Raylin Richard v. Anadarko Petroleum Corporation

Citations: 850 F.3d 701; 2017 WL 835187Docket: 16-30216

Court: Court of Appeals for the Fifth Circuit; March 2, 2017; Federal Appellate Court

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In the case of Raylin Richard v. Anadarko Petroleum Corporation, the Fifth Circuit Court of Appeals addresses an insurance coverage dispute involving Offshore Energy Services, Inc. (OES) and Liberty Mutual Insurance Company. OES indemnified multiple companies for tort claims filed by its employee, Raylin Richard, who sustained injuries while working on an Anadarko project. OES believed it was contractually obligated to provide this indemnity based on their master services contract (MSC) with Anadarko. Liberty Mutual, OES's insurer, denied reimbursement for the legal costs incurred by OES in defending against Richard's claims, leading to Liberty Mutual's appeal on two main issues: the district court's approval of the reformation of the MSC and its interpretation of the insurance policy, which Liberty Mutual argued should only cover a pro-rata share of OES's attorney fees.

The court affirmed the lower court's decision to allow reformation of the MSC and modified the judgment regarding attorney fees, ruling that Liberty Mutual is responsible for $168,695.96, representing its pro-rata share of OES's legal expenses. The background of the case reveals that Richard's lawsuit included multiple defendants, and OES ultimately settled for $2.5 million after navigating a complex chain of indemnifications among Anadarko, Dolphin Drilling Ltd., and Smith International, all linked through the MSC's indemnity provisions. The language of the MSC, specifically regarding indemnity obligations, was heavily contested by the involved parties.

Liberty Mutual denied coverage for OES's expenses related to Dolphin Drilling and Smith International, leading to third-party complaints filed by Anadarko and Dolphin Drilling against both OES and Liberty Mutual. The district court dismissed these claims against Liberty Mutual with prejudice but did not resolve whether Liberty Mutual owed OES coverage for its indemnification expenses. OES cross-claimed for coverage, but the court granted summary judgment in favor of Liberty Mutual, ruling that Dolphin Drilling and Smith International were Anadarko's "contractors," thus falling outside the indemnity provisions of the MSC. The court suggested that OES and Anadarko might seek reformation of the MSC later. 

On March 24, 2015, the district court allowed motions for reconsideration from Anadarko, Dolphin Drilling, Smith International, and OES, permitting the reformation of the MSC to reflect a "knock for knock" indemnity scheme, which would require OES to indemnify Anadarko, Smith, and Dolphin under specific circumstances. Liberty Mutual's subsequent motion for summary judgment against this reformation was denied on October 28, 2015. 

In a bench trial, OES sought reimbursement from Liberty Mutual for settlement funds and attorney’s fees related to the Richard suit. The court awarded OES $900,000 for settlement funds, accounting for the policy limit and deductible, and $468,599.90 for attorney's fees. Liberty Mutual's motions for a new trial or to amend the judgment were denied on February 25, 2016, and Liberty Mutual filed a timely appeal on March 8, 2016. The district court had jurisdiction under 28 U.S.C. 1333(1), and the appellate court has jurisdiction under 28 U.S.C. 1291. The reformation issue will be reviewed de novo, while the findings on mutual mistake will be reviewed for clear error.

Conclusions of law are reviewed freely, while determinations involving parties’ intent, such as reformation issues, are reviewed for clear error under Louisiana law. Findings related to mutual error are factual and should only be overturned if clearly wrong. The interpretation of insurance contracts and conflicts-of-law questions are reviewed de novo.

The appeal primarily concerns whether the district court erred in allowing reformation of the OES-Anadarko Master Services Contract (MSC). The court upheld the district court's decision to allow reformation, noting that federal maritime law permits parol evidence to demonstrate mutual mistakes, and that Liberty Mutual’s interest in the MSC’s indemnity provisions does not obstruct this reformation. The MSC is classified as a maritime contract governed by federal maritime law, which validates contractual choice-of-law provisions. The court recognized that while parties accept federal maritime principles, there is a dispute over their sufficiency in resolving the reformation issue, with Liberty Mutual arguing against reformation.

The district court found that there was no indemnity coverage in the MSC for Dolphin Drilling and Smith International, a point contested by Liberty Mutual. However, the court appropriately considered evidence of a mutual mistake regarding the omission of this coverage. Mutual mistakes can justify reformation, which is an equitable remedy aimed at correcting errors in contracts. For reformation, there must be clear evidence of both the original agreement and the error in writing it down.

The admissibility of parol evidence depends on whether it is used to interpret contract terms or to demonstrate mutual mistakes in accurately recording an agreement. Parol evidence cannot be used to interpret unambiguous terms but can be considered to establish mutual mistakes. Maritime law allows for reformation based on mutual mistakes, and the district court did not violate the maritime parol evidence rule by assessing parol evidence to identify a mutual drafting error warranting reformation. The court found no clear error in concluding that such a mutual error existed.

Reformation of contracts may be appropriate if OES and Anadarko demonstrate a mutual mistake, though the district court noted that federal maritime law lacks a definitive rule regarding reformation when a third party, such as Liberty Mutual, could be negatively impacted. To address this, the court analyzed Louisiana and Texas law, determining that state law could supplement the federal maritime framework. Finding no conflict between the two states' laws on reformation, the court applied Louisiana law. Under federal maritime choice of law rules, contractual choice of law provisions are generally valid, but in this case, the district court's reliance on Louisiana law was deemed appropriate. Louisiana law allows for reformation even if a third party is affected, as illustrated in Samuels v. State Farm, where the Louisiana Supreme Court affirmed reformation despite adverse effects on a third party insurer. The district court found that Liberty Mutual did not rely on the OES-Anadarko Contract before issuing its insurance policy, countering Liberty Mutual’s argument that it should be protected due to obligations based on the original contract language. Liberty Mutual’s reliance on recent case law was deemed inapplicable, as the circumstances in American Electric and Wilcox were distinct and did not support its position against reformation.

Samuels was distinguished from the reformation sought by American Electric Power (AEP) based on two main grounds. First, in Samuels, a third party did not rely on the original contract, while in AEP's case, Affiliated had assumed the coverage obligations of the Chubb Policy and had no knowledge of any informal understanding regarding the term "corporation." Reforming the Chubb Policy would violate principles of fairness and notice. In Wilcox, a district court's refusal to reform a contract defining "Owner" as a specific company was affirmed, rejecting the expansion of the definition to include affiliated entities, in line with American Electric's stance against using parol evidence to alter express terms. Both cases confirmed that expanding contractual terms beyond their usual meaning undermines fairness for third parties.

In the current case, the reformation is deemed not to unfairly surprise Liberty Mutual, as the MSC's indemnity provisions suggest a mutual intent for a “knock for knock” indemnity arrangement, supported by OES's conduct post-signing. Although Liberty Mutual argued that OES lacked sufficient evidence for reformation, the burden of proof lies with the party seeking reformation. Typically, a preponderance of evidence is required, but when seeking to cover a significantly greater risk, clear-and-convincing evidence is necessary. The district court found OES and Anadarko met this higher standard, a conclusion supported by the evidence presented.

Liberty Mutual also questioned whether a court exercising admiralty jurisdiction could consider a reformation claim, to which the response was negative; federal courts can reform maritime contracts under admiralty jurisdiction, as established by previous rulings. Lastly, regarding the interpretation of the OES-Liberty Mutual insurance policy, it was concluded that the district court erred by requiring Liberty Mutual to cover all attorneys' fees from the Richard suit; the policy only obligates them to pay a pro-rata share.

The insurance policy includes general terms and specific endorsements, notably Endorsement 3 and Endorsement 34, which modify the "Supplementary Payments, Coverages A and B" section. Liberty Mutual asserts that the district court incorrectly interpreted these endorsements. Endorsement 3 introduces a "pro-rata" formula for payment obligations, while Endorsement 34 claims to completely replace the Supplementary Payments provision. The district court found two interpretations: either Endorsement 34 is modified by Endorsement 3, applying the pro-rata formula, or Endorsement 34 replaces the provision entirely, negating the pro-rata formula. It chose the latter, awarding OES all incurred legal fees.

However, the analysis concludes that the district court's interpretation contradicts Louisiana contract law principles, which require that policy provisions be read in harmony. The court emphasized that clear and explicit policy language must be enforced as written, and ambiguities must be construed against the insurer only if they are reasonably susceptible to multiple interpretations. The sole reasonable interpretation supports Liberty Mutual's position, leading to the conclusion that the district court's ruling was erroneous in favor of OES.

The final decision affirms the district court's reformation of the MSC but modifies the judgment on attorney's fees, determining OES is entitled to $168,695.96 in fees, rather than the higher amount awarded. The court does not address OES's alternative argument regarding the unreformed MSC's coverage.