the master services agreement, which necessarily triggers the contractor’s insurer’s coverage for “damages” that it agreed to cover in its policy.