Hercules Offshore, Inc. and the Hercules Offshore Drilling Company, LLC v. Excell Crane & Hydraulics, Inc.

Opinion issued November 20, 2014

In The

Court of Appeals

For The

First District of Texas

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NO. 01-13-00817-CV

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HERCULES OFFSHORE, INC. AND THE HERCULES OFFSHORE

DRILLING COMPANY, LLC, Appellants

V.

EXCELL CRANE & HYDRAULICS, INC., Appellee

On Appeal from the 133rd District Court

Harris County, Texas

Trial Court Case No. 2009-49993

OPINION

This dispute between Hercules Offshore, Inc. and The Hercules Offshore

Drilling Company, LLC (collectively “Hercules”) and Excell Crane & Hydraulics,

Inc. arises from the parties’ conflicting interpretations of indemnity and insurance

provisions in their Master Service Agreement (MSA). Hercules contends that the

“additional assured” language in the MSA’s insurance provision means that

Excell’s insurance must be exhausted before Hercules’s indemnity obligation is

triggered. Excell, on the other hand, argues that Hercules’s indemnity obligation is

primary, notwithstanding any other provision of the MSA, including the insurance

provision. The trial court granted summary judgment in favor of Excell and denied

Hercules’s motion for summary judgment.

There is an additional wrinkle. This case arises out of a personal-injury

lawsuit by Hercules employee Dennis Brunson, who sued Hercules and Excell in

Texas state court. Meanwhile, another Hercules employee, Kevin Currey, who

was injured in the same incident, sued Hercules and Excell in Louisiana state court.

Excell prevailed against Hercules in the Louisiana litigation. The Louisiana

judgment in Excell’s favor became final while this appeal was pending, and Excell

now argues that the Louisiana judgment precludes further litigation in this case and

that Excell is entitled to judgment based on principles of res judicata and collateral

estoppel.

We conclude that res judicata and collateral estoppel do not apply, and that

the trial court erred in granting summary judgment in favor of Excell and in

denying Hercules’s summary judgment on the contract interpretation issue.

Accordingly, we reverse the trial court’s summary judgment in favor of Excell,

render judgment granting Hercules summary judgment with respect to liability on

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its breach of contract claim, and remand for further proceedings consistent with

this opinion.

Background

In 2007, Hercules was serving as the drilling operator of a semi-submersible

drilling rig off the shore of Louisiana. Three Hercules employees, including

Brunson and Currey, were injured when the rig elevator in which they were riding

went into a free-fall. Excell had inspected and tested the elevator two months

earlier, and it performed this work under the terms of the MSA.

In August 2009, Brunson sued Hercules and Excell in Texas state court.

Hercules later settled Brunson’s claims against both, leaving only Excell and

Hercules’s dispute regarding the indemnity and insurance provisions of the MSA.

Excell’s cross-claim against Hercules was based upon Paragraph 15.B. of the

MSA:

[Hercules] shall defend, release, indemnify and hold harmless

[Excell], its parents, subsidiaries, affiliates, officers, directors,

employees and agents from and against all liens, claims, demands,

causes of action, costs, expenses or losses (including but not limited to

attorneys’ fees) pertaining to, for or on account of injury to, illness or

death of employees, or agents of [Hercules], or employees of the

“vessel” as used under 33 U.S.C. § 905(c), or its affiliates, or loss or

damage to property of [Hercules], or its affiliates which arise from,

are incident to or result directly or indirectly from the performance of

the Work, the presence of the above individuals at any job or work

site, or transportation to or from such locations, performance of this

Agreement, or breach hereof.

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Excell moved for summary judgment on its cross-claim, arguing that the indemnity

provision unambiguously required Hercules to defend and indemnify Excell

against Brunson’s claims.

Hercules counterclaimed for breach of the MSA, arguing that it was not

obligated to indemnify Excell under Paragraph 15.B. until the insurance that Excell

was obligated to provide Hercules under Paragraph 9 had been exhausted.

Paragraph 9 provided:

During the term of this Agreement, [Excell] shall maintain at its sole

expense the minimum insurance coverage specified in Exhibit “A”

with underwriters acceptable to [Hercules], and under the terms of

coverage specified, all of which is adopted herein. Except as provided

by law, the limits specified therein shall in no way limit liabilities or

obligations of Excell for claims arising from performance of this

Agreement and any applicable Work Order. . . .

Exhibit A provided that Excell shall maintain comprehensive general liability

insurance for overwater operations with a combined single limit of $1 million per

occurrence and excess umbrella liability coverage for overwater operations with a

combined single limit of $5 million. Exhibit A also provided:

All insurance policies shall contain a waiver of subrogation in favor of

[Hercules], its affiliated companies, and any third parties to whom or

for which [Hercules] is under contract or rendering services and/or its

and their employees and agents. All insurance policies, except

Worker’s Compensation, shall name all such parties as additional

assureds. All such policies shall be endorsed to provide that

additional assureds shall not be liable for premiums and that such

policies shall be primary as to additional assureds, regardless of any

“excess” or “other insurance” clauses therein. The coverage extended

an additional assured shall not be less than that provided to the

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Contractor. All policies will cover investigation and defense of

claims. All policies will include contractually assumed liability

coverage.

Thus, Hercules argued that the MSA required Excell to name it an

“additional assured” on all required insurance policies, and that the policies were to

be “primary” as to Hercules. Hercules further argued that the policies were

required to cover “contractually assumed liability coverage”— including any

liability assumed under the indemnity provisions of Paragraph 15 of the MSA. It is

undisputed that Excell obtained some insurance coverage, but Excell concedes that

it did not obtain coverage of the type Hercules argues that Paragraph 9 and Exhibit

A require.

Hercules moved for traditional summary judgment on Excell’s claim for

indemnity and on its own claim for breach of the MSA. Hercules relied on Ogea v.

Loffland Brothers Company, 622 F.2d 186 (5th Cir. 1980), and its progeny to argue

that, where a contract provides that “contractually assumed liability coverage”

must be covered under contractually-required insurance policies, and the coverage

is required to be primary as to additional assureds, the obligation to provide

insurance supersedes any indemnity obligation until the insurance coverage is

exhausted.

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Excell argued that this case was unlike Ogea and its progeny because

Paragraph 15.E. of the MSA provided that the indemnity provision superseded the

other provisions in the MSA:

The allocations of risk contained in this Paragraph 15 or elsewhere in

this agreement shall apply notwithstanding the simple, gross, sole,

joint or concurrent negligence of any person or party (regardless of

whether such person or party is an indemnitee or not), the

unseaworthiness or other fault of any vessel, “ruin,” or strict liability,

liability imposed by statute, defects in premises, equipment or

material, or any other event or condition whether anticipated or

unanticipated and regardless of whether pre-existing this agreement.

In support of this argument, Excell pointed to Paragraph 15.D. which required each

party to support its contractually-assumed indemnity obligations with its own

insurance.

The trial court initially denied both motions for summary judgment. After

both parties moved for reconsideration, the trial court granted Excell’s motion for

reconsideration, vacated its order denying Excell’s motion for summary judgment,

and granted Excell’s motion for summary judgment. The trial court entered a final

judgment, ordering Hercules to defend and indemnify Excell for Brunson’s claims

pursuant to the MSA. Hercules appealed.

Discussion

Hercules contends in a single issue that the trial court erred in granting

summary judgment for Excell and denying Hercules’s motion for summary

judgment as to the contract interpretation issue, because federal maritime law,

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which the parties agree applies here, dictates that the “additional assured” language

in the MSA’s insurance provision means that Hercules’s indemnity obligation is

triggered only after Excell exhausts the insurance it agreed to obtain. Excell

disagrees and argues that the facts of this case are distinguishable from those in

which “additional assured” insurance obligations were held to be primary to

indemnity obligations. Excell further argues that the doctrines of res judicata and

collateral estoppel bar Hercules from relitigating this issue because the Louisiana

judgment in Excell’s favor became final while this appeal has been pending.

A. Standard of Review

We review a trial court’s decision to grant or to deny a motion for summary

judgment de novo. See Tex. Mun. Power Agency v. Pub. Util. Comm’n, 253

S.W.3d 184, 192 (Tex. 2007). “When both sides move for summary judgment, as

they did here, and the trial court grants one motion and denies the other, reviewing

courts consider both sides’ summary-judgment evidence, determine all questions

presented, and render the judgment the trial court should have rendered.” Gilbert

Tex. Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 124 (Tex.

2010) (citing Embrey v. Royal Ins. Co. of Am., 22 S.W.3d 414, 415–16 (Tex.

2000)).

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B. Applicable Law

Both parties agree that federal maritime law governs the substantive dispute

in this case. Well-settled Fifth Circuit law, beginning with Ogea v. Loffland

Brothers Company, 622 F.2d 186 (5th Cir. 1980), holds that a party “who has

entered into a contractual indemnity provision but who also names the indemnitor

. . . as an additional assured under its liability policies, must first exhaust the

insurance it agreed to obtain before seeking contractual indemnity.” Tullier v.

Halliburton Geophysical Servs., Inc., 81 F.3d 552, 553 (5th Cir. 1996); see also

Klepac v. Champlin Petroleum Co., 842 F.2d 746, 747–48 (5th Cir. 1988).

In Ogea, the Fifth Circuit held that contractor Loffland Brothers’ insurance

obligation must be exhausted before Phillips Petroleum Company’s indemnity

obligation was triggered. 622 F.2d at 190. The Fifth Circuit noted that the

insurance and indemnity obligations in a maritime contract “must be read in

conjunction with each other in order to properly interpret the meaning of the

contract.” Id. The Ogea contract provided that Phillips would indemnify Loffland

Brothers from claims by Phillips’ employees or employees of other contractors.

Id. at 188. The contract also provided that Loffland Brothers was required to

procure a $500,000 insurance policy and name Phillips as a co-insured. Id. at 189.

Another contractor’s employee was injured on Phillips’ rig and sued

Loffland, who in turn asserted a third-party indemnity claim against Phillips. Id. at

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187. Phillips asserted a counter-claim against Loffland, alleging that Loffland was

obligated to obtain liability insurance covering Phillips and that Loffland’s

insurance obligation primed Phillips’ indemnity obligation. Id. The district court

rendered judgment in favor of Phillips, and the Fifth Circuit affirmed, holding that

“[t]he indemnity provisions do not come into play” because Phillips did not have

an obligation to indemnify Loffland until the $500,000 policy, on which Phillips

was required to be named a co-insured, was exceeded, and it was not. Id. at 189–

90. The Fifth Circuit held that if Loffland had failed to name Phillips as a co-

insured, then Loffland was liable for breach of contract up to $500,000 and Phillips

would be relieved of liability. Id. at 189.

Since Ogea, the Fifth Circuit has consistently held that a party “who has

entered into a contractual indemnity provision but who also names the

indemnitor . . . as an additional assured under its liability policies, must first

exhaust the insurance it agreed to obtain before seeking contractual indemnity.”

Tullier, 81 F.3d at 553; see Klepac, 842 F.2d at 747–48.

C. Analysis

This case is controlled by Ogea. The MSA provided in Paragraph 15.B. that

Hercules would indemnify Excell against claims by Hercules’s employees.

Paragraph 9 provided that Excell “shall maintain at its sole expense the minimum

insurance coverage specified in Exhibit ‘A,’” and Exhibit A provides:

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All insurance policies shall contain a waiver of subrogation in favor of

[Hercules], its affiliated companies, and any third parties to whom or

for which [Hercules] is under contract or rendering services and/or its

and their employees and agents. All insurance policies, except

Worker’s Compensation, shall name all such parties as additional

assureds. All such policies shall be endorsed to provide that

additional assureds shall not be liable for premiums and that such

policies shall be primary as to additional assureds, regardless of any

“excess” or “other insurance” clauses therein. The coverage extended

an additional assured shall not be less than that provided to the

Contractor. All policies will cover investigation and defense of

claims. All policies will include contractually assumed liability

coverage.

(Emphasis added.)

Here, “[t]he controlling fact . . . is the existence of the ‘additional assured’

coverage whereby [Excell] agreed to procure insurance coverage for the benefit of

[Hercules].” Tullier, 81 F.3d at 554. “The import of the additional assured clause

is emphasized here because [the MSA] also required that insurance procured by

[Excell] must afford primary coverage to [Hercules].” Id. It also made clear that

the policy must include contractually assumed liability coverage, and it did not

limit the insurance requirement to liability coverage assumed by Excell. Cf.

William W. Pugh, OIL AND GAS DRILLING CONTRACTS: A LOOK AT THE MAJOR

RISK ALLOCATION ISSUES, 2013 No. 3 ROCKY MTN. MIN. L. INST. Paper No. 10, 15

(2013) (under Ogea, “when there are conflicting indemnity and insurance

requirements, the insurance of the indemnitee must first respond up to the dollar

limit of coverage. Only then must the indemnitor honor its hold harmless

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obligation. In practice, this situation may be eliminated by the addition of a

sentence limiting the applicability of the additional assured requirement to the

risks and liabilities assumed by the party providing the insurance coverage.”)

(emphasis added).

Excell argues that this case is distinguishable from Ogea because there, the

parties specifically negotiated the additional assured provision and agreed that the

indemnity obligation would not come into play until after the additional assured

insurance was exhausted, while here the parties did not. But the Fifth Circuit has

rejected a nearly identical argument. In Tullier v. Halliburton Geophysical

Services, Inc., 81 F.3d 552 (5th Cir. 1996), the Fifth Circuit held that whether the

parties “directly negotiated [the] result . . . is not controlling,” because the “legal

imperative” is to “read the indemnity and insurance procurement provisions

harmoniously.” 81 F.3d at 554 (holding that insurance obligation was primary to

indemnity obligation).

Excell also argues that Hercules’s interpretation ignores key provisions of

the MSA, such as Paragraph 15.D., which requires the parties to carry their own

insurance for indemnity obligations. Specifically, Paragraph 15.D. provides: “[a]ll

indemnities under this Agreement [] shall be supported by equal amounts of

available liability (or other appropriate) insurance to be carried by the

indemnifying party at its own expense.” But again, Tullier considered and rejected

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a similar argument, concluding that the indemnitor’s obligation was to secure

coverage for liability in excess of the coverage under the additional assured

provision. The Tullier contract required the contractor to “supply primary

coverage up to $1,000,000 per incident, with [the company] as an additional

assured.” Id. at 554. The Fifth Circuit held that the company, therefore,

“contracted to insure liability over that amount in fulfillment of its indemnity

responsibility.” Id. Similarly, here, Paragraph 15.D. required Hercules to procure

insurance to support its indemnity obligation, but that insurance is not triggered

until after the limits of insurance that Excell agreed to purchase under Paragraph 9

and Exhibit A are exhausted. See id.

Excell further argues that Paragraph 15.E should be interpreted to mean that

the indemnity provisions apply notwithstanding anything else contained in the

MSA. Essentially, Excell argues that Paragraph 15.E means that indemnities

trump all other provisions of the MSA. But Paragraph 15.E does not say this. It

provides:

The allocations of risk contained in this Paragraph 15 or elsewhere in

this agreement shall apply notwithstanding the simple, gross, sole,

joint or concurrent negligence of any person or party (regardless of

whether such person or party is an indemnitee or not), the

unseaworthiness or other fault of any vessel, “ruin,” or strict liability,

liability imposed by statute, defects in premises, equipment or

material, or any other event or condition whether anticipated or

unanticipated and regardless of whether pre-existing this agreement.

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This provision gives effect to the indemnities regardless of whose negligence or

gross negligence caused the injury; it is designed to allow the indemnities to

survive the express negligence rule, not to trump every other provision of the

MSA. Moreover, several courts following Ogea and its progeny have rejected the

argument that this type of provision causes the indemnities to trump a party’s

obligation to procure primary insurance for an additional assured. See, e.g., Basin

Exploration, Inc. (Del.) v. Ocean Salvage Corp., No. Civ.A. 01-526, 2003 WL

943642, at *4–5 (E.D. La. March 7, 2003) (contractor was required to exhaust

insurance coverage required under parties’ MSA before seeking indemnity where

indemnity provision provided for indemnity “notwithstanding anything else in this

contract”); Sonat Exploration v. Falcon Drilling, Co., 85 F. Supp. 2d 649, 654

(W.D. La. Sept. 23, 1999) (contract providing for allocation of risk

“[n]otwithstanding said insurance provisions” did not abrogate insurance

requirements of contract; insurance requirements primed indemnity).

Excell relies primarily on three cases to support its interpretation of the

MSA: Spell v. N.L. Industries, Inc., 618 So. 2d 17 (La. App. 3rd Cir. 1993),

Helmerich & Payne International Drilling Company, 180 S.W.3d 635 (Tex.

App.—Houston [14th Dist.] 2005, no pet.), and Brusco Tug & Barge, Inc. v. St.

Paul Fire and Marine Ins. Co., 897 F. Supp. 2d 1048 (W.D. Wash. 2012). But, for

various reasons, none of these cases carries the day.

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The Fifth Circuit has determined that the analysis in the first of these, Spell,

“is inconsistent with that of the Fifth Circuit in Ogea . . . .” Tullier, 81 F.3d at 552

n.1. Spell was also decided under Louisiana law, not federal maritime law. It thus

is of little value to this case. Id. (“Spell was decided under Louisiana law, whereas

the case before us involves federal maritime law, Spell is not controlling and will

not be further discussed.”).

In Helmerich, the Fourteenth Court of Appeals held that an indemnity

provision was primary in a contract that provided that the indemnity provision

applied “[n]otwithstanding anything to the contrary contained herein.” Helmerich,

180 S.W.3d at 638–39. But the MSA at issue in this case contains no such

provision. Additionally, the Fourteenth Court applied Texas law, not federal

maritime law, as the parties acknowledge we are required to do here. See id. at

637.

In the third case Excell relies upon, Brusco Tug, the contract expressly stated

that certain types of indemnification applied, notwithstanding the contract’s

insurance requirements:

Notwithstanding the foregoing provisions as to insurance, liability and

indemnity, the parties agree that with respect to their employees, or

the employees of their subcontractors, each shall assume liability for,

indemnify and hold harmless (including legal costs and fees) from,

and procure contractual liability or other insurance with respect to,

any loss, damage, claim, liability and/or suit arising out of or relating

to bodily injury to their employees or the employees of their

subcontractors.

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Brusco Tug, 897 F. Supp. 2d at 1050. The MSA contains no analogous language.

Finally, at oral argument, Excell argued that Hercules’s interpretation of the

MSA is flawed because it would permit Hercules to claim coverage under Excell’s

insurance for incidents entirely unrelated to Excell’s work. We disagree. We note,

first, that in this instance, Hercules is seeking coverage for Brunson’s injuries,

which allegedly arose as a result of a free fall in an elevator that Excell had

certified for use only 50 days earlier. In any event, we do not agree that adopting

Hercules’s interpretation of the MSA would allow Hercules to seek coverage under

Excell’s policy for damages unrelated to Excell’s work, because the MSA limits

the scope of the agreement such that the insurance referenced in Paragraph 9 could

apply only to work by Excell, its affiliates, and its subcontractors for Hercules or

its affiliated companies.

Accordingly, following well-settled Fifth Circuit maritime law, we conclude

that Hercules is not obligated to indemnify Excell under Paragraph 15 of the MSA

until the limits of insurance coverage that Excell was obligated to purchase by

Paragraph 9 and Exhibit A of the MSA have been exhausted. See Ogea, 622 F.2d

at 189–90; Klepac, 842 F.2d at 747–48; Tullier, 81 F.3d at 553–54. We therefore

hold that the trial court erred in granting Excell’s summary judgment and denying

Hercules’s summary judgment as to the interpretation of the MSA.

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D. Res Judicata and Collateral Estoppel

After briefing in this appeal was complete, Excell sought leave to file a

supplemental brief in which it argued that the doctrines of res judicata and

collateral estoppel preclude further litigation and that Excell is entitled to judgment

in its favor. The basis of the argument is that a Louisiana state court adjudicated

the same issue presented in this case and entered a final judgment in Excell’s favor.

The Louisiana case arose from the same incident. Currey, who was injured in the

same elevator accident as Brunson, sued in Louisiana, and Excell and Hercules

litigated in Louisiana the very same insurance and indemnity issues presented in

this appeal.

No collateral estoppel or res judicata defense was raised in the trial court

below because the Louisiana judgment only became final while this appeal has

been pending. Nevertheless, Excell argues in its supplemental brief that it is not

too late for the preclusion principles to be applied and that, in fact, we are required

to enter judgment in its favor now that the Louisiana judgment is final. Hercules

responds that res judicata and collateral estoppel are affirmative defenses that must

be pleaded and proved and may not be raised for the first time on appeal, and that

applying these doctrines in this case would be unfair.

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1. Applicable Law

Because the final judgment upon which Excell relies was rendered by a

Louisiana court, Louisiana law governs its res judicata and collateral estoppel

effect. See Purcell v. Bellinger, 940 S.W.2d 599, 601 (Tex. 1997) (court of

appeals erred in applying Texas law in determining res judicata effect of New York

state court judgment; proper question was whether New York judgment would

have preclusive effect on Texas suit if it had been brought in New York);

Monsanto Co. v. Davis, 25 S.W.3d 773, 787 (Tex. App.—Waco 2000, pet. dism’d

w.o.j.) (because final judgment was rendered by Louisiana state court, Louisiana

law governed its res judicata effect); Villanueva v. Office of Atty. Gen., 935 S.W.2d

953, 956 (Tex. App.—San Antonio 1996, writ denied) (res judicata effect of

Indiana trial court order determined by applying Indiana law). While Louisiana

substantive law controls the effect of the Louisiana judgment, “Texas procedural

rules control how that effect is determined.” Monsanto, 25 S.W.3d at 787.

2. Analysis

We agree with Hercules that we should decline to apply res judicata and

collateral estoppel. While Louisiana substantive law controls the effect of the

Louisiana judgment, “Texas procedural rules control how that effect is

determined.” Monsanto, 25 S.W.3d at 787. In Texas, res judicata and collateral

estoppel are affirmative defenses that are waived if not raised in the trial court, and

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cannot be raised for the first time on appeal. See Sysco Food Servs., Inc. v.

Trapnell, 890 S.W.2d 796, 802 (Tex. 1994); Worldpeace v. Comm’n for Lawyer

Discipline, 183 S.W.3d 451, 458–59 (Tex. App.—Houston [14th Dist.] 2005, pet.

denied). It is undisputed that Excell did not plead and prove the defenses in the

trial court and that the trial court never considered Excell’s arguments regarding

res judicata or collateral estoppel: they were raised for the first time in Excell’s

supplemental brief, which it filed after briefing in this appeal was complete.

We recognize that Excell could not raise these defenses in the trial court

because the Louisiana judgment did not become final until the Louisiana Supreme

Court denied Hercules’s writ application in February 2014, when this case was

already on appeal. But we may not affirm a summary judgment on a ground not

included the motion. See Stiles v. Resolution Trust Corp., 867 S.W.2d 24, 26 (Tex.

1993) (trial court may not grant summary judgment on ground not included in

summary-judgment motion, and appellate court may not affirm summary judgment

on ground not included in motion). The trial court was not asked—nor could it

have been asked—to render a judgment based upon res judicata or collateral

estoppel. On the record it had before it at the time it granted summary judgment,

the trial court should have granted summary judgment for Hercules on the contract

interpretation issue. Accordingly, we decline to hold that the Louisiana judgment

has preclusive effect in this case. See Stiles, 867 S.W.2d at 26.

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Conclusion

We reverse the trial court’s summary judgment in favor of Excell and render

judgment granting Hercules summary judgment with respect to liability on its

breach of contract claim. Although Hercules requested rendition on all issues in its

brief, it conceded at oral argument that we cannot render judgment on damages

because it did not conclusively prove them. Accordingly, we remand to the trial

court to determine the amount of Hercules’s damages and whether Excell is

entitled to an offset, and to enter judgment accordingly.

Rebeca Huddle

Justice

Panel consists of Justices Massengale, Brown, and Huddle.

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