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Energy Symposium - Master Drillers

Contractual Allocation of Risk - William Pugh

8/12/2010

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Indemnity, Insurance, and Risk Allocation in Operational Contracts

William W. PughEnergy Symposium 2010

Houston, Texas August 12, 2010

OverviewIndemnity and the role of the MSAStructuring the contract interface ‐ Obtaining “pass‐through” protectionBasic insurance protectionsAnticipating limitations on indemnity and insuranceDrilling contract pitfallsSome hypothetical examplesCurrent trends/Hot topics

Indemnity Issues and

the Role of the MSA

Indemnity Issues and

the Role of the MSA



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MSA and Indemnity BasicsMSA is a building block for most operationsMust have valid “magic language” to obtain indemnity for one’s own negligenceIndemnity (and “magic language”) must be broad enough to extend to all intended beneficiariesAnticipate and address possible restrictions on indemnityBe aware of any issues relating to the scope of the indemnity or the scope of the MSA

“Magic Language” –Coverage for the Indemnitee’s Negligence

• Must have clear intent to get indemnity for one’s own fault• Maritime – “Clear and Unequivocal”

• Louisiana – “Unequivocal”• Texas – “Express Negligence”

Coverage for Fault Other than Negligence

Strict Liability

Pre-Existing Conditions

Gross negligence

Punitive/Exemplary Damages

Intentional Acts



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Other Requirements• Form?

Conspicuous?• Broad scope of

obligation • People/property of

indemnitor• Subs/other

contractors?• Directly/indirectly

arising out of work• Broad group of

protected parties (“indemnitees”)

Vessel Charters Present Unique Scope Issues - include “loading and unloading”

Vessel Charters Present Unique Scope Issues - include “loading and unloading”

What About Specialized Risks?

• Downhole tools• Radioactivity• Pollution• Well control• Reservoir damage



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Effect of Different “Reciprocal” Indemnity Provisions

• Narrow – each party responsible for its own employees and property (simple; doesn’t require reliance on what’s in other contracts)

• Broad reciprocal – includes contractors and subcontractors (creates extensive potential liability for Company; without a “pass-through” provision, there may be no back-up indemnity)

• Variations – modified reciprocal; fault-based reciprocal, hybrid

The Drilling Contract is the Key –Anticipating the

Broad Reciprocal Indemnity

Drilling contractor will want indemnity for Company’s people and property and people and property of Company’s other contractors

With broad reciprocal indemnity, Company will owe indemnity to drilling contractor every time there is an accident involving anyone other than the drilling contractor

Indemnity Structure is

Critical

Indemnity Structure is

Critical



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Contractor’s View

Contractor Company

Subcontractor Other Contractors

Operator’s View

Operator

Drilling Wireline Casing

Mud Logging Company

Subcontractor

16 2/3 %

16 2/3 %

16 2/3 %

16 2/3 %

16 2/3 %

16 2/3 %

Drilling

Wireline

Helicopter

Casing

Mud Logging

Vessel

Company



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What Happens without a Pass-Through Provision?What Happens without a

Pass-Through Provision?

For every instance in which Company owes a broad reciprocal indemnity, but the underlying contract has no pass-throughprovision, Company has no recourse

Foreman v. Exxon - Contractual Situation

Exxon(Indemnity)

Employee

Caterer Vessel(Charter)

Offshore WirelineContractor

Diamond M

Foreman v. Exxon - Contractual Situation

Exxon(10%)

(Indemnity)

Employee


Offshore(35%)

WirelineContractor

Diamond M(55%)



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Foreman v. Exxon - ResultExxon

(15%)(10%)

(Indemnity)

Employee


Offshore(35%)

WirelineContractor

Diamond M (85%)(55%)

Foreman v. Exxon - ResultOffshore(15%)(10%)

(Indemnity)

Employee


Offshore(35%)

WirelineContractor

Exxon(85%)(55%)

1) Include contractual liability within scope of indemnity2) Extend indemnity protection to those to whom Company owes

contractual indemnity3) Extend indemnity protection to other contractors and

subcontractors (and others) as indemnified partiesUse a broad defined term (such as “Company Group”) to refer to a broadly defined group of indemnitees

Each option has pros and cons

Copyright 200921

Options for Obtaining a Pass‐ Through



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16 2/3 %

16 2/3 %

16 2/3 %

16 2/3 %

16 2/3 %

16 2/3 %

Wireline

Helicopter

Casing

Vessel

Company

Mud Logging

Drilling

Contractual Insurance Protections

Contractual Insurance Protections

Insurable Risk vs. Business RiskInsurance is available to guard against fortuitous events

Physical loss or damageBodily injury, illness, deathLoss of income/business interruption

Insurance not intended to cover poor performance or breach of contract

There can be uncertainty when dealing with warranty issues



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Key Insurance Requirements• To obtain full insurance protection, the insurance

requirements should include:– an additional insured provision – a waiver of subrogation provision– a provision that insurance required under the

contract will be primary

• Also need to dovetail with indemnity by making sure all indemnitees get the coverage

• Insurance may provide more protection in some instances

Additional Insured/Waiver Provisions• BEWARE of restrictive additional insured provisions and

restricted waivers of subrogation

• covered except for negligence

• covered except for sole negligence

• covered only for vicarious liability

Additional Insured Issues• “All policies of insurance referred to herein, with the

exception of Workers’ Compensation and Employers Liability, shall name ABC Company Group as an Additional Insured with Additional Insured Endorsement (CG 20 10 07 04 or equivalent)”

• Additional Insured status:• Limit to extent of indemnity obligations?• Limit to the extent of the risks and liabilities assumed?• Additional assured except for risks allocated to

[indemnified by] Company under this agreement?

• “Referred to herein” vs. all insurance



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Additional Insured Issues• CG 20 10 11 85 (arising out of “your work”)

• CG 20 10 10 93 (arising out of your ongoing operations)• “ongoing operations” not a defined policy term

• CG 20 10 07 04 (caused by your acts or omissions but excluding completed operations)• Excludes coverage for Sole Negligence of the additional insured

• CG 20 37 07 04 (caused by your work and included in the “products-completed operations hazard)• Excludes coverage for Sole Negligence of the additional insured

Additional Insured Issues• 61712 (9/01) (arising out of your operations or premises and will not

exceed the coverage and/or limits required by said agreement)• Excludes coverage for Sole Negligence of the additional insured

• U-GL-1175-B CW (3/2007) (caused by your acts or omissions and will not exceed the coverage and/or limits required by said agreement)• Excludes coverage for Sole Negligence of the additional insured

• EG2005US 12-03 (12/03) (additional insured solely out of “your work” or “your product” and will not exceed the coverage and/or limits required by said agreement)• Excludes coverage for Sole Negligence of the additional insured• Additional Insured status only lasts through contract period and in

no event will extend past expiration of policy• Problem with survival clauses

Professional LiabilityCG 22 43 07 98

EXCLUSION – ENGINEERS, ARCHITECTS OR SURVEYORS PROFESSIONAL LIABILITY

This insurance does not apply to "bodily injury", "property damage" or "personal and advertising injury" arising out of the rendering of

or failure to render any professional services by you OR any engineer, architect or surveyor who is either employed by you

or performing work on your behalf in such capacity.

Professional services include: 1. The preparing, approving, or failing to prepare or approve,

maps, shop drawings, opinions, reports, surveys, field orders, change orders or drawings and specifications; and

2. Supervisory, inspection, achitectural or engineering activities.



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Providing that Contractor’sInsurance is PrimaryProviding that Contractor’sInsurance is Primary

Critical that the insurance provided be primary

Otherwise, insurer will attempt to rely on its policy’s “other insurance” clause to reduce or even avoid coverage altogether

Excess Liability Issues

• Contractual terms finding their way into sublimits of Excess Liability policies

• Example:– “…the most we [insurance company] will pay for damages

under this policy on behalf of any person or organization to whom you are obligated by a written “insured contract” to provide insurance such as is afforded by this policy is thelesser of the limits of insurance shown in item 3 of the Declarations [$25mm] or the minimum limits of insurance you agreed to procure in such written “insured contract”.”

Other Insurance Pitfalls• State minimum insurance is not a limit on indemnity• Understand whether necessary to limit insurance to

risks assumed • Consider Getty and Marcel• Comply with TOAIA if applicable• Consider important maritime endorsements –

including full coverage without regard to capacity “as owner” or applicability of limitation of liability

• Extend coverage to all indemnitees



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Applicable Law & Restrictions on Indemnity and Insurance

Applicable Law & Restrictions on Indemnity and Insurance

Longshore and Harbor Workers’ Compensation Act

• Maritime indemnities are generally enforceable except that 33 U.S.C. § 905(b) prohibits an indemnity claim by a “vessel” against the employer of an injured longshoreman

• BUT, insurance is fully enforceable and mutual indemnity on OCS is enforceable

Louisiana Oilfield Indemnity Act (“LOIA”)

• LOIA restricts indemnity and insurance

• LOIA only applies to contracts pertaining to a well

• Applies to personal injury/death, not property damage

• No insurance exception unless operator pays contractor’s insurance premium under Marcel v. Placid Oil Co.

• Compare Amoco Prod. Co. v. Lexington with Rogers v. Samedan



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Texas Oilfield Anti-Indemnity Act (“TOAIA”)

• Applies to property damage and personal injury/death

• Exceptions for indemnity supported by insurance

• unilateral indemnity ($500,000)• mutual indemnity (up to amount of insurance

obtained “for the benefit of the other party as indemnitee”) – no longer required to specify equal amounts)

• Act does not apply to insurance that does not directly support the indemnity - Getty

Drilling Contract Pitfalls

General• Include pass through provision

• Avoid inappropriate “magic” language• “floating” – IADC contracts• sound location provision

• Beware of assuming liability for damage to the drilling rig

• Beware of unintended risks



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General• Beware of broad consequential

damage provisions

• Commercial and other provisions may be dangerous• uncapped exposure for paying

day rate during repairs• uncapped exposure for paying

standby rate• liability for contractors hired by

drilling contractor

IADC Onshore Drilling Contract Preamble

• Except for such obligations and liabilities specifically assumed by Contractor, Operator shall be solely responsible and assumes liability for all consequences of operations by both parties while on a Daywork Basis, including results and all other risks or liabilities incurred in or incident to such operations

Indemnity ObligationsSection 14.13

Except as otherwise expressly limited in this Contract, it is the intent of parties hereto that all releases, indemnity obligations and/or liabilities assumed by such parties under terms of this Contract including, without limitation, Subparagraphs 4.9 and 6.3(c), Paragraphs 10 and 12, and Subparagraphs 14.1 through 14.12 hereof, be without limit and without regard to the cause or causes thereof, including but not limited to . . . the negligence of any degree or character (regardless of whether such negligence is sole, joint or concurrent active, passive or gross) . . . .



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Section 14.13 (cont’d)

The indemnities and releases and assumptions of liability extended by the parties hereto under the provisions of Subparagraphs 4.9 and 6.3 and Paragraphs 10, 12, and 14 shall inure to the benefit of such parties, their co-venturers, co-lessees, joint owners, their parent, holding and affiliated companies and the officers, directors, stockholders, partners, managers, representatives, employees, consultants, agents, servants and insurers of each . . . .

10. Sound Location10. Sound Location• Operator shall prepare a sound location adequate in

size and capable of properly supporting the rig, and shall be responsible for a casing and cementing program adequate to prevent soil and subsoil wash out. It is recognized that Operator has superior knowledge of the location and access routes to the location, and must advise Contractor of any subsurface conditions, or obstructions (including, but not limited to, mines, caverns, sink holes, streams, pipelines, power lines and communication lines) which Contractor might encounter while en route to the location or during operations hereunder.

10. Sound Location (cont’d)10. Sound Location (cont’d)• In the event subsurface conditions cause a cratering

or shifting of the location surface, or if seabed conditions prove unsatisfactory to properly support the rig during marine operations hereunder, and loss or damage to the rig or its associated equipment results therefrom, Operator shall, without regard to other provisions of this Contract, including Subparagraph 14.1 hereof, reimburse Contractor for all such loss or damage including removal of debris and payment of Force Majeure Rate during repair and/or demobilization if applicable.



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12. Termination of Location Liability12. Termination of Location Liability

When Contractor has concluded operations at the well location, Operator shall thereafter be liable for damage to property, personal injury or death of any person which occurs as a result of conditions of the location and Contractor shall be relieved of such liability; provided, however, if Contractor shall subsequently reenter upon the location for any reason, Including removal of the rig, any term of the Contract relating to such reentry activity shall become applicable during such period.

13. Insurance13. Insurance. . . same shall not be canceled or materially changed without ten (10) days prior written notice to Operator. For liabilities assumed hereunder by Contractor, its insurance shall be endorsed to provide that the underwriters waive their right of subrogation against Operator. Operator will, as well, cause its insurer to waive subrogation against Contractor for liability it assumes and shall maintain, at Operators expense, or shall self insure, insurance coverage as set forth in Exhibit "A" of the same kind and in the same amount as is required of Contractor, insuring the liabilities specifically assumed by Operator in Paragraph 14 of this Contract.



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13. Insurance (cont’d)13. Insurance (cont’d)• Operator shall procure from the company or

companies writing said insurance a certificate or certificates that said insurance is in full force and effect and that the same shall not be canceled or materially changed without ten (10) days prior written notice to Contractor. Operator and Contractor shall cause their respective underwriters to name the other additionally insured but only to the extent of the indemnification obligations assumed herein.

14.7 Inspection of MaterialsFurnished by Operator

• Contractor agrees to visually inspect all materials furnished by Operator before using same and to notify Operator of any apparent defects therein. Contractor shall not be liable for any loss or damage resulting from the use of materials furnished by Operator, and Operator shall release Contractor from, and shall protect defend and indemnify Contractor from and against, any such liability.

14.11 Pollution & ContaminationNotwithstanding anything to the contrary contained herein, except

the provisions of Paragraphs 10 and 12, it is understood and agreed by and between Contractor and Operator that the responsibility for pollution or contamination shall be as follows:(a) Contractor shall assume all responsibility for, including control and removal of, and shall protect defend and indemnify Operator from and against all claims, demands and causes of action of every kind and character arising from pollution or contamination, which originates above the surface of the land or water from spills of fuels, lubricants, motor oils, pipe dope, paints, solvents, ballast bilge and garbage, except unavoidable pollution from reserve pits, wholly in Contractor's possession and control and directly associated with Contractor's equipment and facilities.



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14.11 Pollution & Contamination(cont’d)

• (b) Operator shall assume all responsibility for, including control and removal of, and shall protect defend and indemnify Contractor and its suppliers, contractors and subcontractors of any tier from and against all claims, demands, and causes of action of every kind and character arising directly or indirectly from all other pollution or contamination . . . . Operator shall release Contractor and its suppliers, contractors and subcontractors of any tier of any liability for the foregoing.

14.12 Consequential Damages14.12 Consequential Damages[E]ach party shall at all times be responsible for and hold harmless and indemnify the other party from and against its own special, indirect, or consequential damages, and the parties agree that special, indirect, or consequential damages shall be deemed to include, without limitation, the following: . . . cost of or loss of use of property, equipment, materials, and services, including without limitation those provided by contractors or subcontractors of every tier or by third parties. Operator shall at all times be responsible for and hold harmless and indemnify Contractor and its suppliers, contractors, and subcontractors of any tier from and against all claims, demands, and causes of action of every kind and character in connection with such special, indirect, or consequential damages suffered by Operator’s co-owners, co-venturers, co-lessees, farmors, farmees, partners, and joint owners.

Indemnity ObligationsSection 14.13



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14.13 Indemnity Obligations

Except as otherwise expressly limited in this Contract, it is the intent of parties hereto that all releases, indemnity obligations and/or liabilities assumed by such parties under terms of this Contract including, without limitation, Subparagraphs 4.9 and 6.3(c), Paragraphs 10 and 12, and Subparagraphs 14.1 through 14.12 hereof, be without limit and without regard to the cause or causes thereof, including but not limited to . . . the negligence of any degree or character (regardless of whether such negligence is sole, joint or concurrent active, passive or gross) . . . .

14.13 Indemnity Obligations

The indemnities and releases and assumptions of liability extended by the parties hereto under the provisions of Subparagraphs 4.9 and 6.3 and Paragraphs 10, 12, and 14 shall inure to the benefit of such parties, their co-venturers, co-lessees, joint owners, their parent, holding and affiliated companies and the officers, directors, stockholders, partners, managers, representatives, employees, consultants, agents, servants and insurers of each . . . .

Practical Examples



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Onshore drilling contract – Texas• Operator hires Big Drill -

unmodified IADC contract

• Big Drill employee is injured • sues Operator, Super

Duper Wireline, and KOT Trucking

• Super Duper and KOT each have an MSA with Operator with a broad reciprocal indemnity

SuperDuper/SOS

KOT Trucking

Big Drill

Roughneck (injury)

Operator

Change the HypotheticalSame contracts, but casualty is different Big Drill drilling rig is destroyed



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Big Drill can’t sue Operator BUT - Big Drill does sue Super Duper and KOT

SuperDuper/SOS

KOT Trucking

Big Drill

Roughneck (injury)

Operator

Solution for Operator ?



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Solution for OperatorMake sure Big Drill agrees to a pass-through provision

SuperDuper/SOS

KOT Trucking

Big Drill

Roughneck (injury)

Operator

Change the Hypothetical AgainChange the Hypothetical Again

• Same basic contracts, but drilling rig is damaged because of an unsound location

• Big Drill uses onshore IADC but agrees to a pass-through provision

• Operator has hired Flat & Safe Ground to prepare the location



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Drilling rig topples and is significantly damaged ($10 -$20 MM)

SuperDuper/SOS

Flat & Safe Ground

KOT Trucking

Big Drill(damage)

Operator

Change the Hypothetical AgainSame basic contracts, but rig is used in Louisiana

Wireline employee is injured by Big Drill negligence and sues Big Drill

Operator owes Big Drill indemnity

Super Duper owes indemnity to Operator Group but invalid under LOIA



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Is there a Marcel provision?

What additional insured endorsement does Super Duper have?

SuperDuper/SOS

KOT Trucking

Big Drill

SD employee (injury)

Operator

Hot Topics/Current Trends

• Blowout• Pollution• Windstorm• Warranty• Sound Location• Carve Outs• Changes in the Market



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ConclusionIndemnity structure is critical – MSAs and drilling contracts must work together

Watch out for inappropriate “magic language”

Beware of carve outs and pitfalls

Factor in enforceability issues

Dovetail indemnity and insurance

A Strategic Look at the Bigger Picture – Risk Allocation in Drilling Contracts and Master

Service Agreements

William W. Pugh Liskow & Lewis Houston, Texas

TABLE OF CONTENTS

I. INTRODUCTION ...............................................................................................................1

II. OVERVIEW OF RISK ALLOCATION IN OPERATIONAL CONTRACTS ......................................................................................................................1

A. Typical Risk Allocation Scheme in Drilling Contracts ...........................................3

B. Effect of Broad Reciprocal Indemnity Provisions ...................................................3

C. “Pass-Through” Indemnity Protection .....................................................................4

1. Why is “pass-through” protection necessary? .............................................4

2. Obtaining pass-through protection ...............................................................5

D. Implementing the Risk Allocation Program With Master Service Agreements ..............................................................................................................6

E. Making Sure Other Contracts Fit with the Risk Allocation Program ......................8

F. Statutory Employer Provision…………………………………………………..…9 III. SPECIFIC INDEMNITY REQUIREMENTS ...................................................................10

A. Basic Requirements for Obtaining Indemnity for the Indemnitee’s Negligence .............................................................................................................10

1. There must be a clear intent to indemnify for the indemnitee’s fault .......................................................................................10

2. The indemnity obligation must be “conspicuous” .....................................11

B. The Scope of the Indemnity ...................................................................................12

IV. MAXIMIZING INSURANCE PROTECTION .................................................................13

A. Summary of Important Insurance Requirements ...................................................13

B. Insurance and Indemnity Interplay ........................................................................16

1. Insurance provisions may prime indemnity provisions .............................16

2. Important vessel coverage endorsements ...................................................17

V. RESTRICTIONS ON INDEMNITY AND INSURANCE ...............................................19

A. The Louisiana Oilfield Indemnity Act ...................................................................19

B. The Texas Anti-Indemnity Act ..............................................................................22

C. The Wyoming Anti-Indemnity Act ........................................................................24

D. The New Mexico Anti-Indemnity Act ...................................................................25

E. Section 905(b) of the LHWCA ..............................................................................26

VI. APPLICABLE LAW: STATE LAW, MARITIME LAW, AND THE OCSLA ..............................................................................................................................28

A. Applicable Law in General ....................................................................................28

B. Application of State Law Under OCSLA ..............................................................29

1. OCSLA situs ..............................................................................................29

2. Federal law applying of its own force ........................................................30

3. State law inconsistent with federal law ......................................................32

4. Effect of choice of law provisions .............................................................32

5. How is the “adjacent” state determined under the OCSLA? .....................33

VII. RISK ALLOCATION ISSUES RELATED TO SPECIFIC OPERATIONAL CONTRACTS .......................................................................................34

A. Drilling Contracts...................................................................................................35

B. Master Service Agreements ...................................................................................36

C. Construction Contracts ...........................................................................................38

D. Vessel Charters ......................................................................................................38

E. Flight Service Agreements .....................................................................................39

VIII. CONCLUSION ..................................................................................................................39

1

A STRATEGIC LOOK AT THE BIGGER PICTURE – RISK ALLOCATION IN DRILLING CONTRACTS AND MASTER SERVICE AGREEMENTS∗

William W. Pugh Liskow & Lewis Houston, Texas

I. INTRODUCTION

Risk management for an oil and gas company is a very broad topic, and it is difficult to understand the nuances of each area of risk. However, it can be critically important to understand the general risks inherent in different facets of the company’s business. The purpose of this paper is to provide an overview and general understanding of some of the most important risk management issues presented by “operational” agreements – contracts used by oil and gas companies to get things done – such as drilling contracts, master service agreements, vessel charters, flight service agreements, and construction contracts. The first parts of this paper will look at the issues from a general standpoint, and the risks related to specific contracts will be discussed thereafter. Operational contracts typically involve a common workplace and a relatively high risk of bodily injury and loss or damage to property. Because of a common workplace and the potentially dangerous working environment, these contracts frequently interact, which makes it critical that the contractual risk allocation provisions in the different contracts are consistent. Otherwise, provisions that might work well in isolation may, when acting together, achieve the opposite of the desired result and leave the company facing significant unanticipated risks. II. OVERVIEW OF RISK ALLOCATION IN OPERATIONAL CONTRACTS

One of the distinctive features of the oil and gas industry today is that most of the operational contracts allocate much of the risk, if not all, on a “regardless of fault” basis, with indemnity being owed by the party that employs the injured party or owns the damaged property, regardless of negligence or other fault of the indemnified party (the “indemnitee”). This approach has developed for a variety of reasons, including difficulties and expense involved in determining proportionate fault in a common workplace and the availability of and reliance upon insurance.

∗ This paper is an update of paper that has been presented previously to the Rocky Mountain

Mineral Law Foundation and other conferences, and it, in turn, contained a number of excerpts from a previous paper, William W. Pugh, “Don’t Lose Sight of the Big Picture — Making Sure the Indemnity and Insurance Provisions in Your Various Contracts Fit Together,” Oil and Gas Agreements: The Exploration Phase, Paper No. 11 (Rocky Mt. Min. L. Fdn. 2004) (hereinafter “Pugh, Big Picture”). The purpose of the “Big Picture” was to provide a detailed discussion on developing a consistent contract risk allocation program. This paper is intended to be more of an overview, but many of the issues in the “Big Picture” are the underpinnings for understanding the “Bigger Picture” – a broader look at risk allocation in operational agreements.

2

For many years, oil and gas companies have been asked by their contractors to assume certain high dollar risks, such as pollution, loss or damage to the hole and down hole tools, and underground or reservoir damage. While the breadth of these assumptions vary from contract to contract, the primary underlying justification is either that a risk is too high for a contractor to assume or too expensive for a contractor to insure. On the other hand, all contractors already carry liability insurance for bodily injury claims, and most either have property insurance covering damage to their property or have made the decision that they prefer not to carry such insurance. As a result, at least historically, a typical operational contract might allocate risk of bodily injury or property damage to the contractor while the company assumed some or all of the potentially more expensive risks.

The intent of these indemnity provisions was to allocate these risks without regard to the negligence or other fault of the indemnitee, but, as discussed further below, a series of judicial decisions mandated that such intent be clearly evidenced in the contract. In addition, the parties often expected insurance to support these indemnity obligations, which has led to a need for much more specific insurance provisions. Also, some states have imposed restrictions on these risk allocation provisions in the form of anti-indemnity statutes. Consequently, enforceability of these risk allocation provisions creates issues that must be understood and addressed.

An important continuing development in the approach to these provisions has been the contractors’ efforts to obtain broader and broader protection through broad reciprocal indemnity agreements, whereby each party assumes the risk of any claims of damage to its own property or injury claims by its own employees. This typically began with the drilling contractors, who have historically taken the position that the company should be responsible not only for claims by its own employees (and its own property damage) but claims for injury and property damage by its other contractors as well. This broad “knock for knock” indemnity, or broad reciprocal indemnity, places a significant risk on the company, which would owe indemnity to each drilling contractor for claims by every other contractor at the work site. The scope of risk is even greater if the drilling contractor excludes (or “carves out”) those risks that operators have historically been asked to assume, such as damage to the contractor’s tools when down hole, and any pollution, loss of hole, or reservoir damage, even if caused by the fault of the contractor. While the merits of the broad reciprocal indemnity can be debated, the justification for such a broad assumption of risk by the company is more justified in a drilling contract (where the contractor supplies a large number of personnel and an expensive property item – the drilling rig) than in a master service agreement or other types of operational contracts. Consequently, one of the threshold issues for developing a contractual risk allocation program is for the company to understand that it will be entering into various different types of contracts and that the risk allocation provisions in each may well need to be different but still need to fit together.

The most common operational contracts entered into by an oil and gas company are drilling contracts and master service agreements, and the operator cannot effectively develop its approach to risk allocation in its master service agreements (or its other operational contracts) without understanding the fundamentals of indemnity and insurance and the pivotal role that the drilling contract will likely play.

3

A. Typical Risk Allocation Scheme in Drilling Contracts

A typical drilling contract1 will allocate a variety of risks on a broad reciprocal basis, particularly liability for bodily injury/death claims and damage to property. As discussed above, these indemnity obligations will almost always apply regardless of fault.2 The impact of this broad reciprocal indemnity structure must be understood to develop a cohesive risk allocation program.

B. Effect of Broad Reciprocal Indemnity Provisions

The effect of a broad reciprocal indemnity is that the company will owe indemnity to the drilling contractor every time there is a casualty involving anyone other than the drilling contractor (or its subcontractors, if any).3 If the company agrees to accept such risks, it must make certain that it has obtained back-up or pass-through indemnity and insurance protection from its other contractors in the applicable master service agreement or other underlying contracts.4 Otherwise, the operator may be entitled to insurance or indemnity protection from its other contractors, but not be able to extend such protection to the drilling contractor.5 Ultimately, the measure of the risk that is being assumed by an operator in a drilling contract as a result of a broad reciprocal indemnity is determined, to a large extent, by what indemnity and insurance protections the operator has obtained, or will obtain, in its underlying contracts, and who besides the operator is entitled to such protection.6 The other major component that determines the magnitude of the risk, which is discussed further below, is enforceability.

1 For a detailed discussion of various issues relating to insurance, indemnity, and risk

allocation issues in drilling contracts, particularly the International Association of Drilling Contractors (IADC) Offshore Daywork Drilling Contract form, see William W. Pugh, “The IADC Offshore Drilling Contract,” Third Special Institute on Oil and Gas Development on the OCS, 8-1 (hereinafter “Pugh, IADC Drilling Contracts”). For a similar discussion relating to master service agreements, see William W. Pugh, “Master Service Agreements and Risk Allocation – In Whose Good Hands Are You?” (Rocky Mt. Min. L. Fdn. 2002) (hereinafter “Pugh, Master Service Agreements”).

2 See William W. Pugh, You Can’t Always Get What You Want, But You Can Avoid Costly Mistakes: Insurance Issues for Oil & Gas Operators, § 10.05[1] (Rocky Mt. Min. L. Fdn. 1999) (hereinafter “Pugh, Insurance Issues”); see also § III infra. The operator will probably also assume other risks, such as well control, downhole pollution, downhole tools, loss or damage to the hole, and reservoir damage, subject to some exceptions. The risks allocated to the drilling contractor should be covered by both insurance and indemnity protection from the drilling contractor. For those risks assumed by the operator, it is also important that each interest owner have appropriate insurance coverage (or knowingly assume such risks on an uninsured basis). See generally Pugh, Insurance Issues.

3 As a practical matter, however, the caterer may well be the drilling contractor’s only subcontractor unless the drilling contract is a turnkey contract.

4 As discussed in § I.E., infra, the operator may have various other underlying contracts, such as a flight service agreement, a time charter if vessels or involved, or other specialized contracts.

5 See Foreman v. Exxon Corp., 770 F.2d 490 (5th Cir. 1985); § II.C., infra. 6 These beneficiaries should include the operator’s economic family (i.e., affiliated

companies), its non-operators, and any partners, joint venturers, or other parties that operator may want to benefit from the indemnity protections. In addition, the operator will often want to be sure that its other contractors are beneficiaries of the indemnity protections as well (to obtain pass-through protection as

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C. “Pass-Through” Indemnity Protection

1. Why is “pass-through” protection necessary?

Absent express language, an indemnity provision will not be held to cover the indemnitee’s contractual liability to a third party. The presence or absence of pass-through protection can be critical. The operator will have no back up indemnity from its other contractor unless there is a pass-through indemnity provision in the underlying contract. Without a pass-through provision, the operator may end up with more liability exposure than it would have had in the absence of any indemnity provision. In Foreman v. Exxon Corp.,7 for example, an oil company had to indemnify a drilling contractor for the proportionate fault attributed to the drilling contractor (more than five times greater than the fault attributed to the oil company), but the indemnity in favor of the oil company (from the plaintiff’s employer) was held not to cover the operator’s indemnity obligation to the drilling contractor.

Ultimately, an indemnity provision that protects the operator from all claims “for or on account of personal injury” to a contractor’s employee protects the operator if it is sued by the contractor’s employee, but if the operator has itself agreed to indemnify another party (i.e., the drilling contractor), the indemnity from the employer/contractor will not cover the operator’s contractual obligation to the drilling contractor.8 Under both Louisiana law9 and maritime law,10 the operator’s contractual obligation to a third party arises from its contract with the third party, not from the injury or claim by the plaintiff. Accordingly, every drilling contract with a broad reciprocal indemnity puts the operator at risk for all claims by its other contractors or their employees and the operator is stuck with that liability unless the contract has a pass-through provision whereby the other contractor’s indemnity obligation to the operator can be passed through to the drilling contractor. Moreover, the same risk is created each time the company agrees to a broad reciprocal indemnity in any other contract, whether in a master service

discussed below). The former protection is generally easy to obtain; the latter can be significantly more difficult to obtain, but may nevertheless be critically important.

In the typical IADC drilling contract, for example, the operator is required to indemnify for claims by its other contractors, but the obligations owed by the drilling contractor do not benefit the other contractors unless the contract is modified. As discussed in § II.D., infra, whether that is critical for the operator will depend on the indemnity obligations owed by the operator in its underlying contracts and the extent to which operator needs a “pass-through” provision. In addition, as discussed in § II.E., infra, these issues can also be critical in a construction contract, particularly on a major construction project, in which each contractor may attempt to insist on indemnity protection against claims by all other contractors.

7 770 F.2d 490, 495 (5th Cir. 1985). 8 See, e.g., Champagne v. Nautical Offshore Corp., No. 01-3123, 2002 WL 31387134 (E.D.

La. Oct. 22, 2002). 9 Foreman, 770 F.2d at 495. 10 Corbitt v. Diamond M. Drilling Co., 654 F.2d 329, 333-34 (5th Cir. 1981).

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agreement, a construction contract,11 or any other agreement, and, as discussed below, this can be extremely problematic if there is also a drilling contractor involved.12

2. Obtaining pass-through protection

There are several ways to obtain pass-through protection,13 but the key is to have each underlying contractor owe its indemnity and insurance obligations to the operator and those to whom the operator wants the protection extended.14 This should include the operator’s related companies and the non-operators, and, at a minimum, the other contractors to whom operator owes indemnity, including the drilling contractor.15 Making this effort in drafting and negotiating the underlying contracts can avoid significant unprotected exposure and benefit the operator (and the non-operators).

Obtaining protection for the company’s contractual indemnity obligations requires specific provisions.16 One method is to require indemnity protection for any contractual liability to third parties.17 The benefit of this approach is that it provides an exact fit with what the company needs – indemnity only extends to those whom the company owes. Another method that is similar is to specify that the indemnity obligation is owed to the indemnitee and anyone to whom the indemnitee owes contractual indemnity. The drawback with these two approaches, however, is that no protection is provided to any other contractors unless the company has agreed to indemnify such other contractors, which means that the company cannot give the contractors any protection from other contractors without agreeing that the company will also owe that protection. In such event, if there is any difficulty with the underlying indemnity (whether enforceability, solvency, or otherwise) the company will be left in the middle.

A third method of obtaining pass-through protection is to expand the categories of persons or companies entitled to indemnity protection such that the indemnitor agrees to indemnify the indemnitee “and its contractors and subcontractors (excluding Contractor and its

11 See Pugh, Insurance Issues, supra note 2, at § 10.05[1][b]. 12 If the operator agrees to a broad reciprocal indemnity in an MSA or a construction contract

and a drilling contractor is also present at the worksite, the operator will have agreed to provide indemnity for loss or damage to the drilling rig. This is particularly dangerous if the drilling contract is an unmodified IADC form contract because the IADC forms do not provide any pass through protection that would extend to other contractors. See generally Pugh, IADC Drilling Contracts, supra note 1.

13 Enforceability can be a problem, as discussed in § § II.D. & IV., infra, but there are approaches that will at least maximize enforceability.

14 Although this paper often refers only to indemnity obligations, it is vitally important, as discussed in § IV, infra, that the company also obtain insurance protection for the same risks (and extend such insurance protection to the same group of beneficiaries) or otherwise have them covered by the pass through provision.

15 See Pugh, Insurance Issues, supra note 2, at § 10.05[1][b]. 16 See Pugh, IADC Drilling Contracts, supra note 1, at § IV.A.4. 17 See Sumrall v. Ensco Offshore Co., 291 F.3d 316, 320 (5th Cir. 2002), in which the contract

provided indemnity for obligations “whether arising in . . . tort” or “contract,” and for “all claims . . . of whatsoever nature or character . . . whether or not caused by the . . . legal duty of [indemnitee].” (Emphasis added.)

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subcontractors).” Campbell v. Sonat Offshore Drilling, Inc. illustrates an effective pass-through using a broad definition of “Company Group” as the recipient of the indemnity protection.18 As discussed in more detail below, the advantage of using this approach is that if the broad definition of Company Group is used consistently, from contract to contract, the company’s flexibility will be maximized, and each contractor will receive the benefit of the other contractors’ indemnities without the company necessarily having to accept a broad reciprocal indemnity obligation.

As mentioned previously, it is important to have pass-through protection in the drilling contract itself as well as in the operator’s underlying contracts.19 First, the operator will want to be certain that the protections obtained from the drilling contractor (particularly as respects damage to the drilling rig) have been extended to all members of Company Group, including the non-operators. Also, if any of the operator’s underlying contracts contain broad reciprocal indemnities (whereby the operator, by assuming liability for its other contractors, has assumed responsibility for damage to the drilling rig or injuries to the drilling contractor’s employees), it will be critical for the drilling contractor’s obligations to extend to the operator’s other contractors, or at least those to whom the operator owes indemnity. Additionally, the existence of such a pass-through in the drilling contract can become essential to the operator’s efforts to obtain “back-up” protection from its other contractors.20

D. Implementing the Risk Allocation Program With Master Service Agreements

Anticipating the risk allocation in the drilling contract and the need for a pass-through provision is a threshold issue, but the primary building block for an operator’s risk allocation program is usually the master service agreement. How the master service agreement should be structured is dependent on a number of variables, such as where operations will be conducted, what contracts are already in place, how the company wants to approach risk allocation, and how

18 979 F.2d 1115 (5th Cir. 1992). In Campbell, the Fifth Circuit held that a contractor had a duty to defend and indemnify both an oil company and a vessel owner for claims by the contractor’s employee because under the indemnity agreement, the contractor owed indemnity to a broadly defined “Company Group,” which included the oil company and its other contractors (one of which was the vessel owner). In response to the contractor’s claim that it was entitled to contribution from the oil company for the amounts owed the vessel owner, the Fifth Circuit held that the contractor had a duty to indemnify the oil company fully for amounts the oil company owed the vessel owner. 979 F.2d at 1126-27.

19 See Pugh, Insurance Issues, supra note 2, at § 10.05[1][b]. 20 As discussed in Pugh, IADC Drilling Contracts, supra note 1, at § IV.A.4, it is sometimes

difficult to obtain pass-through protection in an underlying contract without agreeing that such underlying contractor will only owe protection to other contractors that have agreed to a similar provision.

Another important consideration is that the intent to provide pass-through coverage must be clear. See Pugh, IADC Drilling Contracts, supra note 1, at § IV.A. If the pass-through protection is to be provided by expanding the category of indemnitees, the operator must be careful to use a clear cross-reference. See Melvin Green v. Questor Drilling Corporation, 946 S.W.2d 907 (Tex. App. – Amarillo 1997, no writ); Walter Oil & Gas Corp. v. Safeguard Disposal Sys., 961 F. Supp. 931 (E.D. La. 1996) (holding that a definition of “Company” that included “subcontractors” in the preamble of a master service contract was not sufficient to entitle the Company’s drilling contractor to indemnity from the service contractor); and Pugh, IADC Drilling Contracts, supra note 1, at § VI.D.1.

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the company intends to address any applicable restrictions on contractual risk allocation. Even if operations will take place in only a few jurisdictions, there may be several different options. In any event, however, the first step is to develop a master service agreement that will fit with the drilling contract, which generally means that the indemnities will apply regardless of fault and that there will need to be a pass-through provision.21

The next step is to decide on the basic indemnity scheme of the master service agreement. One option is to use a broad “knock for knock” or broad reciprocal indemnity. This is the option preferred by contractors because it offers them broad protection against most risks of the work place except for claims by their own employees or damage to their property, which is usually very limited.22 This leads to one of the advantages of using this indemnity approach; it is easy to negotiate. In addition, as discussed below,23 this indemnity scheme complies with the mutual indemnity exception of the Texas Anti-Indemnity Act.24 The drawback, however, is that this indemnity scheme requires the operator to assume extensive risk. In theory, if there is a pass-through provision, all parties have agreed to the same contract, and everything works as intended, the operator will be protected. However, if there is any problem of solvency, enforceability, administration, or negotiation, the operator will be left with the entire risk, regardless of fault, with no back-up protection. Accordingly, the choice is one that the operator must weigh carefully, particularly because the operator cannot control the enforceability issues and some of the other variables.

Another approach to the master service indemnity/insurance program is to use a modified reciprocal indemnity. Using that approach the contractor assumes responsibility for its people and property and the people and property of its subcontractors (if it has any) and the company assumes responsibility for its people and property, but not claims by its other contractors. The advantage of such an approach is that the company assumes much less risk and, in addition, if the broad Company Group is used as a pass-through provision, each contractor will be a beneficiary of the indemnity obligations of all the other contractors. In addition, if there is a problem, whether enforceability or otherwise, the default is to leave the two contractors “at law” between themselves, rather than putting all the risk on the company. The main drawbacks of this approach are that it will likely be harder to negotiate, and, if Texas law may apply, it may well not qualify as a “mutual” indemnity. However, as discussed below, the company can obtain significant protection through insurance under Texas law because insurance that does not directly

21 In certain jurisdictions, whether by custom or applicable law, this may not be the case. For

example, it is not uncommon for certain contracts in Canada to allocate liability based on fault. In that situation, the underlying contracts will need to be consistent. On the other hand, in Wyoming and New Mexico, there are oil and gas anti-indemnity statutes with few apparent exceptions, but it is nevertheless common for drilling contracts to allocate risk regardless of fault.

22 There are some exceptions, such as well service contractors that have sophisticated down hole equipment, but those service contractors usually attempt to place risk of loss or damage to down hole tools on the operator.

23 See § V.B., infra. 24 TEX. CIV. PRAC. & REM. CODE ANN. § 127.005; see § V.B., infra.

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support the indemnity is enforceable.25 Thus, a modified reciprocal indemnity can provide a flexible scheme that avoids leaving the company with all of the residual risk while still creating a risk allocation program that gives contractors the protection they want from other contractors, at least to the extent the company can obtain such protection.26

Finally, a narrow indemnity structure is possible where the parties indemnify each other for loss or damage to their own people and property, but do not offer protection for the people and property of their other contractors and subcontractors. Narrow indemnities are much harder to negotiate because they offer far less protection to the contractor. Most importantly, a narrow indemnity will not mesh with a broad indemnity. In the event a contractor with whom an operator has a broad indemnity causes damage to a contractor with whom the operator has a narrow indemnity, the absence of a pass through will leave the operator liable for the damages.

E. Making Sure Other Contracts Fit with the Risk Allocation Program

In addition to drilling contracts and master service agreements, an oil and gas company will have various other service agreements, including construction contracts, flight service agreements, and possibly vessel charters. These contracts will need to fit together, too, if any of them will be performed at the same time as either a drilling contract or any master service agreement. The first step is to include a pass-through provision to attempt to back up any broad reciprocal indemnity obligation owed by the company. The next step is to analyze the type of

25 See Getty Oil Co. v. Ins. Co. of North America, 845 S.W.2d 794 (Tex. 1992), cert. denied

sub. nom. Youell & Cos. v. Getty Oil Co., 510 U.S. 820 (1993); see also Certain Underwriters at Lloyd’s London v. Oryx Energy Co., 142 F.3d 255 (5th Cir. 1998); § IV infra.

26 There can be variations on one of the reciprocal indemnity schemes, either as a result of the contractor attempting to exclude claims by subcontractors or as a result of “carve-outs” or add-ons to the base indemnity provisions. Excluding the contractor’s subcontractors should be avoided because the contractor usually has subcontractors for its own benefit, not for the benefit of the company. On the other hand, some carve-outs have become generally accepted, such as company assuming some liability for loss or damage to the contractor’s down hole tools while in the hole; the negotiation usually centers around the scope of the carve-out, such as whether liability should be based on depreciated value rather than replacement value and whether the contractor should bear the risk up to a cap. Other carve-outs, such as for claims arising during marine or other transportation, should be avoided if at all possible because they can create a very significant risk of a bad fit with the company’s other contracts, such as a time charter or flight service agreement. See generally discussion in § II.E., infra. Another carve-out that should be resisted if at all possible is what has come to be called the “catastrophic loss” provision, in which the contractor asks the company to indemnify contractor for all claims arising out of certain events (e.g., fire, explosion, or blowout). Such a risk shifting provision should be rejected if at all possible because it completely changes the risk allocation just because “something bad happened.” If there are particular risks that company is willing to accept, such as cost of well control, that can be spelled out separately and should not be used to justify altering the whole indemnity scheme. In addition, such a carve-out, as with most carve-outs, can create huge gaps between the indemnity obligations that the company owes (to the drilling contractor or others) and the indemnity protections that the company receives from its other contractors.

There are other indemnity variations that are sometimes used in developing a master service agreement program, such as a negligence-based indemnity scheme or a hybrid scheme. See generally Pugh, Big Picture, supra note * at § II.D.

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contract and develop an acceptable indemnity scheme. The process is similar to that of constructing the master service agreement, but the variables may not always be the same. For instance, a major construction contractor may itself attempt to require a broad reciprocal indemnity. If so, that will put pressure on the company to be sure that all contractors working in conjunction with that construction contract have the right provisions in their contracts.

Some contracts, such as flight service contracts, have historically been fault-based or used a hybrid indemnity scheme in which full indemnity is owed unless there is sole negligence on the part of company (or some other exception). With these types of contracts, a broad reciprocal indemnity, or even a modified indemnity, may not accurately reflect the risks that the parties should be assuming.27 On the other hand, the flight service agreement must fit with other contracts so a pass-through provision is necessary. The ideal is to graft the two indemnity schemes together, but that can be difficult to accomplish.

Yet another contract that may be very important is a time charter if vessels are involved in operations. Here again, the vessel owner may argue that it should be entitled to a broad reciprocal indemnity. However, such a risk allocation places extensive risk on the company because the company’s indemnity obligations in the charter will generally be fully enforceable even if the company’s indemnity protection from its other contractors are held to be governed by state law and perhaps unenforceable under a state anti-indemnity act. Moreover, such an indemnity scheme ignores the fact that passengers may well be injured while in transit but are unlikely to injure the vessel or its crewmembers. Finally, many contractors attempt to carve out liability for claims by their employees arising as passengers on a vessel, which again puts the company at risk of being caught in the middle. Suffice it to say that the indemnity scheme used in a master time charter should be carefully examined in light of other contractual obligations and protections the company may have.

F. Statutory Employer Provision

A useful tool operators should consider adding to their operational contracts is a statutory employer provision. By agreeing beforehand that a contractor’s employees are the statutory or borrowed employees of the operator, in the event that the contractor has failed to procure the necessary worker’s compensation coverage, the operator’s worker’s compensation will respond and the operator will be immune from the injured worker’s tort claims. In early 2009, the Texas Supreme Court held that a premises owner that procures Worker’s Compensation insurance and provides coverage under that policy to its subcontractors is entitled to the benefit of the exclusive remedy defense generally available to employers. Entergy Gulf States, Inc. v Summers, 2009 WL 884906, 52 Tex. Sup. Ct. J. 511 (Tex. 2009). In Summers, the court conducted a textual analysis of the Worker’s Compensation statute and found that Entergy, the premises owner that contracted with the injured party’s employer for the provision of maintenance services and agreed to provide insurance through an owner provided insurance program, met the statute’s definition of a “general contractor” and was therefore eligible to receive the benefits of the sole remedy defense.

27 In a flight service contract, for example, the owner/pilot of the aircraft has extensive control

over operations and any casualty is generally likely to be caused by operator error or a defect in the equipment. Consequently, a “regardless of fault” indemnity is more onerous in this type of contract.

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III. SPECIFIC INDEMNITY REQUIREMENTS

Once the company has decided on its general risk allocation approach, the specific requirements for obtaining indemnity protection become critical. In addition, as discussed in more detail below,28 it is very important that the insurance protections be dovetailed with the indemnity protections and extended to the same group of beneficiaries.

A. Basic Requirements for Obtaining Indemnity for the Indemnitee’s Negligence

There are certain general requirements for an enforceable indemnity provision that are particularly critical if the indemnity is intended to apply without regard to fault.29

1. There must be a clear intent to indemnify for the indemnitee’s fault

Under maritime law, an agreement to indemnify against the indemnitee’s negligence is enforceable only when the intent is expressed in clear and unequivocal terms.30 In Randall v. Chevron U.S.A., Inc.,31 for example, the court held that the words “howsoever arising” did not adequately express the parties’ intent to provide indemnity for damages caused by the indemnitee’s negligence. By comparison, the court in Theriot v. Bay Drilling Corporation32 found that language indemnifying one party “without limit and without regard to the cause or causes thereof or the negligence of any party” was clear and unequivocal.33 Likewise, Louisiana law recognizes the right of indemnification for negligence of the indemnitee only if the intention is expressed in “unequivocal terms.”34 Although the cases state that no “magic words” are required, there should be mention of the “negligence” of the indemnitee in the contractual indemnification provision to avoid any alleged ambiguity. A Louisiana court has held that a clause excluding sole negligence was sufficient to evidence an intent to encompass the negligence of the indemnitee.35

28 See § IV.A. & B., infra. 29 See Pugh, IADC Drilling Contracts, supra note 1, at § IV.A. 30 Theriot v. Bay Drilling Corp., 783 F.2d 527, 540 (5th Cir. 1986). 31 13 F.3d 888, 905-06 (5th Cir. 1994), overruled on other grounds by Bienvenu v. Texaco, Inc.,

164 F.3d 901 (5th Cir. 1999). 32 783 F.2d at 540. 33 Thus, as a general proposition, it is permissible for a contract to require that one party (the

indemnitor) indemnify another party (the indemnitee) for the indemnitee’s own negligence. It is critical, however, that the intent be clearly expressed. To avoid any potential ambiguity, the indemnity provision should include a reference to “release” as well as “defend and indemnify.”

34 Perkins v. Rubicon, Inc., 563 So. 2d 258, 259 (La. 1990); Polozola v. Garlock, Inc., 343 So. 2d 1000, 1003 (La. 1977).

35 DeWoody v. Citgo Petroleum Corp., 595 So. 2d 395, 397 (La. App. 3rd Cir. 1992).

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Although Texas courts originally followed the “clear and unequivocal” test,36 in Ethyl Corporation v. Daniel Construction Company,37 the Supreme Court of Texas adopted the “express negligence doctrine,” i.e. requiring that the intent to indemnify the indemnitee for its own negligence must be stated in specific terms. There must be an express statement that indemnification extends to the negligence of the indemnitee. It apparently is not sufficient under Texas law to provide indemnity for “causes of action of any nature whatsoever (except if caused by [indemnitee’s] sole negligence).”38 It is advisable under all three tests, and in most other jurisdictions, for the contract to be as clear as possible in its intent to cover the negligence of the indemnitee and to comply with the strictest standard, the “express negligence” test, to prevent any ambiguity.39 Moreover, unless prohibited by a particular jurisdiction, it is best to include not merely indemnification for the “negligence” of the indemnitee, but to specifically include the “sole or concurrent” fault or negligence of the indemnitee. Otherwise, the indemnitor could argue that the provision is not sufficiently clear.

2. The indemnity obligation must be “conspicuous”

Under Texas law, in addition to the express negligence requirement, the indemnity provision must also be sufficiently “conspicuous” that the indemnitor can be presumed to be sufficiently aware of and consent to the indemnity. In Dresser Industries, Inc. v. Page Petroleum, Inc.,40 the Texas Supreme Court held that indemnity provisions and releases must be “conspicuous,” and adopted a standard for conspicuousness.41 The safest drafting course is to

36 Joe Adams & Son v. McCann Const. Co., 475 S.W.2d 721, 732 (Tex. 1971). 37 725 S.W.2d 705, 707-08 (Tex. 1987). 38 Linden-Alimak, Inc. v. McDonald, 745 S.W.2d 82, 85-6 (Tex. App. – Forth Worth 1988),

relying on Singleton v. Crown Cent. Petroleum Corp., 729 S.W.2d 690 (Tex. 1987) (per curiam) (Agreement which provided indemnity for “any and all claims, demands, * * * of every kind and character whatsoever, * * * excepting only claims arising out of accidents resulting from the sole negligence of Owner” did not satisfy the express negligence test.). Compare XL Specialty Ins. Co. v. Kiewitt Offshore Services, Ltd., 513 F.3d 146, 150 (5th Cir. 2008), in which the Fifth Circuit, interpreting Texas law, recently held that an indemnity provision covering “any and all claims . . . whether or not caused in part by . . . active or passive negligence or other fault” except in cases of sole negligence satisfied the “express negligence doctrine.”

39 In addition, the “magic language” or “express negligence” language should extend to all indemnified parties.

40 853 S.W.2d 505, 510-11 (Tex. 1993). 41 See Tex. BUS. & COM. CODE ANN. § 1.201(10) (Vernon 1988). Indemnity provisions or

releases located on the back of work orders in a series of uniformly numbered paragraphs with no heading and without contrasting type are not sufficiently conspicuous. Dresser, 853 S.W.2d at 511. Similarly, an indemnity provision on the back of a contract in fine italic print is not conspicuous. McGehee v. Certainteed Corp., 101 F.3d 1078, 1080 (5th Cir. 1996). In contrast, an indemnity or release that appears in an unhidden paragraph on the front side of a one page contract under a clearly identified and separate heading (and not surrounded by unrelated terms) satisfies the conspicuousness requirement. Enserch Corp. v. Parker, 794 S.W.2d 2, 9 (Tex. 1990). These requirements of conspicuousness are inapplicable, however, when the indemnitor possesses actual knowledge of the indemnity agreement. Dresser, 853 S.W.2d at 508 n.2.

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comply with the conspicuousness requirement, which should be easily satisfied by bolding or using all caps for the “magic language” portion of the indemnity provision, or otherwise highlighting the applicable language.42

B. The Scope of the Indemnity

The scope of indemnity depends on the specific contract language. If particular operations are to be treated differently, that must be specifically stated. On the other hand, if the indemnity broadly covers any claims “arising out of” the work, the key inquiry will likely be whether the injuries were related to the work, or the injured person’s presence, not whether the activity of the tortfeasor arose out of the contract. In Rodrigue v. LeGros,43 the plaintiff was the captain of a vessel hired by Mobil to provide services to a rig drilling a well for Mobil. While transiting to the drilling rig, the plaintiff’s vessel was struck by another vessel owned by Mobil but not engaged in work being performed under the drilling contract. The court found that Mobil was entitled to indemnity, holding that the injury arose out of the performance of work under the contract. The appellate court stated, “It does not matter that the fault-cause of the injury, the activity of Mobil’s [other vessel], did not arise out of the performance of ‘the Work,’” and the Louisiana Supreme Court affirmed.44 Accordingly, except for special maritime issues discussed below, if the indemnity provision covers claims directly or indirectly arising out of or in connection with the work, that should be sufficient to cover most situations contemplated by the parties. Even further clarity can be achieved by adding, “or presence on any premises or mode of transportation directly or indirectly relating to or in connection with the work.”

Maritime contracts do present special concerns. The Rodrigue court distinguished

Lanasse v. Travelers Insurance Company,45 which involved a time charter of a vessel and contained language limiting the indemnity to “claims for damages . . . directly or indirectly connected with the possession, navigation, management and operation of the vessel.” The Lanasse court held that the indemnity language was “too loose” to provide coverage to the claim because the cause of the accident, negligent operation of the crane, was not even remotely related to the operation, navigation or management of the vessel.46 In fact, however, the accident happened during loading operations, so there was arguably much more connexity than the court acknowledged. In any event, however, the Lanasse analysis, which impacts both indemnity and insurance,47 creates significant scope issues for an operator because many vessel related

42 See Cleere Drilling Co. v. Dominion Exploration, 351 F.3d 642, 647 (5th Cir. 2003)

(implying that the IADC form’s warnings and boldface headings meet the Texas conspicuousness standard).

43 552 So. 2d 703 (La. App. 3rd Cir. 1989), aff’d 563 So. 2d 248 (La. 1990). 44 Rodrigue, 552 So. 2d at 705-06. 45 450 F.2d 580, 582 (5th Cir. 1971), cert. denied sub nom. Chevron Oil Co. v. Royal Ins. Co.,

406 U.S. 921 (1972). 46 Id. at 582 n.4, 583. 47 See § IV.B.2., infra.

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accidents occur in a loading or unloading situation, while the vessel is adjacent to a dock or a platform. The cases since Lanasse have analyzed whether contractual indemnity provisions are sufficiently broad to require indemnity coverage beyond that allowed in Lanasse. In the latest of a series of cases, Gaspard v. Offshore Crane and Equipment Company,48 the Fifth Circuit held that indemnity was available for an injury sustained on board a vessel resulting from platform negligence because the indemnity provision included indemnity for personal injury or death arising out of or in any way directly or indirectly connected with the “loading or unloading of cargo.”49 Consequently, any indemnity covering maritime operations should include an express reference to claims arising out of loading or unloading of cargo, and, to be as expansive as possible, to claims arising out of ingress and egress. In the absence of such language, the company may find that it is not entitled to indemnity in the situations it needs it most, such as when a drilling contractor negligently injures a vessel crewmember and the company owes the drilling contractor a broad reciprocal indemnity; even if the time charter has a pass-through provision, the vessel will not owe indemnity if it has a viable Lanasse defense. IV. MAXIMIZING INSURANCE PROTECTION

A. Summary of Important Insurance Requirements

Generally, the insurance requirements should dovetail with the indemnity provisions, both for the purpose of insuring solvency and for the purpose of maximizing enforceability of the agreed risk allocation.50 Accordingly, there are certain insurance requirements that should be included by the company whenever possible.

The most critical insurance requirements are an additional insured provision, a waiver of subrogation provision, and a provision that insurance required under the contract will be primary.51 In addition, all three of these benefits should be owed to all entities for whom the company desires protection, i.e., all indemnified parties. It is the extension of the insurance

48 106 F.3d 1232 (5th Cir. 1997). 49 Id. at 1234. Similarly, in Clement v. Marathon Oil Company, 724 F. Supp. 431, 433 (E.D.

La. 1989), the court allowed indemnity for defense where the indemnity provision provided indemnity for “the related activities of [the oil company] in the vicinity [of the vessel], including but not limited to loading or unloading.” Using a similar analysis, in Lavergne v. Chevron U.S.A., Inc., 782 F. Supp. 1163, 1170-71 (W.D. La. 1991), aff’d, 980 F.2d 1444 (5th Cir. 1992), the court upheld a Lanasse argument and denied indemnity based on the absence of language referencing loading or unloading. See generally Pugh, Big Picture, supra note * at § III.B.

50 See Pugh, IADC Drilling Contracts, supra note 1, at § IV.B. 51 In Hodgen v. Forest Oil Corp., 862 F. Supp. 1567 (W.D. La. 1994), aff’d in part, questions

certified to Louisiana Supreme Court, 87 F.3d 1512 (5th Cir. 1996), cert. quest. denied, 681 So. 2d 354 (La. 1996), aff’d, 115 F.3d 358 (5th Cir. 1997), the oil company was covered as an additional insured in the vessel’s Protection & Indemnity (P&I) policy. However, the district court held that the vessel policy had a stronger “other insurance” clause (“escape clause”) such that the oil company could not recover anything from the vessel’s insurers even though the vessel was undisputedly an additional insured under the P&I policy (and would otherwise have been entitled to coverage).

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protections to Company Group, including the company’s other contractors and subcontractors, that will maximize the company’s ability to meet any broad reciprocal indemnity obligations. This is particularly true given that there are certain instances in which insurance can provide more protection than indemnity.52

The specific coverages and endorsements required under each contract will differ, although

there will generally, at a minimum, be some combination of worker’s compensation/employer’s liability, automobile liability, commercial general liability, and excess liability coverage. The various other coverages, and specific endorsements, that should be required is beyond the scope of this paper,53 but the following is a summary of the main general insurance protections that should be required to maximize the implementation of a risk allocation program.

• Insurance protection should be extended to all indemnified parties, i.e., use same defined

term, such as “Company Group.”

• The contract should require a waiver of subrogation in favor of all indemnified parties. This is particularly important in any major contract because of the magnitude of the property damage risk if there is loss or damage to a drilling rig, a contractor’s vessel, or any expensive piece of contractor equipment.

• It is important that all indemnified parties be named as additional assureds.

• The insurance should be required to be primary as respects any other coverage in favor of

the indemnitees (i.e., all of the indemnified parties), at least for risks assumed by the indemnitor. This precaution will avoid any argument that the indemnitee’s insurer should also be required to respond in the event of a claim (based on “other insurance” clauses present in nearly all liability policies).54

• The insurance requirements should state that the minimum limits are not a limitation or

restriction on indemnity.55

• The contract should include a provision requiring all subcontractors to meet the minimum insurance requirements (unless the company concludes that a lesser requirement or leaving the issue up to the contractor is acceptable).

• There should be a requirement of advance notice to the company (usually thirty days) of

any policy cancellation, non-renewal, or material change.

52 See § § IV.B.; V.A.; V.E., infra. 53 See Pugh, Insurance Issues, supra note 2, at § 10.02 for a discussion of particular types of

coverage. 54 See Hodgen v. Forest Oil Corp., 862 F. Supp. 1567, 1576 (W.D. La. 1994). 55 Dickerson v. Continental Oil Co., 449 F.2d 1209, 1222 (5th Cir. 1971), cert. denied sub nom.

Ins. Co. of North America v. Continental Oil Co., 405 U.S. 934 (1972). If Texas law, or the law of some other jurisdiction, may require that the indemnity be limited, the following parenthetical can be added: “(except to the extent expressly mandated by applicable law).”

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• The applicable policies should be required to provide adequate territorial and navigation

limits.

• There should be a requirement that the policies be obtained from acceptable/suitable insurers.

• Where required by applicable law, there should be minimum limits (i.e., Texas “unilateral” indemnity).56

• If the contract includes a Texas “mutual” indemnity, the contract should include language in the indemnity provision requiring that each party obtain insurance for the benefit of the other (and its indemnified parties) as indemnitees, with a reference to some minimum insurance or self insurance limit.57

• For protection and indemnity policies, it is important to require an endorsement providing

full coverage for all indemnified parties regardless of any “as owner” coverage restriction,58 and to delete any restriction of coverage in the event of limitation of liability.59

• Depending on applicable law, insurance may provide more protection than indemnity.

Under Getty Oil Company v. Insurance Company of North America,60 insurance that does not directly support an indemnity may be fully enforceable without regard to the Texas Anti-Indemnity Act. But if the Louisiana Oilfield Indemnity Act may apply, consider possible application of Marcel v. Placid Oil Company,61 which requires that the party receiving the insurance benefit bear all material cost of the insurance.

56 See § V.B., infra. 57 See TEX. CIV. PRAC. & REM. CODE ANN. § 127.001, et seq.; see also § V.B., infra. 58 Lanasse, 450 F.2d at 580; Helaire v. Mobil Oil Co., 709 F.2d 1031, 1042 (5th Cir. 1983);

Texas Eastern Transmission Corp. v. McMoRan Offshore Exploration Co., 877 F.2d 1214 (5th Cir. 1989), cert. denied sub nom. Marathon Oil Co. v. McMoRan Offshore Exploration Co., 493 U.S. 937 (1989); Gaspard, 106 F.3d at 1232. In addition to taking a restrictive view of the indemnity provision, as discussed above, § III.B., supra, the Lanasse court interpreted the applicable insurance policy restrictively as well, and that restrictive interpretation needs to be counteracted by an express insurance requirement. See § III.B., supra.

59 Crown Zellerbach Corp. v. Ingram Industries, Inc., 783 F.2d 1296 (5th Cir. 1986), cert. denied, 479 U.S. 821 (1986); see also Champagne, 2002 WL 31387134 at *6. It is common for a shipowner’s liability policy to provide that the policy’s limit of liability is reduced to the amount of the limitation fund if the shipowner is entitled to assert limitation. However, time charterers and other non-vessel owners are not entitled to limitation, and that means that the company must include a requirement that coverage not be reduced or be left with no recourse.

60 845 S.W.2d at 803-05. For a discussion of the Getty exception to the Texas Anti-Indemnity Act, see § V.B., infra.

61 11 F.3d 563, 569 (5th Cir. 1994). For a discussion of the Marcel exception to the LOIA, see § V.A., infra.

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• Remember that if maritime law applies, insurance protection is enforceable even if the

indemnity provision is invalid under section 905(b) of the Longshore Act.62

B. Insurance and Indemnity Interplay

1. Insurance provisions may prime indemnity provisions

Whenever possible, insurance requirements should fit with the applicable indemnity provisions.63 An incautious statement in an indemnity provision can lead to an otherwise enforceable indemnity obligation being limited to the amount of insurance required under the contract. For example, in Dickerson v. Continental Oil Company,64 language requiring the purchase of insurance with “limits of not less than” a specific dollar amount “to cover all obligations imposed” by the indemnity provision was interpreted as restricting the indemnity recovery to the required minimum limit of insurance. In Smith v. Shell Oil Company,65 however, the court refused to limit a contractor’s indemnity liability to the minimum insurance limits required by the contract. Unlike Dickerson, the contract language in Smith did not state that the insurance was intended “to cover all obligations imposed” by the indemnity clause so the court concluded that there was no clear intent to limit liability to the stated limits of the required insurance. The Dickerson limitation is easily resolved by adding a sentence to the contract stating that the minimum insurance requirements are not intended in any way to limit the contractor’s indemnity obligations.

Where the indemnity portion of a contract required one party to indemnify the other, but the insurance section required that the indemnitor be named as an additional insured, the Fifth Circuit concluded, in Ogea v. Loffland Bros. Company,66 that the insurance obligation was primary and the indemnity obligation only secondary. Under this holding, when there are conflicting indemnity and insurance requirements, the insurance of the indemnitee must first respond up to the dollar limit of coverage. Only then must the indemnitor honor its hold harmless obligation.67 In practice, this situation may be eliminated by the addition of a sentence limiting the applicability of the additional assured requirement to the risks and liabilities assumed by the party providing the insurance coverage.

62 See discussion in § V.E., infra. 63 See Pugh, IADC Drilling Contracts, supra note 1, at § IV.B.2. 64 449 F.2d at 1222; Hicks v. Ocean Drilling & Exploration Co., 512 F.2d 817, 826 (5th Cir.

1975), cert. denied sub nom. H. B. Buster Hughes, Inc. v. Ocean Drilling and Exploration Co., 423 U.S. 1050 (1976).

65 746 F.2d 1087, 1095 (5th Cir. 1984). 66 622 F.2d at 186, 189-90 (5th Cir. 1980). 67 See also Tullier v. Halliburton Geophysical Services, 81 F.3d 552 (5th Cir. 1996); Kelpac v.

Champlin Petroleum Co., 842 F.2d 746 (5th Cir. 1988); Woods v. Dravo Basic Materials Co., 887 F.2d 618 (5th Cir. 1989); Ridings v. Danos and Curole Marine Contractors, Inc., 723 So. 2d 979 (La. App. 4th Cir. 1998); but see Spell v. NL Indus., Inc., 618 So. 2d 17, 19 (La. App. 3d Cir. 1993) (apparently an aberration resulting from contractor’s failure to obtain additional assured coverage for other party as required by contract).

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Sometimes insurance protection is more likely to be enforced than an indemnity obligation. In Getty Oil Company v. Insurance Company of North America,68 the Texas Supreme Court held that the Texas Anti-Indemnity Act does not prohibit enforcement of an additional insured provision that does not directly support an invalid indemnity agreement. Accordingly, insurance protection can be fully enforceable under a contract governed by Texas law, even if the indemnity provision is invalid.

In Certain Underwriters at Lloyd’s v. Oryx Energy Co.,69 Mallard’s drilling contract with Oryx required Mallard to indemnify Oryx and to name Oryx as an additional assured under Mallard’s policy. When a Mallard employee sued Oryx for personal injury, Mallard’s insurer (Lloyd’s) contributed $11,050,000 toward a settlement, but asserted that the Texas Anti-Indemnity Act barred payments in excess of $500,000. Lloyd’s then sued Oryx for reimbursement, and the district court held that the indemnity was unenforceable in excess of $500,000. The court also agreed that Oryx was entitled to insurance only up to $500,000, based on the contract language that made Oryx additional assured “to the extent of the indemnity provided by Mallard under this Contract.” The Fifth Circuit, citing Getty, reversed, noting that the obligation at issue, to provide additional assured status, was not regulated by the Texas Indemnity Act provided that the insurance did not support the void indemnity. The Fifth Circuit ruled that Oryx did not claim the right of insurance coverage pursuant to the indemnity, but as an additional assured. Therefore, the court held that the insurance obligation was valid and Oryx was entitled to full coverage.

In light of Getty and Oryx, it is very important for the company to include language that will meet the Getty test. There were two prongs to the Getty analysis, and it is not clear which is critical or whether either is talismanic. However, to maximize protection, the contract should address both prongs as follows. First, the indemnity and insurance provisions in the contract should be separate, and there should be a provision in the indemnity section that provides for supporting the indemnity obligations with insurance. Second, the insurance provision of the contract should apply to all insurance policies of the contractor relating to the work, not just those required by the contract.70

2. Important vessel coverage endorsements

Protection & Indemnity (“P&I”) policies typically provide coverage to an insured in its capacity “as owner” of a vessel, which can be problematic in the context of offshore operations. When an oil company is named as an additional insured in a vessel owner’s P&I policy, the “as owner” language in the policy has limited the oil company’s coverage to liability incurred in its capacity as charterer of the vessel. In Lanasse v. Travelers Insurance Company,71 the Fifth Circuit held that there was no P&I policy coverage for the platform-based negligence of the oil company’s crane operator because the oil company’s liability had not been incurred “as owner of

68 845 S.W.2d 794, 803 (Tex. 1992); see also Oryx, 142 F.3d at 258-60. 69 142 F.3d 255, 285-60 (5th Cir. 1998). 70 See discussion in § V.B., infra. 71 450 F.2d 580, 584 (5th Cir. 1971).

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the vessel.” The Fifth Circuit in Randall v. Chevron U.S.A., Inc.72 clarified that negligence of an operator in directing a vessel to operate in rough weather conditions constitutes negligence “as time charterer” and therefore qualifies as liability incurred “as owner” of the vessel for purposes of obtaining P&I coverage. Subsequent to Lanasse, oil companies began including provisions in their charter agreements requiring vessel operators to have the “as owner” coverage limitation deleted from their P&I policies. The Fifth Circuit in Helaire v. Mobil Oil Company73 agreed that deletion of the “as owner” restriction expanded the scope of P&I coverage to include liability an oil company might have in its capacity as a platform operator. However, the Fifth Circuit’s decision in Texas Eastern Transmission Corp. v. McMoRan Offshore Exploration Company74 appeared to have negated the ability to delete the “as owner” clause. In Texas Eastern, faced with an oil company’s non-vessel owner liability and a contractual provision allegedly seeking to expand the vessel owner’s P&I policy’s scope, the Fifth Circuit held, without citation of Helaire, that there was no language in the policy that could be deleted to extend coverage to non-shipowners. More recently, however, the Fifth Circuit has held, in Gaspard v. Offshore Crane and Equipment, Inc.,75 that the deletion of the “as owner” language may extend coverage to the oil company’s vessel related negligence, committed as platform owner. Deletion of the “as owner” clause creates, at the very least, an issue of material fact as to whether such coverage exists.76 The court relied on Helaire for the principle that deletion of “as owner” can expand coverage to include negligence as platform operator. Thus, if the parties intended for the deletion of the “as owner” language to broaden the scope of coverage, then such coverage existed. The court in Gaspard addressed the apparent inconsistency between its holding and Helaire on the one hand and Texas Eastern on the other. In Gaspard and Helaire, the parties agreed to the deletion of the “as owner” language from the P&I policy, effectively broadening the scope of the coverage; however, in Texas Eastern the contractual provision was not as clear. The Gaspard court interpreted Texas Eastern as concluding that the charterer simply required that its coverage as additional insured should be co-extensive with that of the vessel owner; because the owner was not covered for acts of platform negligence, neither was the charterer. While Gaspard’s interpretation of the Texas Eastern rationale may be subject to question, it is now clear that contractual and policy language can be expanded to provide coverage for platform negligence and that deletion of the “as owner” language is therefore crucial to achieve maximum protection. Accordingly, there should be language in the contractual insurance provision requiring an affirmative endorsement expanding the coverage afforded by the P&I policy to provide full coverage for liability of the company (and Company Group) whether or not incurred “as owner” of the vessel and to delete any “as owner” language.77

72 13 F.3d at 905-06. 73 709 F.2d at 1031. 74 877 F.2d at 1227-28. 75 106 F.3d at 1232. 76 Id. 77 As discussed in § III.B., supra, it is also important to expand the indemnity provision to cover

such activities as loading and unloading and ingress and egress.

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Importantly, the Lanasse analysis does not apply in the context of hull policies. In Wiley v. Offshore Painting Contractors, Inc.,78 the court held that the issuer of a hull policy on a vessel damaged in a fire caused by negligent operation of a platform was not entitled to indemnification from the platform owner. The platform owner was an additional insured on the hull policy that covered the loss whether or not it resulted from the platform owner’s operation or ownership of the vessel. V. RESTRICTIONS ON INDEMNITY AND INSURANCE

In putting together a risk allocation program, the company must take into account the impact of restrictions on obtaining indemnity and insurance, including oilfield anti-indemnity statutes,79 and section 905(b) of the Longshore and Harbor Workers’ Compensation Act (“LHWCA”).80 As a general rule, these statutes are considered to be based on public policy and, to varying degrees, invalidate certain contractual indemnity requirements and, to a somewhat lesser extent, contractual insurance provisions.

A. The Louisiana Oilfield Indemnity Act

Subsection A of Louisiana Revised Statute section 9:2780, commonly known as the Louisiana Oilfield Indemnity Act (“LOIA”), contains a legislative finding that there was a fundamental inequity forced on certain contractors “in some agreements pertaining to a well for oil, gas, or water” with respect to defense or indemnity provisions. The legislature declared that a provision requiring indemnification would be void as against public policy to the extent that it provided indemnity for negligence on the part of the indemnitee or its agents, employees or independent contractors directly responsible to the indemnitee. The LOIA addresses only indemnification provisions for death or bodily injury to persons; it does not preclude indemnity for property damage. Also, the federal courts have interpreted the LOIA as only applying to agreements “pertaining to a well,”81 and the Fifth Circuit has adopted a two-step process for determining whether the LOIA applies.82 First, the

78 716 F.2d 256, 257 (5th Cir. 1983) (on reh’g). 79 See Pugh, Insurance Issues, supra note 2, at § 10.05[2]. 80 33 U.S.C. § 905(b). Also of potential concern, depending on the circumstances, are anti-

indemnity statues relating to construction. While it can be argued that such statues were not intended to impact oil and gas operations, the language of such statutes tends to be very broad and might be used as the basis of a defense to indemnity under certain circumstances.

81 For example, in Clarkco Contractors, Inc. v. Texas Eastern Gas Pipeline Co., Div. of Texas Eastern Transmission Corp., 615 F. Supp. 775 (M.D. La. 1985), a district court found the LOIA inapplicable to a contract to perform services on an inland natural gas transmission line. The court acknowledged that subsection C of the LOIA referred to the “transportation” of oil or gas; however, the court noted that subsection C had to be read in conjunction with subsection A which references “agreements pertaining to wells for oil, gas, or water, or drilling for minerals.” As court in Clarkco explained that, in enacting the LOIA, “the Legislature intended to include only transportation contracts pertaining to wells or drilling for minerals.” Id. at 781.

82 See Transcontinental Gas Pipe Line Corp. v. Transp. Ins. Co., 953 F.2d 985 (5th Cir. 1992); see also Lloyds of London v. Transcontinental Gas Pipe Line Corp., 38 F.3d 193 (5th Cir. 1994).

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agreement must pertain to a well. Second, the court must conduct an examination of the contract’s involvement with operations related to the exploration, development, production, or transportation of oil, gas, or water.83 The LOIA does not permit contractual contribution, i.e. in a contract subject to the LOIA, there can be no agreement that purports to provide indemnification for damages attributable to the comparative fault of the indemnitor.84 The court in Meloy v. Conoco, Inc.,85 held that the LOIA totally invalidates any provision in any agreement that requires defense or indemnification “where there is any negligence or fault on the part of the indemnitee.” If the indemnitor is anyone other than the plaintiff’s employer, contractual contribution is unnecessary because tort contribution will allocate proportionate fault. As to the employer, however, Meloy prohibits any reimbursement for the employer’s proportionate fault if there is any fault on the part of the indemnitee. Where Louisiana tort law is applicable, the effect of Meloy should now be minimal because Civil Code Article 2324 has been amended to negate solidary liability. The issue may still exist, however, in instances in which Louisiana law governs the contract, but the substantive tort law is other than Louisiana law. Meloy does permit the recovery of costs of defense if there is no negligence or fault on the part of the indemnitee and there is some provision for defense costs in the contract.86 “An agreement providing for cost of defense in the event of a meritless suit against the indemnitee is outside the scope of the LOIA.”87

In Melancon v. Amoco Production Company,88 the Fifth Circuit held that the LOIA does not apply unless there is a finding of negligence or fault on the part of the indemnitee.89 Therefore, a successful legal defense, such as borrowed employee status (which obviates the need for a determination of fault or negligence) was sufficient to validate the indemnity obligation. Faced with a similar issue, however, the Louisiana Third Circuit, in Phillips Petroleum Company v. Liberty Services,90 ruled to the contrary, stating that the existence of a

83 Transcontinental Gas Pipe Line, 953 F.2d at 994; see also Broussard v. Conoco Inc., 959 F.2d 42 (5th Cir. 1992) (LOIA applicable to contract to provide catering and maintenance services to offshore platforms); Hanks v. Transcontinental Gas Pipe Line Corp., 953 F.2d 996 (5th Cir. 1992) (LOIA inapplicable to contract for construction of intermediate segment of interstate gas pipeline); Thomas v. Amoco Oil Co., 815 F. Supp. 184 (W.D. La. 1993) (LOIA not triggered based on lack of sufficient nexus between “a particular well” and the inland natural gas pipeline which was the subject of the agreement); Brumfield v. Conoco, No. 93-1712, 1994 WL 321080 (E.D. La June 28, 1994) (LOIA applied to void indemnity provision in blanket contract pursuant to which workover operations were performed at various wells on an offshore platform); Fontenot v. Chevron U.S.A., 676 So. 2d 557 (La. 1996); Hutchins v. Hill Petroleum Co., 609 So. 2d 312 (La. App. 3rd Cir. 1992); Griffin v. Tenneco Oil Co., 519 So. 2d 1194, 1196 (La. 1988).

84 Meloy v. Conoco, Inc., 504 So. 2d 833 (La. 1987). 85 Id. at 836-37. 86 Perry v. Chevron U.S.A., Inc., 887 F.2d 624, 629-30 (5th Cir. 1989). Whether a “duty to

defend” is alone sufficient was not decided in Perry. 87 Id. at 839. 88 834 F.2d 1238 (5th Cir. 1988). 89 See also Forest Oil Corp. v. Ace Indemnity Insurance Co., No. Civ. A. 04-0435, 2004 WL

1900488, at *5, (E.D. La. Aug. 24, 2004). 90 657 So. 2d 405 (La. App. 3rd Cir.), writ denied, 661 So. 2d 1354 (La. 1995).

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valid legal defense that does not require a determination of negligence or fault is not enough to render the LOIA inapplicable. Consequently, a successful defense does not insure a valid claim for defense costs.

A settlement by the company may also jeopardize a claim for defense costs. The Fifth Circuit has held, in Tanksley v. Gulf Oil Corporation,91 that a potential indemnitee cannot settle a plaintiff’s suit without waiving its claim for defense costs under Meloy because the decision to settle and “forego a trial” prevents a determination that the indemnitee was without fault and therefore entitled to defense costs.92 However, Tanksley’s position on this point has been questioned by dicta in Fontenot v. Chevron U.S.A. Inc.,93 and apparently rejected by two other state courts.94

Importantly, the indemnitee’s capacity of fault appears to be irrelevant in the context of the LOIA. In Hodgen v. Forest Oil Corporation,95 an oil company pursued defense costs under Meloy based on the court’s finding that it was not at fault in its capacity as platform owner. The district court rejected that argument based on the judicial determination that the oil company was at fault in its capacity as time charterer of the vessel on which the plaintiff was injured. The Fifth Circuit concluded that it was unclear whether Meloy would encompass such a situation and certified the question to the Louisiana Supreme Court, which declined the opportunity to resolve the issue. The Fifth Circuit then rejected the oil company’s argument, noting that the LOIA speaks of entities rather than capacities. Because the oil company, as a whole, was not without fault, the LOIA invalidated the indemnity provision. Consequently, fault in any capacity appears to be sufficient to invoke the LOIA.

There are few exceptions to the LOIA. Even insurance protection for indemnity is generally invalid. Subsection G of the LOIA invalidates any contractual requirement that a party be named as an additional insured or be granted a waiver of subrogation if there is negligence on the part of the indemnitee,96 and the defense is available to both the indemnitor and its insurer

91 848 F.2d 515 (5th Cir. 1988). 92 It should be noted that a different conclusion is reached when the LOIA is not applicable.

See Liberty Mut. Ins. Co. v. Pine Bluff Sand & Gravel Co., 89 F.3d 243 (5th Cir. 1996). Nevertheless, the potential claim for defense costs can be asserted by third party demand prior to any judicial determination of freedom from fault; the merits of the claim for defense costs are simply dependent upon the outcome of the plaintiff’s main demand against the indemnitee. Berninger v. Georgia-Pacific Corporation, 582 So. 2d 266 (La. App. 1st Cir. 1991).

93 676 So. 2d at 557 n.7. 94 See Phillips Petroleum, 657 So. 2d at 409; Ridings v. Danos and Curole Marine Contractors,

Inc., 723 So. 2d 979 (La. App. 4th Cir. 1998); but see A.M.C. Liftboats, Inc. v. Apache Corporation, 2008 WL 631244 (E.D. La. March 5, 2008) (holding that the negative history surrounding Tanksley is not enough to convince the federal courts to not follow it).

95 862 F. Supp. 1567 (W.D. La. 1994), aff’d in part, questions certified to Louisiana Supreme Court, 87 F.3d 1512 (5th Cir. 1996), cert. quest. denied, 681 So. 2d 354 (La. 1996), aff’d, 115 F.3d 358 (5th Cir. 1997).

96 Babineaux v. McBroom Rig Building Service, Inc., 806 F.2d 1282 (5th Cir. 1987); see generally Ridings, 723 So. 2d 979 (if LOIA applied to MSA, indemnitee would not be entitled to additional assured status in accordance with the MSA).

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when a demand is made for additional insured protection by the indemnitee. To the extent there is alleged privity of contract between the indemnitee/additional insured and the insurer under the additional insured provision, that agreement is considered “collateral to” a covered agreement, as set forth in Subsection I of the LOIA.

Marcel v. Placid Oil Company does provide a narrow exception to this rule if the indemnitee/additional insured is able to prove that it has actually paid for the required insurance.97 However, language that a contractor “may” be required to invoice insurance premiums allocable to work performed does not satisfy Marcel.98 Also, an unwritten “working policy” whereby contractors could factor in the cost of procuring insurance when submitting bids to work likewise does not satisfy the exception.99 Special problems can also arise where the proposed indemnitor is self-insured, making calculation of the premium difficult.100

B. The Texas Anti-Indemnity Act

Sections 127.001 through 127.007 of the Texas Civil Practice and Remedies Code Annotated are the most recent version of the Texas Anti-Indemnity Act. It applies to agreements pertaining to a well or to a mine, but section 127.001(4)(B)(i) specifically excludes purchasing, selling, gathering, storing, or transporting gas or natural gas liquids by pipeline or fixed associated facilities. The Texas Anti-Indemnity Act now allows unilateral indemnity up to $500,000101 and mutual indemnity limited to the extent of coverage and dollar limits each party as indemnitor has agreed to obtain for the benefit of the other party as indemnitee.102 Section 127.001(3) defines “mutual indemnity obligations” as indemnity obligations whereby the

97 11 F.3d 563 (5th Cir. 1994); see also Patterson v. Conoco, Inc., 670 F. Supp. 182 (W.D. La.

1987); Rogers v. Samedan Oil Corp., 308 F.3d 477 (5th Cir. 2002). In Rogers, the Fifth Circuit distinguished Amoco Production Company v. Lexington Insurance Company, 745 So. 2d 676 (La. App. 1st Cir. 1999), writ denied, 755 So. 2d 235 (La. 2000), and held that payment of the $500 premium set by the insurer entitled the oil company to enforce its additional insured status.

98 Brumfield v. Conoco, No. 93-1712, 1994 U.S. Dist. LEXIS 8945 (E.D. La. June 28, 1994). 99 Hodgen, 87 F.3d at 1529. 100 One other possible exception relates to a waiver of subrogation, but this exception may be

limited in scope. In Fontenot v. Chevron U.S.A., 676 So. 2d 557 (La. 1996), the Louisiana Supreme Court enforced a waiver of subrogation clause contained, pursuant to the oil company’s requirement, in a contractor’s workmen’s compensation insurance policy. The Court explained that such waivers are invalid only if they “frustrate or circumvent the prohibitions” of the LOIA. La. R.S. § 9:2780(G). Absent an indemnity claim, the waiver of subrogation clause itself does not frustrate or circumvent the prohibitions of the LOIA. In such cases, the oil company is not shifting its liability to the contractor or its insurer. Moreover, voiding the waiver of subrogation clause would actually punish the injured employee, as the insurer would be reimbursed out of his recovery. Accordingly, at least in this case, voiding the waiver would hinder, rather than promote, the purposes of the LOIA.

101 Prior to its amendment in 1989, the Texas Anti-Indemnity Act, by its terms, did not apply if the parties agreed in writing that the indemnity obligation would be supported by available liability insurance of the indemnitor. The indemnity allowed, however, was limited to the coverage and dollar limits of the insurance agreed to be furnished, and the amount of insurance required could not exceed twelve times the state’s basic limits for personal injury at $25,000 (i.e., $300,000).

102 TEX. CIV. PRAC. & REM. CODE ANN § 127.005.

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parties to the contract agree to indemnify one another “and each other’s contractors and their employees” for claims brought by their respective employees and their respective contractors and their employees and invitees for bodily injury, death, and damage to property. Section 127.001(6) also defines a “unilateral indemnity obligation” as one whereby the indemnitor agrees to indemnify the indemnitee for personal injury or death to the employees of the indemnitor or of the indemnitor’s contractors, with no reciprocal indemnification by the indemnitee to the indemnitor. No case specifically states that all elements of the definition of “mutual indemnity” must be met for the indemnity to qualify as mutual, and the presence of some differences will not invalidate the indemnity provision.103 In addition, there is no express requirement that the parties indemnify each other for their respective property damage claims, but the decision in Tesoro Petroleum Corporation v. Nabors Drilling USA, Inc.104 seems to sanction such an interpretation.

Neither a unilateral nor a mutual indemnity obligation will be enforced unless the parties have agreed in writing that the obligation will be supported by liability insurance coverage that is to be furnished by the indemnitor. Under prior jurisprudence, where the indemnitor voluntarily provided more coverage than required, an indemnitee was allowed to collect indemnity up to the amount of insurance actually obtained.105 The court in Greene’s Pressure Testing & Rentals v. Flournoy Drilling Co.,106 questioned whether that rationale still applies to the current provisions of the Texas Anti-Indemnity Act.107 In addition, the court in Greene’s explicitly stated that the parties agreed that the indemnity provision was a “mutual” indemnity and that the unilateral indemnity provisions of section 127.005(c) did not apply. It is not clear whether the parties acquiesced in this result because it seems questionable whether an attempt to obtain mutual indemnity protection should automatically negate the ability to obtain a “unilateral” indemnity.

Significantly, the Texas Anti-Indemnity Act does not apply to insurance not directly supporting the indemnity. In Getty Oil Company v. Insurance Company of North America,108 the applicable insurance provision was not subject to the Texas Anti-Indemnity Act because it did not directly support the indemnity provision. The applicable section was a four-paragraph provision entitled “4. INSURANCE AND INDEMNITY.” The first paragraph outlined certain required insurance policies and coverages, and the second paragraph required that all “insurance coverages carried by Seller, whether or not required hereby,” extend to and protect purchaser. The third paragraph contained an indemnity provision, and the last sentence stated: “Insurance covering this indemnity agreement shall be provided by Seller.” The court articulated two reasons for its conclusion that the insurance provision did not “directly support” the indemnity provision. First, the court noted that the last sentence of the indemnity provision expressly required that seller obtain insurance covering the indemnity agreement, and the court held that such insurance requirement was the one directly supporting the indemnity, not the sentence in

103 Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487, 495 (5th Cir. 2000). 104 106 S.W.3d 118 (Tex. App.— Houston [1st Dist.] 2002, pet. denied). 105 Campbell v. Sonat Offshore Drilling, Inc., 979 F.2d at 1126. 106 113 F.3d 47 (5th Cir. 1997). 107 Despite this comment in dicta, there should be a good argument that the rationale of the prior

jurisprudence remains applicable. Whether that argument will be accepted has not yet been resolved. 108 845 S.W.2d 794 (Tex. 1992).

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the insurance paragraph. Second, the court noted that the insurance requirements applied to all policies of the Seller, not just the insurance required by the contract. The claims against the seller were found to be res judicata, but the claims against the insurers were allowed. It is not clear from the opinion whether both prongs of the court’s analysis have to be met in order for Getty to apply.109

The Getty result was followed by the Fifth Circuit in Certain Underwriters at Lloyd’s v. Oryx Energy Co.110 Consequently, when Texas law applies, an indemnity obligation may be valid under the unilateral or mutual exceptions of the Texas Act,111 or the contractual insurance requirements may be separately enforceable if the requirements of Getty and Oryx have been met.

C. The Wyoming Anti-Indemnity Act

The Wyoming anti-indemnity act (the “Wyoming Act”)112 also applies to both personal injury and property damage claims.113 Its scope is generally the same as the Texas Act, invalidating any agreement pertaining to any “well for oil, gas or water, or mine for any mineral” to the extent such contract “purports to relieve the indemnitee from loss or liability for his own negligence.”114 While the Wyoming Act has an insurance exception, which states that it “shall not affect the validity of any insurance contract or any benefit conferred by the Worker’s Compensation Law,” there appear to be no reported Wyoming cases interpreting that provision. Courts have allowed “partial indemnity” under the Wyoming Act to the extent the indemnitee is not negligent.115

Importantly the Wyoming Act is silent as to its effect on a Joint Operating Agreement, and the Wyoming Supreme Court, in Bolak v. Chevron, U.S.A,116 applied section 30-1-131 to void an agreement in a Unit Operating Agreement that would have allowed an operator to recover from the non-operators their proportionate share of the costs of settling a personal injury

109 See also Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660, 2008 (Tex.,

2008). 110 142 F.3d 255, reh’g en banc denied, 149 F.3d 1181 (5th Cir. 1998). See § IV.B.1., supra. 111 Under the decision in Nabors Corporate Services, Inc. v. Northfield Insurance Company, 132

S.W.3d 90 (Tex. App.— Houston [14th Dist], 2004), the indemnity will be valid even if the insurer has gone bankrupt provided the requirements of the applicable exception to the Texas Act have been met.

112 Wyo. Stat. Ann. § 30-1-131 (Michie 1998). 113 See Pugh, Insurance Issues, supra note 2, at § 10.05[2][c]. 114 Wyo. Stat. Ann. § 30-1-131 (a) (Michie 1998); see Northwinds of Wyo., Inc. v. Phillips

Petroleum Co., 779 P.2d 753 (Wyo. 1989); Mountain Fuel Supply Co. v. Emerson, 578 P.2d 1351 (Wyo. 1978); Heckart v. Viking Exploration, Inc., 673 F.2d 309 (10th Cir. 1982); Hull v. Chevron U.S.A., Inc., 812 F.2d 590 (10th Cir. 1987).

115 Cities Service Co. v. Northern Production Co., 705 P.2d 321, 328 (Wyo. 1985); Hull v. Chevron, U.S.A., Inc., 812 F.2d 590, 592 (10th Cir. 1987); cf. Meloy v. Conoco, Inc., 504 So. 2d 833 (La. 1987).

116 963 P.2d 237, 241 (Wyo. 1998).

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suit.117 In light of the decision in Bolak, it appears that an operator in Wyoming will have difficulty sharing liabilities with its non-operators as normally contemplated by the JOA. One option would be to rely on the insurance exception in the Wyoming Act and require the non-operators to purchase their own insurance and name the operator as an additional insured with a waiver of subrogation (and a provision that such coverage would be primary as respects their proportionate interest). The only other option for distributing such costs appears to be for the operator to obtain insurance for the benefit of the joint account and require all parties to share in the premiums.

Despite the broad interpretation of the Wyoming Act in the Bolak case, the scope of the Wyoming Act has generally been rather narrowly interpreted. In several cases, the Wyoming courts have refused to apply the Act to indemnity agreements unless the contract is directly related to the drilling of a well as opposed to other well services.118

D. The New Mexico Anti-Indemnity Act

As with the Texas Act and the Wyoming Act, the New Mexico anti-indemnity act (the “New Mexico Act”)119 applies to claims for both personal injury and property damage. Its scope is similar to the other anti-indemnity acts.120 The New Mexico Act does not include any specific exception for Joint Operating Agreements, but it can certainly be persuasively argued that the allocation of liability under a Joint Operating Agreement is not the type of agreement that the Act was intended to prohibit.121 Under a Joint Operating Agreement, the operator is performing operations on behalf of the non-operators, as would a managing partner of a partnership, and the Joint Operating Agreement simply requires all participants to bear their share of joint expenses (including liabilities). That is significantly different from the situation in which one company hires another to perform a service, which is the context in which the anti-indemnity statutes have generally been applied.

117 Id. at 241. In Bolak, the court stated that the strong public policy underlying the Wyoming

Act was to promote safety and that allowing the operator’s claim under the Unit Operating Agreement would thwart that public policy.

118 R&G Electric, Inc. v. Devon Energy Corp., 53 F. App. 857 (10th Cir. 2002) (Where contractor performed work on a pump well downstream of the well, the Wyoming Anti-Indemnity Act would not apply because the services of the electricians were not closely connected to well drilling, and therefore the indemnity provision did not offend Wyoming law. Consequently, the law of Oklahoma, which was selected by the parties, would apply to the interpretation of the indemnity provision at issue.); Union Pacific Resources Co. v. William Dolenc, d/b/a Dolenc Welding Service, 86 P.3d 1287 (Wyo. 2004) (Wyoming Anti-Indemnity Statute did not apply to work performed at a water plant used to enhance oil production because the statute only applies to contracts for work performed directly on an oil, gas, or water well.)

119 N.M. Stat. Ann. 56-7-2 (Michie 1999). 120 The New Mexico Act does not prevent indemnity for the partial fault of the indemnitor even

if the indemnitee is also partially at fault. Guitard v. Gulf Oil Co., 670 P.2d 969, 972 (N.M. Ct. App. 1983). Cf. Meloy v. Conoco, Inc., 504 So. 2d 833 (La. 1987). See Pugh, Insurance Issues, supra note 2, at § 10.05[2][d].

121 But see Bolak v. Chevron, U.S.A., 963 P.2d 237, 241 (Wyo. 1998).

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The New Mexico Act, like the other anti-indemnity statutes, also states that it “shall not affect the validity of any insurance contract or any benefit conferred by the Workmen’s Compensation Act.”122 However, this apparent exception for insurance coverage appears to be illusory under the decision in Amoco Production Co. v. Action Well Service,123 in which the New Mexico Supreme Court held that the exception applies only “to insurance purchased by the indemnitor to protect its interests, and not the interests of the indemnitee.”124 In other words, there is no insurance exception to the New Mexico Act.125 At one point, following the decision in Reagan v. McGee Drilling Corporation,126 it appeared that the New Mexico courts would allow enforcement of an insurance exception if the Texas Act applied under a choice of law provision.127 Although contractual choice of law provisions are often not enforced in connection with an anti-indemnity statute because of public policy, the Reagan court, in a case involving extensive Texas contacts, held that the policy underlying the Texas Act was the same as that underlying the New Mexico Act, to promote safety. Accordingly, the Texas Act’s exceptions could be enforced under the choice of law provision even though the Texas Act’s insurance exception was not present in the New Mexico Act. The result in Reagan, however, appears to have been intentionally overturned by the New Mexico legislature, which passed an amendment to the New Mexico Act, shortly after the Reagan decision, stating that any requirement to obtain insurance was against public policy and void.128 Consequently, while it may be argued some day that the rationale of Reagan should have some application in another jurisdiction, the issue in New Mexico appears to be resolved.

E. Section 905(b) of the LHWCA

Section 905(b) of the LHWCA prohibits an indemnity claim by a “vessel” against the employer of an injured longshoreman.129 Because section 905(b) defines “vessel” broadly so as to include not only a vessel and its owner, but also a charterer of the vessel, an oil company can

122 N.M. Stat. Ann. 56-7-2 (Michie 1999). 123 755 P.2d 52, 55-56 (N.M. 1988). 124 The court reasoned that the public policy behind the bar to indemnity, promoting safety,

would be better served by not allowing insurance protection for one’s own negligence: “Both the operator and the subcontractor will have incentive to monitor the safety of the operation knowing that they will be responsible for their own negligence.” Id. at 55.

125 This issue is now even more clear because the New Mexico Act was amended in 1999 to delete the prior “insurance exception” and replace it with the following provision: C. A provision in an insurance contract indemnity agreement naming a person as an additional insured or a provision in an insurance contract or any other contract requiring a waiver of rights of subrogation or otherwise having the effect of imposing a duty of indemnification on the primary insured party that would, if it were a direct or collateral agreement described in Subsection A and B of this section, be void, is against public policy and void.

126 933 P.2d 867, 870 (N.M. Ct. App. 1997). 127 Id. 128 N.M. Stat. Ann. 56-7-2 C. 129 See generally Pugh, IADC Drilling Contracts, supra note 1, at § V.A.

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often fall under the scope of section 905(b).130 Section 905(b) does not prohibit indemnity from a non-employer, and does not preclude a non-vessel from obtaining indemnity from an LHWCA employer. When an operator acts in more than one capacity, such as charterer of a crewboat and operator of a fixed platform, section 905(b) may preclude indemnity only for “vessel” negligence, i.e., negligence in the capacity of vessel owner or charterer.131 A written indemnity provision in a contract between a “vessel” and an employer of an employee covered by the LHWCA is enforceable if the indemnity contains reciprocal obligations and relates to operations on the Outer Continental Shelf (“OCS”). Section 905(c) provides in part:

Nothing contained in subsection (b) of this section shall preclude the enforcement according to its terms of any reciprocal indemnity provision whereby the employer of a person entitled to receive benefits under this chapter by virtue of section 1333 of Title 43 and the vessel agree to defend and indemnify the other for cost of defense and loss or liability for damages arising out of or resulting from death or bodily injury to their employees.

In other words, a reciprocal indemnity provision for work on the OCS is enforceable if it

meets the requirements of section 905(c).132 Moreover, the reciprocal indemnity requirement of section 905(c) can be satisfied by pass-through indemnities from two of the owner’s contractors (as with a modified reciprocal indemnity scheme). In Campbell v. Sonat Offshore Drilling,133 the court required a contractor to defend and indemnify both an oil company and the owner of a vessel on which the contractor’s employee was injured. The contractor and the vessel, through contracts with the oil company, had explicitly agreed to indemnify each other reciprocally (through pass-through indemnities) even though the two contractors were not in privity of contract with each other. A similar result was reached in Demette v. Falcon Drilling Co.,134 in which a casing contractor owed the drilling contractor indemnity, and vice versa, pursuant to pass-through provisions under which each contractor owed indemnity to the “other contractors” of the oil company.135

130 Lewis v. Keyes 303, Inc., 834 F. Supp. 191, 195 (S.D. Tex. 1993), cert. denied, 502 U.S. 857

(1991); but see Campbell v. Offshore Pipeline, Inc., No. 92-1189, 1993 WL 476529 (E.D. La., Aug. 5, 1993) (Oil company that did not own or control the operation of a pipelaying vessel was not a “vessel” for purposes of section 905(b)’s indemnity bar.).

131 Meredith v. A & P Boat Rentals, Inc., 414 F. Supp. 788, 791 (E.D. La. 1976); see Crutchfield v. Atlas Offshore Boat Service, Inc., 403 F. Supp. 920 (E.D. La. 1975) (permitting oil company to seek indemnity from employer for non-vessel negligence).

132 See Diamond Offshore Co. v. A&B Builders, Inc., 302 F.3d 531 (5th Cir. 2002). 133 979 F.2d 1115, 1124-25 (5th Cir. 1992). 134 280 F.3d 492, 1502-03 (5th Cir. 2002). 135 Demette also held that section 905(c) applies to all parties entitled to LHWCA benefits “by

virtue of” the OCSLA even if they would otherwise have been covered by the LHWCA.

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Even if an indemnity provision is invalid under section 905(b) and section 905(c) is inapplicable, a requirement that the employer name the “vessel” (i.e., the company or Company Group) as an additional insured is fully enforceable, despite section 905(b). “Neither the statute nor its legislative history suggests that additional assured clauses . . . are a proscribed form of indirect liability.”136 Thus, it is critical that all parties entitled to indemnity protection also be named as additional insureds.

VI. APPLICABLE LAW: STATE LAW, MARITIME LAW, AND THE OCSLA

A. Applicable Law in General

As noted above in connection with the discussion of the anti-indemnity statutes, the general rule is that a choice of law provision will not be enforced if doing so would violate applicable public policy. Determining what law is “applicable,” however, is not necessarily simple. In Roberts v. Energy Development Corporation,137 the Fifth Circuit held that Louisiana conflicts of law articles govern the enforceability of a maritime choice of law clause with respect to operations on a fixed platform in Louisiana territorial waters, but the court interpreted those articles as requiring application of the LOIA in a case involving a Louisiana contractor. Recently, however, in King v. I.E. Miller of Eunice, Inc., 970 So.2d 703 (La. App. 2007) a Louisiana court decided that a Texas choice of law provision benefitting a non-Louisiana contractor would be upheld despite public policy of Louisiana against allowing indemnity for an indemnitee’s negligence. It is not clear how this area will eventually unfold.

On the other hand, in Chesapeake Operating, Inc. v. Nabors Drilling USA, Inc., 138 the Texas court of appeals concluded that the law applicable to a particular contractual issue depends on the particular issue in question and the facts of the case, and the court concluded, relying on Restatement (Second) Conflict of Laws §§ 6, 187, and 1888, that the law of the state in which the underlying suit was asserted governs a claim for contractual indemnity. Accordingly, use of a maritime choice of law clause (or some other choice of law that would effectuate the parties’ intent) should be considered whenever possible, and there may be some benefit to attempting to select a forum contractually as well.139

If the contract is to be performed offshore on the OCS, there are different issues. State law may be applicable, but only as surrogate federal law.

136 Voisin v. O.D.E.C.O. Drilling Co., 744 F.2d 1174, 1177 (5th Cir. 1984); see Price v. Zim

Israel Navigation Co., 616 F.2d 422 (9th Cir. 1980). 137 235 F.3d 935, 942-43 (5th Cir. 2000). 138 94 S.W.3d 163 (Tex. App.—Houston [14th Dist.] 2002). 139 But see La. Rev. Stat. Ann. § 9:2779 (Supp. 2002), which prohibits selection of a non-

Louisiana forum, or any law other than that of Louisiana, in connection with a construction contract to be performed in Louisiana.

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B. Application of State Law Under OCSLA

In determining what law applies on the OCS, the analysis begins with the language of the Outer Continental Shelf Lands Act (“OCSLA”), which provides in pertinent part:

To the extent that they are applicable and not inconsistent with this subchapter or with other Federal laws and regulations of the Secretary now in effect or hereafter adopted, the civil and criminal laws of each adjacent State, . . . are hereby declared to be the law of the United States for that portion of the subsoil and seabed of the outer Continental Shelf, and artificial islands and fixed structures erected thereon, which would be within the area of the State if its boundaries were extended seaward to the outer margin of the outer Continental Shelf, and the President shall determine and publish in the Federal Register such projected lines extending seaward and defining each such area.140

Accordingly, in the context of contractual disputes arising from operations conducted on the OCS,141 the Fifth Circuit, in Union Texas Petroleum Corp. v. PLT Engineering,142 held that state law applies as surrogate federal law, pursuant to the OCSLA, if the following three conditions are satisfied: (1) the controversy arises on a situs covered by the OCSLA; (2) federal maritime law does not apply of its own force; and (3) state law is not inconsistent with federal law.

1. OCSLA situs

The OCSLA situs test is applied quite broadly and is satisfied fairly easily. For the OCSLA situs requirement, the controversy must arise on the subsoil, seabed, or artificial structure permanently or temporarily attached thereto.143 If the facility being constructed is a fixed platform, this condition will easily be met.144 The same is true if the facility is a pipeline

140 43 U.S.C. § 1333(a)(2)(A) (West 1986). 141 The OCS is generally understood to include “the seabed and subsoil adjacent to the coastal

nation, but beyond the [three mile] territorial sea, to a depth of 200 meters or beyond where the depth of the superjacent water admits of the exploitation of the natural resources.” See The 1958 Convention on the Continental Shelf, 92 I.D. 459, 460. However, through the OCSLA, Congress apparently intended the outer limits of the OCS to expand “as U.S. jurisdiction and control expand.” Id.; see Apryl E. Hand, Comment, The Role of State Law in the Outer Continental Shelf Lands Act, 72 Tul. L. Rev. 2139, 2140 n.6 (1998).

142 895 F.2d 1043, 1047 (5th Cir. 1990), cert. denied sub nom. Union Texas Petroleum Corp. v. State Serv. Co., 498 U.S. 848 (1990).

143 43 U.S.C. § 1349(b); Campbell v. Sonat Offshore Drilling, Inc., 979 F.2d 1115 (5th Cir. 1992); Laredo Offshore Constructors, Inc. v. Hunt Oil Co., 754 F.2d 1223, 1226-27 (5th Cir. 1985).

144 See, e.g., Scott v. Delmar Offshore Serv. Inc., 943 F. Supp. 764, 768 (S.D. Tex. 1996) (Galley hand’s accident onboard fixed platform on OCS met situs prong of OCSLA application.); Laredo, 754 F.2d at 1226-27.

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because the pipeline is permanently attached to the seabed,145 and the result should be the same for any subsea systems. Most facilities on the OCS, even drilling rigs (at least when in contact with the seabed), satisfy the OCSLA situs test.146 However, the Fifth Circuit has recently taken pains to stress that there is a difference between tort and contract claims when analyzing the OCSLA situs prong. In Grand Isle Shipyard, Inc., v. Seacor Marine, LLC.,147 the court reaffirmed that for the purposes of a tort claim, the situs prong of the PLT test would be determined by the situs of the tort; however, for the purposes of a contract claim (such as an indemnity claim) the situs would be the “focus of the contract.”148

2. Federal law applying of its own force

Federal law will apply “of its own force” when the issue implicates a federal statute or when a dispute involves a maritime contract. Whether a particular contract is “maritime” depends on (1) the situs of its performance or execution, and (2) the nature and character of the contract.149 Frequently, before a contract can be considered maritime, the analysis focuses on whether there is a direct link between the contract and a vessel’s operation or maritime commerce.150 For example, if a drilling contract requires the services of a jack-up or semi-submersible drilling rig, such drilling rigs are considered to be vessels, and maritime law governs such contracts.151 However, if the drilling will be performed from a drilling rig stationed on a

145 Union Texas Petroleum v. PLT Engineering, 895 F.2d at 1047. 146 The Fifth Circuit has interpreted the OCSLA situs rule broadly. In Hollier v. Union Texas

Petroleum Corp., 972 F.2d 662, 666 (5th Cir. 1992), the decedent, while attempting to cross from the crew vessel to the platform, fell and was crushed to death between them. Although the vessel was clearly maritime, the court held that OCSLA’s situs rule had been met because “Hollier was in physical contact with the platform at the time of his injury.” Hollier, 972 F.2d at 665. In Hodgen v. Forest Oil Corp., 87 F.3d 1512 (5th Cir. 1996), Hodgen suffered back injuries while attempting to swing on a rope from the platform to a vessel. A swell lifted the boat sharply and Hodgen landed awkwardly on the deck. The Fifth Circuit found that OCSLA applied as Hodgen was in contact with the rope which was in turn connected to the platform. Id. at 1527.

147 589 F.3d 778 (5th Cir. 2009) 148 Id. at 787 149 Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313, 316 (5th Cir. 1990); Theriot., 783 F.2d at

538. 150 J.A.R., Inc. v. M/V Lady Lucille, 963 F.2d 96 (5th Cir. 1992) (A maritime contract is one that

relates “to a ship in its use as such, or to commerce or navigation on navigable waters, or to transportation by sea or to maritime employment.”); Davis & Sons, 919 F.2d at 316; Theriot, 783 F.2d at 538-39; AGIP Petroleum Co. v. Gulf Island Fabrication, Inc., 920 F. Supp. 1330, 1339 (S.D. Tex. 1996); see Wilson v. J. Ray McDermott & Co., 616 F. Supp. 1301 (E.D. La. 1985) (“[D]rilling and other oilfield-related contracts are to be construed by admiralty law if the contract affects operations aboard a vessel.”) (Emphasis in the original.)

151 Dupre v. Penrod Drilling Corp., 993 F.2d 474 (5th Cir. 1993); Dupont v. Sandefer Oil & Gas, Inc., 963 F.2d 60 (5th Cir. 1992); Smith v. Penrod Drilling Corp., 960 F.2d 456, 459-60 (5th Cir. 1992); Lewis v. Glendel Drilling Company, 898 F.2d 1083 (5th Cir. 1990); Campbell, 979 F.2d at 1123-24; Vickers v. Chiles Drilling Co., 822 F.2d 535, 537 (5th Cir. 1987); Theriot, 783 F.2d at 538-39; Mobil Exploration & Producing U.S., Inc. v. A-Z/Grant Int’l Co., 1992 WL 186975, No. CIV.A. 91-3124, *2

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platform, maritime law does not apply of its own force because the platform is considered to be an island, and the law of the adjacent state is applicable pursuant to the OCSLA.152 One of the preeminent Fifth Circuit cases involving the maritime contract issue is Davis & Sons v. Gulf Oil Corporation.153 In Davis & Sons, the Fifth Circuit, noting “apparent” inconsistencies in the jurisprudence, outlined a two-part test “based on a fairly consistent underlying approach” utilized by previous cases to determine the applicability of maritime law to a contract. First, the court considered the “historical treatment in the jurisprudence” of the particular type of contract at issue. Second, the court outlined the following six-pronged fact specific inquiry: (1) What did the specific work order in effect at the time of injury provide?; (2) What work did the crew assigned under the work order actually do?; (3) Was the crew working aboard a vessel in navigable waters?; (4) To what extent did the work being done relate to the mission of that vessel?; (5) What was the principal work of the injured worker?; and (6) What work was the injured worker actually doing at the time of the injury? While the Davis & Sons analysis is generally considered the current test, clearly the factors articulated by the court emphasized the application of the test involving personal injury as opposed to property damage. In any event, however, the analysis ultimately focused more on the significance of the transportation function of the vessel as opposed to focusing primarily on the principal obligation of the contract. Because a review of the six factors demonstrated that the plaintiff’s accident in Davis & Sons arose during the fulfillment of a work order calling for maintenance activities to be conducted from a special purpose vessel, the court held that the work order and the blanket agreement should be viewed as a maritime contract. This conclusion was based in part on a determination that the transportation function of the vessel was more than merely incidental to its primary purpose of serving as a work platform, and that the plaintiff contributed to the accomplishment of the vessel’s mission. 154

(E.D. La. Jul. 28, 1992); Seaux v. Lynn, 708 F. Supp. 134, 136 (E.D. La. 1989); but see Sohyde Drilling & Marine Co. v. Coastal States Gas Producing Co., 644 F.2d 1132 (5th Cir. 1981).

152 See Demette, 280 F.3d at 1502-03. 153 919 F.2d 313 (5th Cir. 1990). 154 Davis & Sons was purportedly followed in Domingue v. Ocean Drilling & Exploration Co.,

923 F.2d 393 (5th Cir. 1991), cert. denied sub nom. Ocean Drilling & Exploration Co. v. Dimensional Oilfield Serv., 502 U.S. 1033 (1992). Domingue involved a contract to perform wireline services on a jack-up drilling rig. The Fifth Circuit concluded that wireline services were non-maritime in nature and were insufficiently related to the mission of the vessel to take on “a salty flavor.” The court’s analysis in Domingue is very questionable but the ultimate holding has not yet been revised. On the other hand, Campbell, 979 F.2d at 1120-21, characterized a contract to provide drive pipe, hammer work, and casing services aboard a jack-up drilling rig provided by another party as maritime. Although the contractor did not provide the vessel, the contract was nevertheless found to be maritime in nature based on the performance of the contract aboard a vessel and the contribution of the services to the vessel’s mission. Campbell and Domingue form the bookends in this area of jurisprudence with respect to evaluating the applicable law for contracts performed on a jack-up drilling rig. How contracts in the spectrum between these two cases will be resolved is still an open question.

More recently, in Hoda v. Rowan Companies, 419 F.3d 379 (5th Cir. 2005), the Fifth Circuit held that a contract between oil company and service company to provide torquing up and down of blow out preventer stacks performed aboard a jack-up rig provided by the drilling contractor was an integral part of

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3. State law inconsistent with federal law

Most cases involving the law applicable under the OCSLA have involved enforceability of indemnity or insurance provisions. In the absence of a maritime contract, often the only argument for enforceability is that either the LOIA or the Texas Anti-Indemnity Act is inconsistent with federal law. Neither of these arguments, however, has been successful in federal courts, which have repeatedly held that neither act is inconsistent with federal law.155

4. Effect of choice of law provisions

If state law applies only as surrogate federal law under the OCSLA and maritime law is not applicable on its own accord, a maritime choice of law clause will not be enforced to avoid application of a state anti-indemnity statute.156 For instance, where Louisiana law is applicable to activities taking place on a fixed structure on the OCS, a maritime choice of law provision in the contract is unenforceable to avoid the LOIA. The court in Matte v. Zapata Offshore

the drilling operation, which was the primary purpose of the vessel and was maritime in nature, but refused to apply a blanket test. In Lopez v. Magnolia Industrial Fabricators, Inc., No. Civ. A. 05-0371, 2006 WL 2850447 at *4 (E.D. La. Oct. 3, 2006), the court found a contract to provide maintenance and inspection on a crane aboard a jack-up rig was maritime.

In contrast, in a recent case entitled In re Broussard Bros., Inc., No. Civ. A. 03-1428, 2004 WL 1900519, at *2 (E.D. La. Aug. 20, 2004), the principal obligation of the contract at issue was non-maritime. The work order in effect at the time of the injury was to provide construction and repair services to offshore platforms. The crew performing the work was assigned to a spud barge that provided transportation and acted as a work platform. Because the injured parties were involved in the construction work on the platform at the time of their injuries and not involved in performing a function related to the mission of the spud barge, the court concluded the contract was non-maritime. In Alleman v. Omni Energy Services Corp., 434 F. Supp. 2d 405 (E.D. La. 2006), the court distinguished wrongful death and personal injury cases arising out of helicopter crashes that have been held to invoke admiralty tort jurisdiction, and held that a contract to provide helicopter shuttle services to and from production platforms, unlike a contract to transport workers on water in a vessel, did not effectuate maritime commerce. In Smith v. Enervest Operating, L.L.C., No. Civ. A. 603CV1922, 2005 WL 1630023 at *3 (W.D. La. Jul. 1, 2005), aff’d, 169 Fed.Appx. 920 (5th Cir. 2006) the court held that a contract for the sale of lube oil delivered by barge to a platform was non-maritime because the transportation via navigable waters was incidental and not the primary object of bargaining. Most recently, in Gautreaux v. Tetra Applied Technologies, LLC., 2010 WL 1930925 (E.D.La, May 10, 2010), the court found that a contract to replace seal rings on drill pipe was not maritime. The court found that work to replace the rings did not require the equipment of the vessel, nor did it require transport by the vessel. Much like Domingue, the vessel was found to be nothing more than a work platform.

155 Knapp v. Chevron USA, Inc., 781 F.2d 1123, 1130 (5th Cir. 1986); Hodgen, 87 F.3d at 1528; Graham v. Freeport Sulphur Co., 962 F. Supp. 82, 84 (E.D. La. 1997); Falcon Operators, Inc. v. P.M.P. Wireline Services, Inc., 1997 WL 610825, *6 (E.D. La. Sept. 30, 1997); Bourg v. Continental Oil Co., No. 95-3192, 1997 WL 79298, *1 (E.D. La. Feb. 21, 1997).

156 Matte v. Zapata Offshore Co., 784 F.2d 628, 631 (5th Cir.), cert. denied sub nom. Zapata Offshore Co. v. Timco, Inc., 479 U.S. 872 (1986); Texaco Exploration and Production, Inc. v. AmClyde Engineered Products, 448 F.3d 760 (5th Cir. 2006).

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Company157 held that the LOIA is a statement of Louisiana public policy and that an attempt to adopt maritime law to avoid the LOIA’s prohibitions is invalid because the OCSLA is considered a congressionally mandated choice of law provision.158 Significantly, maritime law does permit the enforcement of a Louisiana choice of law provision, including application of the LOIA, even though the contract would otherwise be considered maritime and the indemnity allowed.159 Although a joint choice of law clause (i.e., Louisiana law and maritime law) has been held not to preclude maritime law,160 any potential ambiguity in a contract should be minimized. Even more importantly, a choice of law provision selecting only Louisiana law should be avoided unless the parties specifically intend for Louisiana law and the LOIA to apply in all instances, even if maritime law would otherwise be applicable. Another issue relates to choice of law provisions that do not directly implicate state public policy issues. Many cases have broad language stating that the OCSLA is a mandatory choice of law provision. Nearly all of those cases, however, involved public policy statutes (such as the LOIA or the Texas Anti-Indemnity Act) or statutes such as the Louisiana Oil Well Lien Act (“LOWLA”), which may not rise to the level of public policy but at least come fairly close. An argument can be made that many choice of law provisions would be enforceable under maritime law, the laws of the adjacent state, and presumably general federal common law, and that such consensual choice of law provisions should not be invalid just because they appear in a contract related to the OCS. This type of argument appears to have been adopted in AGIP Petroleum Company v. Gulf Island Fabrication, Inc.,161 in which the court honored a choice of maritime law and prohibited a party from recovering economic damages. The court reasoned that the parties were sophisticated entities and had allocated risks.

5. How is the “adjacent” state determined under the OCSLA?

If the contract at issue involves a fixed platform on the OCS, and the OCSLA is implicated, which state’s law will apply? The OCSLA does not have a definition of “adjacent,” and the directive requiring the President to extend the boundaries of the states by determining the “projected lines” has never been implemented. Although at least one federal district court case seemed to support the conclusion that the test would be a factual one based solely on geographical proximity,162 the Fifth Circuit has now held in Snyder Oil Corp. v. Samedan Oil

157 784 F.2d at 631. 158 See also Union Texas Petroleum Corp. v. PLT Engineering, Inc., 895 F. 2d 1043, 1050 (5th

Cir. 1990). In Hollier v. Union Texas Petroleum Corporation, 972 F.2d 662, 665 (5th Cir. 1992), the Fifth Circuit held that a Texas choice of law provision did not apply to an action arising from a fatality on a platform adjacent to Louisiana because it violated the OCSLA.

159 Stoot v. Fluor Drilling Serv., Inc., 851 F.2d 1514 (5th Cir. 1988); see Rodrigue v. LeGros, 563 So. 2d 248 (La. 1990).

160 See Angelina Casualty Co. v. Exxon Corp., U.S.A., 876 F.2d 40, 42 (5th Cir. 1989). 161 17 F. Supp. 2d 658, 659 (S.D. Tex. 1998). 162 Pittencrieff Resources, Inc. v. Firstland Offshore Exploration Co., 942 F. Supp. 271 (E.D. La.

1996) (holding that a Joint Operating Agreement (“JOA”) covering Main Pass Blocks 253 and 254 was governed by Alabama law because the blocks were closer to Alabama than to Louisiana or Florida).

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Corporation163 that the test will be to look at various factors, including federal and state government agency determinations. The result in Snyder is consistent with the one other case that contained a factual discussion as to what law applies under the OCSLA as the law of the “adjacent” state. In Reeves v. B & S Welding, Inc.,164 the issue was whether a High Island Block was “adjacent” to Louisiana or Texas for purposes of the OCSLA. The court did not decide the issue, however, because the only two “acceptable” boundaries under the facts presented, the traditional boundary between the states and the boundary projected from Texas’ three league territorial boundary, both placed the disputed area under Texas law. 165 While the Reeves court may not have been presented with sufficient evidence to make a reasoned decision, the Fifth Circuit considered the MMS interpretation as well as geographical proximity as factors in its decision. Based on the approach taken in Snyder, there may be no definitive answer as to what law will apply as the law of the “adjacent” state in areas where some of the factors may point to different jurisdictions and there has been no definitive court decision. Snyder provides guidance, but it also appears to leave some questions open.166 VII. RISK ALLOCATION ISSUES RELATED TO SPECIFIC OPERATIONAL

CONTRACTS

Most of the issues discussed up to this point are common to all operational contracts, at least to a large extent. However, there are certain issues that are limited (or at least most significant) to particular contracts. some of the most important such issues are discussed below.

163 208 F.3d 521, 524 (5th Cir. 2000). 164 897 F.2d 178 (5th Cir. 1990). 165 In determining boundaries for distributing federal funds under the Coastal Zone Management

Act of 1972, as amended in 1976, Congress directed Coastal Zone Management to establish “lateral seaward boundaries” on the basis of the international law applicable to lateral boundaries determinations. The boundary between Louisiana and Mississippi was established as the midpoint between (a) the line each of whose points are equidistant from the two applicable states (which would maximize federal waters considered to be “adjacent” to Louisiana) (the “equidistant line”) and (b) a line somewhat closer to Louisiana (which would expand the federal waters considered to be adjacent to Mississippi, and presumably Alabama) based on the “special circumstances” created by Louisiana’s curving coastline. The rationale of these two lines, and other alternatives, is discussed at length in The Delimitation of Lateral Seaward Boundaries Between States in a Domestic Context, 75 Am. J. Int’l. Law 28 (1981).

166 For example, several cases have held platforms in the Main Pass Blocks to be adjacent to Louisiana with no discussion of possible application of Mississippi law, see, e.g., Freeport McMoRan Resource Partners, L.P. v. Kremco, Inc., 827 F. Supp. 1248 (E.D. La. 1992) (Main Pass 299); Haynie v. Dynamic Offshore Contractors, Inc., No. CIV.A. 89-4552, 1991 WL 33615 (E.D. La. March 17, 1991) (Main Pass 116B), while Pittencrief focused solely on geographic proximity as respects Main Pass Block 261.

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A. Drilling Contracts167

As noted above, the drilling contract is usually the biggest and most important contract that an operator needs to enter into, and such contracts present significant risks. The initial major issue involves the market situation and the extent to which the company has to have the drilling rig, and how quickly. If the market is tight or time is tight, or both, the company may be limited to damage control. In that case, here are some issues to watch out for, particularly in an IADC form drilling contract.

If the company has any broad reciprocal indemnity provisions in any underlying contract,

it is critical to obtain a pass through provision. The IADC contracts require the company to assume the risk of claims by all of its other contractors, but the form will not extend the drilling contractor’s indemnity (or insurance) to such other contractors unless the form is modified. As a result, if a wireline contractor negligently causes a blowout that destroys the rig, the company may owe the wireline contractor full indemnity (if there is a broad reciprocal) without having any backup protection from the drilling contractor.

Another issue relates to the “floating” magic language in the IADC form contracts. In the

preamble of the offshore form, the operator is made responsible for all unallocated risks, regardless of the sole or concurrent negligence of the drilling contractor. This is certainly not the intent of the operator and should be revised. Similar provisions are found in paragraph 501 of the offshore form. In the onshore IADC form, paragraph 14.13 provides that the “magic language” applies to all indemnity provisions in the contract, including but not limited to specific provisions and paragraphs. Included in the extension of magic language is the “Sound Location” provision, paragraph 604 or 605 in the offshore form and section 10 in the onshore form. However, when “magic language” is applied to the Sound Location provision, the result – operator potentially paying for damage to the rig caused by the sole negligence of drilling contractor – is certainly not intended by the operator. Accordingly, these provisions need to be revised.

The Sound Location provision also needs to be revised to limit the operator’s liability for

repair costs to the rig and its potentially unlimited obligation to pay the standby rate during repairs. First, the operator needs to confirm that it has insurance for damage to a drilling rig, which is often excluded from an operator’s coverage. Next, the potential exposure should be limited to risk of which the contractor was not aware. Finally, liability for damages to the rig should be capped at a reasonable amount, or the contractor’s deductible, whichever is less. As to payment of standby during repairs, that should be capped at a maximum number of days (or, if necessary, included in the overall cap).

For offshore operations, two critical provisions are sections relating to property damage

to the drilling rig and wreck removal. Contractor’s base indemnity obligation in paragraph 901 is to indemnify for any claims for loss or damage to its property. The exceptions, however, now include damage to the rig by vessels, and helicopters in the 2003 form, and this again exposes operator to a claim for damage to the rig. Vessel contractors will ask for a broad reciprocal

167 See generally Pugh, IADC Drilling Contracts, supra note 1.

Formatted: No underline

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indemnity; if granted, operator will be stuck in the middle if the IADC contract is not modified. Helicopter contracts are less easy to categorize, but the risk remains the same. These carve outs should be rejected or, at a minimum, capped. As respects wreck removal, the base IADC form makes the operator liable for wreck removal except to the extent of the contractor’s insurance. To begin with, the company should not have to pay the contractor’s deductible and, in any event, the deductible may be very high. In addition, the scope of coverage of the contractor’s insurance should be the contractor’s responsibility, not that of the operator. Further, issues concerning coverage for voluntary wreck removal (perhaps necessary if the wreck is not a hazard to navigation but is interfering with lease operations or has to be removed under the lease). In fact, if possible the operator should obtain an indemnity (and insurance) from the contractor for wreck removal, including removal reasonably required by the operator. Another significant issue in drilling contracts relates to consequential damages, and that issue in turn relates to the underlying contracts. Under the 2003 IADC forms, the operator is asked to indemnify for consequential damage claims by its contractors for loss of use of damaged property. The magnitude of the risk presented by such a provision depends on the extent to which the underlying contracts have provided pass through protection for consequential damages – a question that may not have an easy answer, as discussed below. There are other significant pitfalls in the IADC drilling contracts, including the commercial provisions. The repair rate provision, the payment provision, the lack of a right to terminate, potential obligations to pay standby rate for unlimited periods of time, and limited right to terminate can all result in major problems in a particular situation. Suffice it to say that the drilling contract, particularly an IADC form, requires much attention on the part of the operator.

B. Master Service Agreements168

The master service agreement (“MSA”) is the building block for a company’s risk allocation program, and many of the MSA’s most significant issues concern the way in which the MSA relates to the structure of the company’s other contracts.

At the most basic level, the MSA needs a pass through provision. Otherwise, the

company will have liability exposure for claims between its contractors (which would include claims for loss or damage to the drilling rig. While the company will be protected for its own fault by the drilling contractor’s indemnity, there would be no protection for a claim based on sole or concurrent fault of another contractor. For every instance where the company fails to obtain a pass through, each MSA using a broad reciprocal indemnity approach magnifies the problem even further.

Whether to use a broad reciprocal indemnity, and how aggressive to be in the form MSA,

presents another threshold issue. The more aggressive the MSA, the more the company will be

168 See generally Pugh, Master Service Agreements, supra note 1.

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protected against risk but the more time it will spend on negotiation. This is a matter of company policy and resource allocation. The structure of the indemnity presents the same type of decision – a broad reciprocal indemnity allocates more risk to the company (because the company effectively becomes the insurer of the workplace subject to enforcing its pass through provisions) but such an indemnity is much easier to negotiate (because that’s what contractors want). In addition, as discussed above, the broad reciprocal indemnity clearly qualifies for the Texas mutual indemnity exception, which avoids any issue of enforceability.

There are numerous other important issues in an MSA but not as many are structural

issues. One such issue, though, relates to the consequential damage provision. First, the company has to decide whether to waive or indemnify for consequential damages – contractors would like it but it is often more to the benefit of the contractor than the company. However, if the contractor has valuable equipment, the company may want to avoid consequential damage claims and, in any event, the contractor may insist. The issue then becomes the scope of the provision. Historically, this provision was a reciprocal waiver, with contractor and company each waiving their own consequential damage claims against the other. In recent years, however, particularly in drilling contracts but in other agreements as well, contractors have requested (or attempted to insist upon) indemnity protection, or a broad waiver. In some instances, contractors want such provisions to expressly include indemnity for consequential damage claims by other parties, such as other contractors. The company can prepare for such requests by attempting to extend its pass through provisions to cover the consequential damage claims (such that Company Group is protected against claims for the contractor’s consequential damage claims). However, unless all contracts have been revised in that fashion, it is very dangerous to agree to indemnify for consequential damage claims by the company’s other contractors.

One other general issue relating to MSAs concerns instances in which MSAs should not

be used.169 The MSA assumes the existence of a common workplace. Often the company is giving significant protection for property damage rather than personal injury (because the company may have few direct employees involved in the work. However, the company often is primarily receiving protection for personal injury because the contractors often have little expensive property. Therefore, if there is no common workplace, and therefore no significant risk of personal injury, an MSA may be the wrong type of indemnity approach to use. In a tool rental contract for example, if the renter’s employee never comes on site, and company still has to return the rented item in good condition or pay damages, the company would not want to provide full indemnity for any loss or damage to its property (or injuries to its personnel or even its other contractors) as a result of a defective piece of equipment. In other words, in agreements like sales and rentals, the company may not be making the right trade if it uses an MSA.

Other contracts may raise similar issues. For example, the MSA indemnity should not be

used for a trucking contract because the company does not want to indemnify for negligent damage to the transported property. Somewhat similarly, an MSA should not be used for a construction project, at least not without modification, because the company does not want to indemnify the contractor for loss or damage to the item being constructed (even though that

169 See generally Pugh, Master Service Agreements, supra note 1, at § X.

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property may become company’s property as it is being constructed). Therefore, at a minimum, the MSA indemnity provisions should be revised to separately address loss or damage to the work if the MSA is to be used. In most instances, however, particularly if the contract value is significant, a construction contract should be used rather than an MSA.

C. Construction Contracts

One of the biggest issues with respect to risk allocation in a construction contract is to determine how to allocate risk of loss or damage to the work. In the “good old days” that problem could often be solved fairly easily by acquiring builder’s risk or construction all risk “CAR”) insurance to cover such loss or damage. In that event, the main issues related to the amount of the deductible and how much protection should be extended to other contractors. Those issues are still present, but the cost of such insurance is now extremely high and the deductibles are often huge. Consequently, risk of damage to the work is a significant issue and one that may require much negotiation.

For offshore projects, the problem has gotten even worse because the main insurance

form for providing CAR coverage is the WELCAR form. This form has significant drawbacks, including various sublimits and exclusions. Of even more importance, however, may be the form’s restrictions on extending coverage under the CAR policy to the company’s other contractors and subcontractors. The company still has the right to name them as additional insured, or waive subrogation, which may be required by contract as discussed above. However, the right to so name or waive is subject to a condition precedent requiring compliance by the contractor with quality assurance and quality control requirement passed on by the company. Whether the company does have such QA/QC requirements in the contract, and whether they are sufficient, are two unanswered questions. In addition, however, if the contractor will not agree to condition its protection on compliance with the QA/QC requirements, company might owe protection without having insurance coverage. There are ways to address these issues, but they still present a dangerous pitfall.

Another major risk allocation issue in construction contracts relates to the fact that

warranty protection is now even more important (because of restricted insurance coverage), but contractors strongly resist anything other than the most limited warranty. In addition, termination for poor performance is often not a viable issue; mitigation of that risk requires a proactive default procedure that will allow the company to recognize and attempt to address performance problems early in the process.

Finally, all of the issues relating to pass through indemnity provisions may be present in

this type of contract depending on the particular situation. If there are any broad reciprocals, or my be in the future, the pass through and structure issues need to be addressed.

D. Vessel Charters

As respects vessel charters, all of the MSA issues are present, including the pass through issues. Also at issue is the potential impact of the drilling contract carve out for damage to the rig caused by a vessel. If the company cannot resist such a provision, or is only able to cap it at some relatively high amount, it will be particularly important for the company not to owe a broad

39

reciprocal indemnity to the vessel. If that approach is not possible, the company may want to try to negotiate a carve out that matches the carve out in the drilling contract such that the vessel is not entitled to indemnity for damage to the drilling rig (or at least not up to a negotiated cap).

Another major issue in the vessel charter relates to the scope of the indemnity and the

importance of maritime endorsements. As discussed above, the indemnity provision should definitely be expanded to include a reference to loading and unloading, and, if possible, to ingress and egress. In addition, the two maritime endorsements, providing coverage for liability other than as owner of the vessel and preventing a reduction of limits in the event of limitation of liability, should both be added, and the protection should be extended to Company Group.170

Finally, dovetailing of insurance with the indemnity protection (i.e., extending both to

cover Company Group) is particularly important in a vessel charter because the indemnity may be invalid under section 905(b) of the LHWCA.171

E. Flight Service Agreements

The biggest risk allocation issue with flight service agreements, particularly helicopter contracts, is how to fit the preferred risk attribution (most if not all risk to the helicopter company) with the likely interaction with broad reciprocal indemnity provisions. Historically, the helicopter company owed indemnity for everything except sole fault of company. However, there was no pass through provision, and that indemnity was owed only to the company, not to the broad company group. However, if the helicopter is flying anywhere near a contractor that has a broad reciprocal indemnity protection, such as a drilling contractor, the company now owes full indemnity to such other contractor for any claim asserted by the helicopter or its personnel. While it may occur very often, it is certainly possible for a helicopter crash to be caused by obstructions attributable to a drilling contractor or construction company. In such event, the company gets stuck in the middle unless there is a pass through provision.

Moreover, helicopter companies are now often seeking broad reciprocal indemnity

protection themselves, and this in turn creates more risk with respect to all the other contractors. And such risk is arguably inconsistent with some of the assumptions underlying the “regardless of fault” indemnities because of the strong likelihood that the helicopter will be at fault.

The best solution to these issues is to limit the indemnities owed to the helicopter and to

graft on a type of pass through provision, but this is not an easy result to achieve. How important such an approach is will depend on the applicable law and structure of the related contractual indemnity provisions. VIII. CONCLUSION

There are a number of important issues in understanding contractual risk allocation in operational contracts. The threshold determinations should relate to how the company’s various

170 See § IV.B.(2), supra. 171 See § V.E., supra.

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contracts are intended to fit together. The drilling contract is usually a primary driver and the scheme of the master service agreements program needs to mesh with the drilling contract and other major single project contracts (such as a major construction contract or a major maintenance or “turnaround” contract). Other multiple-use contracts, such as master time charters or flight service agreements, also need to be consistent with the overall risk allocation approach.

The most important means of achieving flexibility while maximizing protection is to use a pass-through provision consistently, from contract to contract, and to be sure that the indemnified parties (including the company’s affiliated companies, non-operators, and other contractors and subcontractors) all receive both the indemnity and the insurance benefits in each contract. The next step is to identify the jurisdictions in which the contracts will be used, develop a risk allocation approach, and identify how to address potential restrictions on indemnity and insurance. Attempting to use a different contract for each different jurisdiction can simplify the risk allocation issues, but that approach also creates significant administrative issues (i.e., picking the right contract, handling contractors that work in more than one jurisdiction, and avoiding instances in which the applicable law may not be clear). The alternative is to anticipate the potential restrictions and address them in the contract, whether by accepting the risk created by a broad reciprocal indemnity or by choosing an alternative approach, such as relying on a Getty provision or a Marcel provision.

There is no simple or perfect solution to developing a consistent and flexible risk

allocation program, and there are many variables to assess. But the place to start is to consider these issues in the context of the big picture – the company’s overall contractual risk allocation program – not in isolation while looking at only one contract or type of contract. If the company takes a broad view, individual contracts can be designed as part of an overall plan so as to be as flexible as possible and to maximize the effectiveness of the indemnity and insurance protections.

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