Martin K. Eby Construction Co. v. Onebeacon Insurance, 777 F.3d 1132

Background

Martin K. Eby Construction Co. (Eby) contracted to build a water pipeline and its predecessor engaged Kellogg Brown & Root (Kellogg); Eby’s predecessor promised to indemnify Kellogg for claims “directly or indirectly arising from or caused by or in connection with” Eby’s work.
While constructing the pipeline, Eby struck an adjacent methanol pipeline, causing a leak that was discovered over 20 years later; the pipeline owner cleaned up and sued Kellogg and Eby for various claims (fraud, nuisance, restitution, CERCLA and Texas SWDA violations).
Kellogg incurred over $2 million defending those claims and sued Eby (and Eby’s insurer, Travelers) seeking indemnity under Eby’s contractual promise and insurance coverage tied to assumed liabilities.
The district court granted summary judgment to Eby and Travelers; Kellogg appealed to the Tenth Circuit.
The central legal question: whether Eby’s broad indemnity clause is enforceable under Texas’s “fair notice” (express negligence/conspicuousness) rule when it effectively covers claims based on the indemnitee’s (Kellogg’s) own fault.

Issues

Issue	Plaintiff's Argument (Kellogg)	Defendant's Argument (Eby/Travelers)	Held
Whether the indemnity clause covers claims based on Kellogg’s own fault	Clause is broad and covers claims arising from Eby’s work, so it indemnifies Kellogg for defenses even when claims allege Kellogg’s fault	Clause may be broad but enforceability is governed by Texas fair notice rule before it can cover indemnitee’s fault	Clause does reach claims alleging Kellogg’s fault, but enforceability is subject to fair notice rule
Whether the Texas fair notice (express-negligence) rule applies when the clause does not explicitly mention indemnitee fault	Fair notice shouldn’t apply because Kellogg’s suit seeks indemnity for Eby’s conduct (jury found Eby caused the damage)	Fair notice applies when indemnity would cover indemnitee’s fault even if implicit	Fair notice applies; Texas precedent (Ethyl, Fisk) treats implicit coverage of indemnitee fault as triggering the rule
Whether the indemnity clause is conspicuous/express enough under the fair notice rule	The clause was referenced in a 4-page exhibit and thus provided notice; Kellogg had actual knowledge	Clause is buried in a 197-page single-spaced contract with no conspicuous formatting; no admissible evidence of actual notice	Clause is not conspicuous and Kellogg waived and failed to prove actual notice; clause unenforceable
Whether Travelers must provide coverage because Eby made (even unenforceable) promise or assumed Kellogg’s liabilities	Even if unenforceable, the promise was made and Travelers’ policy covers liabilities assumed by Eby, so Travelers must cover Kellogg’s defense costs	Without an enforceable indemnity, Eby did not assume Kellogg’s liability and Travelers has no obligation	Travelers not liable: unenforceable indemnity means Eby did not assume Kellogg’s liabilities, so no insurance coverage for Kellogg

Key Cases Cited

Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705 (Tex. 1987) (express negligence rule requires explicit contractual language to indemnify indemnitee for its own negligence)
Fisk Elec. Co. v. Constructors & Assocs., Inc., 888 S.W.2d 813 (Tex. 1994) (applies express negligence rule where indemnity clause implicitly covers indemnitee fault)
Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993) (fair notice rule requires indemnity for indemnitee fault to be conspicuous and express)
Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190 (Tex. 2004) (examples of conspicuous formatting that can satisfy fair notice)
Burlington N. & Santa Fe Ry. Co. v. United States, 556 U.S. 599 (2009) (definition of "arranger" under CERCLA informing when conduct constitutes intentional steps to dispose of hazardous substance)
Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589 (5th Cir. 2011) (distinguishes additional-insured coverage from indemnity-based coverage; cited to reject a different theory of coverage)