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AIG unit loses appeal in oil derrick accident case

oil rig

A federal appeals court has ruled for the second time against an American International Group Inc. unit over the issue of whether it is obligated to reimburse a drilling company for an accident settlement.

The complex, long-running case stemmed from a December 2008 accident in which Darrell Jent, an independent contractor of Sugar Land,
Texas-based Upstream International LLC, was injured while working in Sublette County, Wyoming. The accident occurred 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 et al.

Upstream had a contract with Houston-based Ultra Resources Inc., which held a lease for the wellsite, to manage the site. This required Upstream to obtain insurance coverage for its contractors and subcontractors.

Upstream obtained a general liability policy and a commercial umbrella policy from AIG unit Lexington, according to Wednesday’s ruling in the case by the 10th U.S. Circuit Court of Appeals in Denver.  

Ultra then contracted with Precision Drilling to operate a drilling rig at the wellsite. Precision had a separate policy with Lloyd’s of London covering it for primary and excess liability.

After the accident, Mr. Jent sued Precision for negligence. The case was settled for $3 million. Lexington, which chose not to attend a mediation conference and denied liability for any part of the settlement, filed suit in U.S. District Court in Cheyenne, Wyoming, against Precision, Lloyd’s and Upstream seeking a ruling it had no duty to defend or indemnify Precision against Mr. Jent’s clams.

The district court granted Lexington summary judgment in the case in December 2014. In its first ruling in the case, a 10th Circuit three-judge panel unanimously reversed the lower court in July, 2016, holding that Wyoming law prohibits oil and gas companies from contractually shifting liability to others for their own negligence, and that Lexington was not absolved from reimbursing the drilling company.

On remand, the district court ruled in Precision’s favor, holding it was an additional insured under Lexington’s coverage and entitled to reimbursement for the settlement.

That ruling was affirmed by a three-judge appeals court panel in Wednesday’s ruling. It said a provision in the coverage provides Precision is covered “as an additional insured when Precision is liable to a third party, and the liability arises from work performed by Upstream for Precision.”

The court also agreed with the district court that Lexington must reimburse Precision for the full amount of the $3 million settlement, but that Precision was not entitled to prejudgment interest or attorneys’ fees.

Commenting on the ruling, Precision attorney John M. Walker, an attorney with Hickey & Evans LLP in Cheyenne, said, “Ultimately, I’m very pleased with the well-reasoned decision.”

Mr. Walker said, “These kinds of contractual disputes can be complicated, and I’m grateful that the court took the time to evaluate the various contract provisions, and I think they got it right.”

AIG’s attorney did not respond to a request for comment.