IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 2, 2008
No. 06-41785 Charles R. Fulbruge III
Clerk
XL SPECIALTY INSURANCE CO.
Plaintiff-Appellant
v.
KIEWIT OFFSHORE SERVICES, LTD.;
Defendant-Appellee
RBT WELDERS, INC.
Defendant-Appellant
Appeal from the United States District Court
for the Southern District of Texas
Before KING, GARZA, and BENAVIDES, Circuit Judges.
BENAVIDES, Circuit Judge:
This appeal is from a declaratory judgment ruling that the plaintiff
insurance company had a duty to defend and indemnify the defendant general
contractor in an underlying state wrongful death suit. It involves the
application of Texas’s express negligence rule to an indemnity contract between
a general contractor, the indemnitee, and a sub-contractor, the indemnitor.
Applying Texas precedent, we conclude that the language in the indemnity
provision satisfied the requirement that the contract must unambiguously state
a party’s intent to indemnify the indemnitee for all liability caused by the
No. 06-41785
indemnitee’s own future negligence. Additionally, we reject the challenge to the
reasonableness of the settlement. We affirm.
I. BACKGROUND
Defendant-Appellee Kiewit Offshore Services (Kiewit) was the general
contractor performing welding services on the Skyway Bridge San Francisco Bay
Project. Kiewit entered into a subcontract with Defendant-Appellant R.B.T.
Welders, Inc. (RBT). Pursuant to this contract, RBT provided welders to Kiewit
to work on the project at Kiewit’s facility in Ingleside, Texas.
On January 6, 2003, at the facility, Mann Nguyen, an employee of RBT,
entered a confined space, which resembled a large steel box, to perform a weld
repair. The gas in the steel box ignited, and the resulting explosion blew off the
roof. Nguyen, who was conscious after the explosion, suffered third degree burns
over sixty-five percent of his body. He was transported to the Brooks Army
Medical Center and died one week later. Ernesto Moreno, a Kiewit employee,
had been standing on the roof at the time of the explosion and was killed
instantly.
The families of Moreno and Nguyen brought suit against Kiewit and RBT
in Texas state court, alleging that Kiewit and RBT were negligent for operating
the Ingleside Plant without implementing an adequate safety program for
welding in confined spaces. At the time of the explosion, RBT had the following
insurance policies: (1) an excess liability policy through XL Specialty Insurance
Company (the Plaintiff-Appellant in the instant declaratory judgment action);
(2) a commercial general liability insurance policy from Atlantic Insurance
Company; (3) and a worker’s compensation policy through American Interstate
Insurance Company. After receiving service, Kiewit demanded that XL
Specialty defend and indemnify Kiewit as an additional insured. XL Specialty
refused, and Atlantic tendered a defense.
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No. 06-41785
RBT settled with the Moreno family for four million dollars and the
Nguyen family for one million dollars. Kiewit subsequently began negotiating
with the Nguyen family. During this time, Kiewit’s counsel prepared a report
analyzing Kiewit’s potential liability to the Nguyen family. The report was
prepared based on Kiewit’s internal investigation and initial discovery in the
underlying suit.
The evidence demonstrated that Kiewit was hired to construct bridge
footings, a type of project that Kiewit had not previously undertaken. Kiewit
usually worked on offshore platforms. Unlike offshore platforms, the welding on
bridge footings had to be done in an enclosed space. Kiewit’s safety officer had
no experience working on structures like bridge footings. Kiewit had no
provision for ventilating the enclosed space during welding. Although Kiewit
provided fans for welders in the enclosed spaces, these fans did not have
“explosive proof” switches and were not placed fully outside the enclosed space
when in use.
Kiewit’s counsel concluded that the operating procedures created a
foreseeable risk of an explosion and that such procedures did not adequately
protect the employees from the hazards of welding in enclosed spaces. The
report concluded that Kiewit was potentially liable to the Nguyen family for: (1)
failing to properly execute the confined space entry permit system; (2) failing to
implement a proper confined space ventilation system; and (3) providing a
ventilation fan that potentially was the ignition source for the explosion. It also
estimated that Nguyen’s survival damages for the week in the hospital suffering
third-degree burns could be twenty million dollars, with perhaps fifty to sixty
percent of the fault attributed to Kiewit. Because Kiewit owned the facility, the
report stated the percentage of fault could be higher.
Kiewit, using RBT’s settlement with the Moreno family as a guidepost,
settled with the Nguyen claimants for four million dollars. Subsequent to the
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No. 06-41785
settlements, XL Specialty filed a declaratory judgment action in federal district
court, seeking a judgment that it had no duty to defend or indemnify Kiewit for
Kiewit’s settlement with the Nguyen claimants because Kiewit was not an
additional insured under the XL Specialty policy. Kiewit filed a third-party
claim against RBT and a cross-claim against XL Specialty, asserting that RBT
had a duty to defend and indemnify Kiewit under the indemnification provision
in the RBT/Kiewit subcontract. Kiewit further asserted that the XL Specialty
policy provided coverage for RBT’s liability under the indemnification provision.
The district court granted summary judgment, holding that RBT had
contracted to indemnify Kiewit for Kiewit’s negligence with respect to the
explosion, and the XL Specialty policy provided coverage for RBT’s contractual
duty to indemnify. RBT and XL Specialty now appeal.
II. ANALYSIS
A. Standard of Review
This Court reviews a district court’s grant of summary judgment de novo,
applying the same standards as the district court. E.g., Hirras v. Nat’l R.R.
Passenger Corp., 95 F.3d 396, 399 (5th Cir. 1996). Summary judgment is proper
if the record reflects “that there is no genuine issue as to any material fact and
that the moving party is entitled to a judgment as a matter of law.” FED. R. CIV.
P. 56(c).
B. Express Negligence Rule
Appellants RBT and XL Specialty contend that the district court erred in
finding that the indemnity provision at issue expressly provided that RBT would
indemnify Kiewit for Kiewit’s own negligence. Appellants argue that the
indemnity clause did not satisfy the express negligence rule. Texas’s express
negligence rule is a “rule of contract interpretation that applies specifically to
agreements to indemnify another party for the consequences of that party’s own
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No. 06-41785
negligence.” Quorum Health Serv. v. Maverick County Hospital District, 308 F.3d
451, 458 (5th Cir. 2002). Under this rule, “contracting parties seeking to
indemnify one party from the consequences of its own negligence must express
that intent in specific terms, within the four corners of the document.” Id. (citing
Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705, 707-08 (Tex. 1987)). The Texas
Supreme Court adopted this stringent rule because indemnification of a party
for the consequences of that party’s negligence was an “extraordinary shifting
of risk.” Id. at 458-59. Whether an indemnity provision satisfies the express
negligence rule is a question of law for the court to determine. Id. at 459.
The instant indemnification provision reads as follows:
To the fullest extent permitted by law, Subcontractor [RBT]
specifically obligates itself to Contractor [Kiewit], Contractor’s
partners, individually, and all Kiewit companies (defined as any
company or business entity in which Peter Kiewit Sons, Inc. directly
or indirectly holds a controlling interest). Contractor’s surety,
Owner and any other party required to be indemnified under the
Prime Contract, jointly and severally, (hereinafter “Contractor
Indemnified Parties”) in the following respects, to-wit:
. . . .
(b) TO DEFEND AND INDEMNIFY THEM AGAINST AND
SAVE THEM HARMLESS FROM ANY AND ALL CLAIMS, SUITS
OR LIABILITY FOR DAMAGES TO PROPERTY, INCLUDING
LOSS OF USE THEREOF, INJURIES TO PERSONS, INCLUDING
DEATH, AND FROM ANY OTHER CLAIMS, SUITS OR
LIABILITY ON ACCOUNT OF ACTS OR OMISSIONS OF
SUBCONTRACTOR, OR ANY OF ITS SUBCONTRACTORS,
SUPPLIERS, OFFICERS, AGENTS, EMPLOYEES OR
SERVANTS, WHETHER OR NOT CAUSED IN PART BY THE
ACTIVE OR PASSIVE NEGLIGENCE OR OTHER FAULT OF A
CONTRACTOR INDEMNIFIED PARTY; PROVIDED HOWEVER
SUBCONTRACTOR’S DUTY HEREUNDER SHALL NOT ARISE
IF SUCH CLAIMS, SUITS OR LIABILITY, INJURIES OR DEATH
OR OTHER CLAIMS OR SUITS ARE CAUSED BY THE SOLE
NEGLIGENCE OF CONTRACTOR, UNLESS OTHERWISE
PROVIDED IN THE PRIME CONTRACT. SUBCONTRACTOR’S
OBLIGATION HEREUNDER SHALL NOT BE LIMITED BY THE
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No. 06-41785
PROVISIONS OF ANY WORKERS’ COMPENSATION ACT OR
SIMILAR STATUTE.
(emphasis added).
Texas precedent persuades us that this language would satisfy the express
negligence rule. In Payne & Keller, Inc., v. P.P.G. Industries, Inc., the Texas
Supreme Court held that similar language expressed the parties’ clear intent
that Payne & Keller would indemnify P.P.G. for P.P.G.’s own concurrent
negligence:
By its terms, the Payne & Keller/P.P.G. contract required Payne &
Keller to indemnify P.P.G. for work-related claims “arising out of .
. . the acts or omissions . . . of [Payne & Keller] or its . . . employees
. . . in the performance of the work . . . irrespective of whether
[P.P.G.] was concurrently negligent . . . but excepting where the
injury or death . . . was caused by the sole negligence of [P.P.G.].”
793 S.W.2d 956, 957 (Tex. 1990) (brackets and ellipsis in opinion).
Although the wording in the instant provision is not identical to the
language in the above case, the key language is quite similar. In this case, as
previously set forth, the indemnity clause provides that RBT will indemnify
Kiewit “on account of” the acts or omissions of RBT regardless of whether such
acts were caused in part by the negligence of Kiewet. With respect to the
contract provision in the cited case, the principal, relevant difference is that
instead of “on account of,” that contract provision uses the phrase “arising out
of.” Accordingly, as the appellants admit in their reply brief, the crux of the
issue is whether the instant phrase “on account of” is synonymous with the
phrase “arising out of,” which was used in the Texas case finding that the
express negligence rule was satisfied.
There is language indicating that the phrases are synonymous. In Joe
Adams & Son v. McCann Construction Company, the Texas Supreme Court
interchangeably used these similar phrases. 475 S.W.2d 721 (Tex. 1971). In
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No. 06-41785
that case, the indemnity clause provided that the contractor would indemnify the
owner for damages “through or on account of any act or in connection with the
contractor.” 475 S.W.2d at 723 (emphasis added).1 While analyzing the
indemnity clause, the court paraphrased the language and stated that “it
purports to afford protection against liability arising from . . . any default or
omission . . . .” Id. at 725 (emphasis added). We are persuaded that the Texas
Supreme Court would find “on account of” to be interchangeable with the phrase
“arising from.” Thus, we conclude that the instant indemnity clause satisfies
the fair notice requirement of the express negligence rule.
Nonetheless, we address Appellants’ remaining arguments. Relying on
Fisk Elec. Co. v. Constructor & Assoc., Inc., Appellants point to other language
in the instant provision that is very similar to language the Texas Supreme
Court has held did not satisfy the express negligence rule. 888 S.W.2d 813 (Tex.
1994). In Fisk, “the contract contained the following indemnity clause: ‘[t]o the
fullest extent permitted by law, [Fisk] shall indemnify, hold harmless, and
defend [Constructors] ... from and against all claims, damages, losses, and
expenses, including but not limited to attorney’s fees ...’ arising out of or
resulting from the performance of Fisk’s work.” Id. at 814. Appellants correctly
state that the instant indemnity provision contains similar language that does
not, by itself, satisfy the express negligence rule. Nonetheless, Fisk is
distinguishable because it does not contain the additional language providing
that RBT would indemnify Kiewit regardless of whether Kiewit was negligent.
1
It should be noted that in Joe Adam & Son, the indemnity provision was found
insufficient because, unlike the instant case, it did not contain the additional language that
the subcontractor would indemnify the contractor regardless of whether the damages were in
part based on the contractor’s own negligence. Id. It should also be noted that Joe Adam &
Son involved applying the “clear and unequivocal” test that was later replaced with the express
negligence rule. Ethyl Corp., 725 S.W.2d 705. We do not find that troubling because we are
relying on the court using the two relevant phrases interchangeably, not the court’s application
of the clear and unequivocal test.
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No. 06-41785
Appellants also rely on precedent holding that “contracts defining what is
included in an indemnity obligation by stating what is excluded fail the rule’s
requirements.” Quorum, 308 F.3d at 462 (citing Singleton v. Crown Cent.
Petroleum Corp., 729 S.W.2d 690 (Tex. 1987)). Stated another way, if the only
language indicating coverage is exclusionary, the only way to find coverage
would be implied. By definition, implied coverage does not satisfy the express
negligence rule. In this case, although the indemnity provision does exclude
indemnity for damages when the contractor is solely responsible, this
exclusionary language does not provide coverage. Instead, the language that
satisfies the rule is the language that the subcontractor will indemnify the
contractor “ON ACCOUNT OF ACTS OR OMISSIONS OF SUBCONTRACTOR
. . . WHETHER OR NOT CAUSED IN PART BY THE ACTIVE OR PASSIVE
NEGLIGENCE OR OTHER FAULT OF A CONTRACTOR.” As previously
discussed, this inclusionary language demonstrates the parties’ intent that the
subcontractor will indemnify the contractor regardless of whether the contractor
is partially responsible.
In sum, the district court properly granted summary judgment finding
that the indemnity provision satisfied the express negligence rule.
C. Sole or Gross Negligence
Appellants argue that the case should be remanded for a trial to determine
whether Kiewit was solely or grossly negligent because the indemnity clause
expressly precludes indemnity if Kiewit was solely or grossly negligent. It is
clear that the indemnity clause excludes claims based on Kiewit’s sole or gross
negligence. The district court found these arguments waived because neither
argument was raised as an affirmative defense in their pleadings.2 On appeal,
2
The district court relied on Rule 8(c) of the Federal Rules of Civil Procedure to find
the arguments waived. In a diversity case, the “Federal Rules of Civil Procedure provide the
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No. 06-41785
Appellants have failed to challenge the district court’s finding of waiver. Thus,
we are precluded from reaching the arguments. Even assuming arguendo that
the district court erred in finding waiver, Appellants point to no evidence in their
brief showing that there is a genuine issue of material fact with respect to
whether Kiewit was solely or grossly negligent. Thus, Appellants, who had the
burden of pleading and proving these affirmative defenses,3 have failed to show
that the district court erred in finding that they did not satisfy their burden.
D. Reasonableness of Settlement
Appellants argue that the district court erred in ruling that Kiewit’s $4
million settlement with the Nguyens was reasonable and prudent. “Under Texas
law, where an indemnitee enters into a settlement with a third party, it may
recover from the indemnitor only upon a showing that potential liability existed,
and that the settlement was reasonable, prudent, and in good faith under the
circumstances.” Insurance Co. of North America v. Aberdeen Ins. Services, 253
F.3d 878, 888 (5th Cir. 2001) (citing Transamerica Ins. v. Avenell, 66 F.3d 715,
721 n.15 (5th Cir. 1995)). Further, “[t]he settling indemnitee need not prove
actual liability to the third party before recovering from the indemnitor.” Id.
Appellants’ argument is very narrow. Appellants admit that “Kiewit faced
potential liability to the Nguyen plaintiffs.” There is no allegation of bad faith.
Thus, the only question is whether the $4 million settlement was reasonable and
prudent. Appellants do not dispute that the Nguyen claimants suffered $4
million in damages. Indeed, in district court, although RBT admitted “that from
manner and time in which defenses are raised and when waiver occurs.” Arismendez v.
Nightingale Home Health Care, 493 F.3d 602, 610 (5th Cir. 2007) (citation and internal
quotation marks omitted).
3
Delta Engineering Corp. v. Warren Petroleum, 668 S.W.2d 770, 772-73
(Tex.App.–Houston [1st Dist.] 1984, writ ref’d n.r.e.).
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No. 06-41785
Kiewit’s perspective the settlement was reasonable,” RBT incorrectly argued
that the reasonableness of the settlement should be determined from
indemnitor’s perspective. XL Specialty Ins. Co. v. Kiewit Offshore Serv., 426
F.Supp.2d 565, 577 n.11 (S.D.Tex. 2006 ). As the district court explained, the
Texas Supreme Court has held that the indemnitee must “establish that from
its standpoint the settlement was made in good faith and was reasonable and
prudent under the circumstances.” Mitchell’s, Inc. v. Friedman,157 Tex. 424,
431, 303 S.W.2d 775 (Tex. 1957) (emphasis added); Accord Aerospatiale
Helicopter Corp. v. Universal Health Services, Inc., 778 S.W.2d 492, 500
(Tex.App.-Dallas 1989, writ denied) (citing Pan American Gas Co. v. Natural Gas
Const. Corp., 418 S.W.2d 380, 381 (Tex.Civ.App.-Waco, 1967 writ ref’d n.r.e.)).
Thus, RBT has effectively conceded the reasonableness of the $4 million
settlement. Assuming that XL Specialty is not bound by this concession, we
address the remaining arguments.
Appellants argue that the “opportunity for Kiewit to prevail” on either the
borrowed servant defense or the statutory employer defense “lowered the
settlement value of the claim.” In other words, Appellants contend that these
defenses should have been used as bargaining tools to reduce the value of the
settlement. Kiewit responds that this argument is being raised for the first time
on appeal. An argument not raised before the district court cannot be asserted
for the first time on appeal. Stokes v. Emerson Elec. Co., 217 F.3d 353, 358 n.19
(5th Cir. 2000). To preserve an argument, it “must be raised to such a degree
that the trial court may rule on it.” Matter of Fairchild Aircraft Corp., 6 F.3d
1119, 1128 (5th Cir. 1993).
Appellants assert that the reasonableness of the settlement was contested
in light of the two defenses available. However, our review of the briefing before
the district court reveals that Appellants argued the two defenses rendered
Kiewit immune from suit. Thus, Appellants argued Kiewit should not have
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No. 06-41785
agreed to a settlement. We have not found (and Appellants have not shown us)
an argument before the district court that the amount of the settlement was
unreasonable based on the availability of the above cited two defenses. We
believe those arguments are distinct and conclude that the reasonableness of the
amount of the settlement in light of the two defenses was not sufficiently raised.
Indeed, as the district court noted, “[i]n light of Nguyen’s third-degree burns, XL
and RBT’s counsel admitted at the hearing on Kiewit’s motion that if Kiewit was
found liable, a judgment of at least four million dollars against Kiewit was
likely.” XL Specialty Ins., 426 F.Supp.2d at 577. Under these circumstances,
it does not appear that the particular issue was sufficiently raised such that the
district may have ruled on it.
Even assuming the argument was sufficiently raised, we find it offers
Appellants no succor. As previously indicated, Appellants contend that the
amount was not reasonable “in light of two good legal defenses which Kiewit
could–and should–have developed.” Contrary to Appellants’ assertions, Kiewit
did investigate these possible defenses. In the court below, Kiewit provided the
affidavits of in-house counsel and pre-settlement outside counsel. Additionally,
as set forth previously, Kiewit’s counsel prepared a report analyzing the
potential liability to the Nguyens. With respect to the worker’s compensation
and borrowed servant defenses, both law firms retained by Kiewit advised that
the defenses would “probably not immunize Kiewit from suit.”
The bottom line is that Appellant RBT first settled with its employee
(Moreno) for $4 million, and Kiewit, using that settlement as a guidepost,
likewise settled with its employee (Nguyen) for $4 million. Additionally, RBT
settled with Nguyen for $1 million. In light of Kiewit’s undisputed potential
liability, and the evidence indicating that Kiewit considered the possible
defenses, we find that the $4 million settlement was prudent and reasonable
from Kiewit’s perspective. Appellants have failed to establish a genuine issue
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No. 06-41785
of material fact with respect to the reasonableness of Kiewit’s settlement with
the Nguyens.
Accordingly, the judgment of the district court is AFFIRMED.
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