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AIG unit must reimburse policyholder for oil field accident settlement


A Wyoming law that prohibits oil and gas companies from contractually shifting liability to others for their own negligence does not absolve an American International Group Inc. unit from reimbursing a drilling company for an accident settlement, says an appeals court in reversing a lower court ruling.

In December 2008, Darrell Jent, an independent contractor of Houston-based Precision Drilling Co. working in Sublette County, Wyoming, was injured when a derrick unexpectedly crashed to the ground while being broken down in preparation for moving, according to court papers in Lexington Insurance Co. v. Precision Drilling Co. L.P. et al.

Mr. Jent later sued Precision, which settled the case for $3 million in April 2012 and then sought reimbursement from AIG unit Lexington Insurance Co., which refused to contribute to the settlement.

While Lexington accepted that it issued, and was paid, for two insurance policies covering Precision for accidents such as this one, it argued a Wyoming state statute rendered those policies “a nullity so any coverage there was more illusory than real and any liability must be Precision's alone,” according to Tuesday's ruling by the 10th U.S. Circuit Court of Appeals in Denver in the case.

The U.S. District Court in Cheyenne, Wyoming granted Lexington summary judgment in the case in December 2014.

A three-judge panel of the 10th Circuit unanimously reversed the ruling. “There can be no doubt that Wyoming law usually prohibits those engaged in the oil and gas industry from contractually shifting to others liability for their own negligence,” said the ruling.

It “seems Wyoming generally wishes those engaged in oil and gas extraction to internalize the costs of their own operations, maybe on the view that doing so will encourage them to be more mindful of employee safety,” says the ruling.

“The trouble for Lexington is the statute doesn't stop there. In fact, the very next sentence adds that 'this provision shall not affect the validity of any insurance contract.' … So while indemnity agreements are generally impermissible, insurance contracts supply an exception to the ruling,” said the opinion.

“Lexington suggests the Wyoming legislature intended to allow an oil or gas company to benefit from insurance coverage only if it (and not a third party) purchased the policy in question,” said the ruling, adding that in this case coverage was paid for by one third party, the well-site manager, at the request of still another third party, the leaseholder.

“We cannot agree,” said the ruling. “Instead of supplying a case for textual ambiguity, Lexington asks us to override the statute's admittedly plain text simply on the basis of speculation about the Wyoming legislature's textually unexpressed intentions,” said the panel, in reversing the lower court and remanding the case for further proceedings.

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