Is a failure to procure the right type of insurance for a construction contract a material breach of contract?  If so, what are the damages arising from that breach and are they actual or consequential?  A recent opinion from the Houston Court of Appeals answers these important questions.

In Totalenergies Petrochemicals & Refining USA, Inc., v. Kinder Morgan Petcoke, LP, et al., an employee of Kinder Morgan Petcoke (Kinder Morgan), Gary Counts, died at a refinery owned by Totalenergies Petrochemicals & Refining (Total).  Counts’ estate filed suit against Kinder Morgan, Total and some Total employees, asserting wrongful death and survival claims.  The estate non-suited Kinder Morgan after a finding from the Department of Insurance that the claims were covered under Kinder Morgan’s workers compensation insurance.  Total, Total’s insurer, Chubb, and Kinder Morgan funded a settlement of the Counts lawsuit. Total and Chubb then filed suit against Kinder Morgan to recover the amounts they expended to settle the suit.

Kinder Morgan had previously contracted with Total to perform work at Total’s Port Arthur refinery, the location of the accident.  The contract obligated Kinder Morgan to procure and maintain various forms of insurance, including a $1 million primary and $5 million excess commercial general liability (CGL) policy “with insurance companies”.  Kinder Morgan’s policies were to name Total and its employees as additional insureds, with 30 days written notice provided to Total of any material modification to any of those policies.

About two years before Counts’ accident, Total had replaced its commercial general liability coverage with a $25 million excess policy from Lloyds syndicates containing a $10 million self-insured retention.  The Lloyds policy was in effect on the date of Counts’ accident. The policy narrowly defined an “additional insured” as a person or organization whom Kinder Morgan was required to contractually indemnify. The contract between Total and Kinder Morgan contained an indemnity clause that indemnified Total, but not Total’s employees, and was triggered only Kinder Morgan “being adjudged” solely, jointly, or comparatively liable for the damages.

Total demanded that Kinder Morgan defend and indemnify it in the Counts lawsuit. Kinder Morgan declined, stating that since Kinder Morgan had been non-suited from the lawsuit, it was not and could not be “adjudged liable”.  Kinder Morgan further argued that because no indemnity was owed to Total, Total did not qualify as an additional insured under the Lloyds policy.  As you might imagine, Total and its insurer, Chubb, were not pleased.

At the trial court level, Total and Kinder Morgan filed competing motions for summary judgment.  The trial court judge granted relief on some of Total’s claims and awarded it $1 million in damages. Both parties appealed.

The Houston Court of Appeals affirmed the trial court’s ruling that Kinder Morgan breached its contract with Total by failing to buy a primary and excess CGL policy “with insurance companies” and by failing to name Total’s employees as additional insureds.  According to the Court, the Lloyd policy with the large AIR was not the type of insurance bargained for between the parties.  Further, since the insurance requirements in the contract required Total’s employees be named insureds, Kinder Morgan’s failure to secure such coverage on the Lloyds policy was a breach of the contract.

Total also argued that the type of additional insured coverage Kinder Morgan procured—limited to the scope of the contractual indemnity clause—breached the contract. The contract mandated that “all policies and coverages required by the Contract shall extend to all occurrences”.  By limiting the additional insured coverage to only those claims and person covered in the contractual indemnity clause, the Court found that Kinder Morgan had not provided coverage for “all occurrences”. “All occurrences” is not the same as “some occurrences”.

In response, Kinder Morgan argued it had provided notice to Total of changes in its insurance program and the nature of additional insured coverage by sending a Certificate of Insurance for the Lloyds policy to Total.  The Court disagreed, finding that the Certificate did not provide notice of the change in scope of who qualifies as an additional insured.  In reaching this conclusion, the Court held that a change in the definition of additional insured was a “material change” that would have had “great importance” or impacted Total’s decision making process.

On the damages front, Kinder Morgan argued that all of Total’s and Chubb’s damages were consequential and thus barred by the waiver of consequential damages provision in the contract.  The Court disagreed.  The Court noted that “when a party fails to fulfill its contractual insurance obligations, it must itself provide the coverage that the contract required it procure”.  These types of damages flow naturally and necessarily from the breach, and according to the Court, are actual, not consequential, damages.

Ultimately, the Houston Court of Appeals remanded the case to the trial court level for further determination of what damages, if any, Total and Chubb were entitled to recover from Kinder Morgan. The Court noted that Total still needed to prove that had Kinder Morgan procured the primary and excess CGL policies required by contract, those insurers would have paid the damages Total and Chubb sought to recover.

As this case demonstrates, even innocuous sounding insurance requirements, such as the breadth of additional insured coverage, can create significant liability for contractors who choose to deviate from them. The attorneys in our Austin and Dallas offices have significant experience drafting and negotiating contracts for participants in the design and construction industry, and are available to answer any questions you may have. You may contact us for info@gstexlaw.com

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