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Oklahoma Court: Indirect Contractual Relationship Can Invoke Coverage

Despite having an indirect contractual relationship with the insured, three insurance companies are liable for coverage of the insured through contracts entered into by the insured’s subcontractors. A pipeline of JP Energy Marketing LLC caught fire while still under construction. Following this incident, JP Energy found itself embroiled in numerous lawsuits, which later resulted in an appeal, JP Energy Marketing LLC v. Commerce and Industry Insurance Co. et al., No. 115285, 2017 WL 7903997 (Okla. Civ. App. 2018).

JP Energy’s subcontractor, IPS Engineering LLC, signed Global Pipeline Construction LLC and Wilcrest Field Services, Inc., for subcontracting duties on the project. Global and Wilcrest took out policies with Alterra America Insurance Co., Navigators Insurance Co. and BITCO General Insurance Co.

The three insurers argued that they should not have to cover JP Energy’s lawsuits relating to this pipeline incident because they never had a direct contractual relationship with JP Energy. An Oklahoma state court and appeals court disagreed with this position and held that the three insurers were liable to cover JP Energy’s suits because the contracts that IPS signed with Global and Wilcrest required them to add JP Energy and IPS as additional insureds. This indirect agreement between JP Energy and IPS was enough to infer an obligation on the part of Alterra, Navigators and BITCO.

As evidenced by this case, contract language is critical. Adding a clause requiring a “direct contract” between all the parties involved could have given this case a different outcome. Limitations are important in contracts, especially when there are potential third parties involved. When drafting contracts, try to think outside the box and imagine as many scenarios as possible. This case presents a great learning opportunity and will hopefully provide some guidance on the pitfalls of contract drafting.

For legal advice regarding contracts and insurance coverage, the experienced attorneys at Parker Straus, LLP, are here to help. Contact our office today to schedule your free consultation with our legal team!

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