AUSTIN – In a trial over three deaths from an oil well explosion in Louisiana, Harrison County District Judge Bonnie Leggat Hagan applied Texas law when she should have applied Louisiana law, the Texas Supreme Court ruled Nov. 21.
The Court wiped out a jury verdict that would have required Cudd Pressure Control to pay more than $20 million to Sonat Exploration Company.
Sonat had paid $28 million to settle claims from the blast, and jurors agreed that Sonat deserved indemnification from Cudd for most of that amount.
Now a different jury will have to view the case from a different angle.
On appeal, neither Cudd nor Sonat favored application of Louisiana law. Lumbermens Mutual Casualty Company did, however, and the Justices agreed with the insurer.
"It is of course true that an appellate court cannot reverse on a ground an appellant has never raised," Justice Scott Brister wrote.
"But while Cudd did not raise the choice of law issue, Lumbermens did so on its behalf," he wrote.
Under a doctrine of "virtual representation," he wrote, Lumbermens did not intervene as a separate party but was already a party.
"While insurer and insured are asserting different legal theories regarding choice of law, both still share the identity of interest created by their insurance contract," he wrote.
Sonat hired Cudd in 1998 to perform oilfield services. The contract specified state law for every place where Sonat might drill except Louisiana.
Each company indemnified the other for claims that employees of one might bring against the other.
On Louisiana jobs, the contract required that Cudd's insurance policies name Sonat as an additional insured.
The ink had scarcely dried when an explosion in Louisiana killed four Cudd workers and three other persons.
Survivors of the Cudd workers sued Cudd and Sonat. Sonat demanded indemnity and Cudd refused it.
Sonat demanded coverage from Lumbermens as Cudd's insurer. Lumbermens refused it, claiming Cudd had not named Sonat as an additional insured.
Sonat filed an indemnity claim against Cudd in the survivor suits. Sonat separately sued Lumbermens, with an alternative claim against Cudd for failing to insure Sonat.
Sonat and Cudd jointly settled with one survivor. Sonat settled with the other three for $28 million and sought indemnity from Cudd.
Sonat asked Judge Hagan to apply Texas law, and Cudd favored Louisiana law. Hagan applied Texas law.
Jurors enforced the indemnity agreement and found that a reasonable settlement would have been $20,719,166.74.
Hagan entered judgment in that amount.
Cudd sent a notice of appeal to the Sixth District in Texarkana, and Lumbermens posted $29 million as security.
Cudd and Sonat then reached an agreement that left Lumbermens on the hook. Cudd waived its argument for Louisiana law, and Sonat dropped its claim against Cudd.
Lumbermens asked the Sixth District to let it intervene and argue for Louisiana law, and the Sixth District turned the insurer down.
Lumbermens sought mandamus relief and the Supreme Court granted it, finding that the agreement might allow Cudd to foist liability for uninsured claims on its insurer.
The Sixth District reversed the application of Texas law and tried to send the case back to Hagan, but Sonat appealed to the Supreme Court.
Sonat argued that indemnity was valid under Texas law, Cudd argued that it was invalid under Texas law, and Lumbermens argued that it was invalid under Louisiana law.
Under Texas law, oilfield indemnity clauses are valid if they are mutual and supported by liability insurance.
Under Louisiana law, the clauses are invalid if the party seeking indemnity was negligent or strictly liable.
Brister wrote, "The parties all agree, as do we, that these laws conflict."
He wrote that Cudd's place of business was arguably significant. "But that place is itself unclear," he wrote.
The 1998 contract gave an Oklahoma address. An affidavit of the company president identified Louisiana as the place of business, but Sonat filed an affidavit from a different case in which the same person swore that management decisions were made in Georgia.
"Suffice it to say that Cudd's place of business appears to be flexible," Brister wrote.
The Justices reached their decision by figuring out that Cudd and Sonat expected trouble in enforcing cross indemnities under Louisiana law.
The provision for an additional insured "would have been superfluous had they expected their indemnities to be enforceable in such cases," Brister wrote.
"Because contracts should be governed by the law the parties had in mind when the contract was made, we hold in these circumstances that Louisiana law applies," he wrote.
No one dissented. Justice Don Willett did not participate in the decision.
Christopher Tramonte and Arthur Landry represented Lumbermens. Sam Baxter, Rosemary Snider and Keith Jarrett represented Sonat. David Gunn, James Foley and Michael Bagot Jr. represented Cudd.