Fifth Circuit Orders Halliburton to Arbitrate Insurance Dispute Following Oil Rig Explosion

The United States Court of Appeals for the Fifth Circuit has ruled an insurance dispute related to an oil rig explosion should be sent to arbitration.  In Halliburton Energy Services, Inc. v. Ironshore Specialty Insurance Co., No. 17-20678 (April 17, 2019), Statoil USA Onshore Properties and Halliburton Energy Services entered into a Master Services Agreement (“MSA”) to operate an Ohio oil rig.  The MSA included a binding arbitration provision and various indemnification clauses.  In addition, the MSA made multiple references to resolving any disputes in the State of Texas.  Later, the oil rig that was operated by Statoil and fracked by Halliburton exploded.

Following the explosion, one of Statoil’s insurers, Ironshore Specialty Insurance, paid $12 million in damages to the company.  After that, Ironshore demanded reimbursement from Halliburton based on the company’s MSA with Statoil.  Halliburton not only refused to pay Ironshore, but also filed a declaratory action in the Southern District of Texas asserting the insurer committed breach of contract and should have indemnified Halliburton as well as Statoil.  In response, Ironshore sought to compel the dispute to arbitration based on the terms of the MSA.  The federal district court held arbitration was not merited because the insurer waived its subrogation rights under the parties’ contract.  Ironshore then fled an interlocutory appeal with the United States Court of Appeals for the Fifth Circuit.  In a separate action, the Southern District of Texas dismissed the case for lack of personal jurisdiction over Ironshore and Halliburton appealed.

On appeal, the Fifth Circuit first consolidated the two cases before examining the lower court’s arbitration ruling.  According to the court:

From a lower level, the nub of this dispute is whether Ironshore waived its subrogation rights under the MSA. The MSA states that Statoil will “cause its insurer to waive subrogation against [Halliburton] for liabilities [Statoil] assumes.” The contract clearly requires Statoil to force its insurer to waive subrogation. And a full subrogation waiver would preclude Ironshore from enforcing the arbitration clause. But Ironshore only waived subrogation if (1) it is an insurer under the MSA and (2) the asserted claim involves a liability that Statoil assumed under the MSA. If Ironshore shows that either of these elements does not apply, then it retained subrogation rights.

Next, the appellate court examined the facts of the case before determining Ironshore was an insurer under the MSA.  The court then turned to the question of whether Statoil assumed liability for the oil rig explosion.  After examining the various liability provisions included in the MSA, the Fifth Circuit stated:

The district court determined that Ironshore made a roughly $12 million payment to Statoil for damage caused by the fire. But the court did not determine whose property was damaged in the fire. Nor did it determine what damage the $12 million payment covered. If Halliburton’s property was damaged, then Ironshore did not waive subrogation rights, since Statoil did not assume liability for damage to Halliburton’s property. If, however, Statoil’s or a third party’s property was damaged, then Ironshore did waive its subrogation rights and the claim fell outside of the MSA’s arbitration agreement. Without determining what damage Ironshore reimbursed with its roughly $12 million payment, the district court could not determine whether Statoil or Halliburton should be liable for the damage.

The district court also did not determine what kind of damage Ironshore’s payment was meant to remediate—pollution, contamination, or otherwise. While the district court stated that the explosion caused “significant environmental damage,” it did not relate this statement to Section 12.10. Meanwhile, Ironshore argues, with some support, that the explosion occurred above ground and started with Halliburton’s equipment. Ironshore further argues that some of the damage resulted from chemical runoff at the drilling site, which caused environmental harm unrelated to the fire and explosion. If those contentions are true, then Ironshore likely has a strong claim that it did not waive subrogation rights to an indemnification claim. In short, Ironshore waived some subrogation rights, but not all. The district court’s opinion, however, incorrectly held that Ironshore waived them all.

The Fifth Circuit then ruled the Southern District of Texas committed error when it found the insurer waived its subrogation rights and held “there is a binding arbitration agreement between Ironshore, as subrogee, and Halliburton.”

With regard to the question of arbitrability, the appellate court said:

Here, two MSA provisions show that the parties’ intended to submit questions of substantive arbitrability to an arbitrator. First, the parties incorporated the AAA’s rules, including Rule 7(a), into its arbitration provision. The Rule 7(a) inclusion and arbitration provision here are indistinguishable from those in other cases where courts gave substantive arbitrability questions to the arbitrator. See, e.g., Super Starr Int’l, LLC, 2017 WL 4054395, at *4; Saxa, 312 S.W.3d at 230. Second, the parties drafted a broad arbitration provision covering “[a]ny controversy between the Parties . . . related to this [MSA] involving the construction or application of any of the terms, covenants, or conditions.” Like in other cases, this language suggests that the parties intended to submit substantive arbitrability issues to an arbitrator. See, e.g., Am. Realty Tr., 74 S.W.3d at 531.

We hold that Ironshore has produced clear and unmistakable evidence that Statoil and Halliburton agreed to submit issues of substantive arbitrability, which include this dispute, to the arbitrator. We therefore REMAND to the district court to stay the case pending arbitration.

Finally, the Fifth Circuit Court of Appeals affirmed the Southern District of Texas’s conclusion “that Ironshore lacks minimum contacts with Texas and dismissing Halliburton’s breach of contract claims,” before remanding the case with instructions to issue a stay pending arbitration proceedings.

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