Oilfield Anti-Indemnity Acts and Their Impact on Insurance Coverage: A Comparative Analysis

August 22, 2005

In the oilfield, operators typically enter into Master Service Agreements with various contractors who supply services and materials needed in connection with the many and varied oilfield operations. The Master Service Agreements usually require the contractor to indemnify the operator against any claims arising out of or in connection with the services and materials supplied by the contractor, whether caused by the contractor’s or owner’s negligence. The contractors are also generally required to carry minimum amounts of insurance coverage and to include the operator as an additional insured under their insurance policies.

Most states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence, and have prohibitions against such agreements in certain circumstances. However, four states–Texas, Louisiana, New Mexico and Wyoming–have statutes specifically prohibiting certain indemnity agreements contained in or related to oilfield contracts, generally referred to as Oilfield Anti- Indemnity Acts.

Scope of Oilfield Anti-Indemnity Acts
The language of the four Oilfield Anti-Indemnity Acts is remarkably similar in describing the indemnity agreements that are prohibited. The Louisiana Anti-Indemnity Act, which is representative of the four Acts, provides that:

Any provision contained in, collateral to, or affecting an agreement pertaining to a well for oil, gas, or water, or drilling for minerals which occur in a solid, liquid, gaseous, or other state, is void and unenforceable to the extent that it purports to or does provide for defense or indemnity, or either, to the indemnitee against loss or liability for damages arising out of or resulting from death or bodily injury to persons, which is caused by or results from the sole or concurrent negligence or fault (strict liability) of the indemnitee, or an agent, employee, or an independent Contractor who is directly responsible to the indemnitee.

The statutory language leaves open the question of whether any specific indemnity agreement is “collateral to” or “affects” an agreement which “pertains to” a well or the drilling for minerals. As a result, there has been a fair amount of litigation to determine whether particular agreements come within the scope of the Oilfield Anti-Indemnity Acts. In general, the courts in Texas, Louisiana, New Mexico and Wyoming do not apply their Oilfield Anti-Indemnity Acts to agreements for general oilfield work, but only to those agreements which have a not too attenuated relation to the operation, maintenance or repair of a distinct oil, gas or other mineral well or wells.

In addition, the Oilfield Anti-Indemnity Acts generally state that only provisions designed to indemnify a party against its sole or concurrent negligence are invalid. Accordingly, courts in Wyoming and New Mexico have held that their respective Oilfield Anti-Indemnity Acts do not prohibit an operator from seeking indemnity from the contractor for the contractor’s percentage of negligence resulting in a claim or loss. Louisiana courts, however, have held that under the Louisiana Oilfield Anti-Indemnity Act, any negligence on the part of the party seeking indemnity invalidates that party’s right to any indemnity, even to the extent of the other party’s concurrent negligence.

Coverage under Oilfield Anti-Indemnity Acts
Although the four Oilfield Anti-Indemnity Acts are similar in their restrictions on indemnity agreements in certain types of oilfield contracts, notable differences exist in their treatment of insurance coverage of such agreements.

Of the four, Louisiana is the clearest in invalidating insurance coverage of indemnity agreements prohibited by its Oilfield Anti-Indemnity Act. The Louisiana Oilfield Anti- Indemnity Act provides that:
Any provision in any agreement arising out of the operations, services or activities listed in Subsection C of this section of the Louisiana Revised Statutes of 1950 which requires waivers of subrogation, additional named insured endorsements, or any other form of insurance protection which would frustrate or circumvent the prohibitions of this section, shall be null and void and of no force and effect.

The courts have created a judicial exception to this prohibition, known as the Marcel exception. This exception allows insurance coverage of an indemnity provision prohibited by the Louisiana Oilfield Anti-Indemnity Act when the party being indemnified pays for its own insurance coverage and no material part of the cost of insurance is borne by the party procuring the coverage. In addition, the Louisiana Supreme Court has held that a waiver of subrogation clause is not invalidated by the Louisiana Oilfield Anti-Indemnity Act where such a clause is not enforced in conjunction with the enforcement of an indemnity obligation, and, thus, does not shift liability from the tortfeasor operator to the contractor in circumvention of the Louisiana Oilfield Anti-Indemnity Act.

New Mexico
Prior to 1999, the New Mexico Oilfield Anti-Indemnity Act did not clearly state whether insurance coverage of prohibited indemnity agreements was allowed, but the New Mexico Supreme Court held in a case raising the issue that insurance coverage was not permitted to circumvent the Oilfield Anti-Indemnity Act. (9) In 1999, New Mexico amended its Oilfield Anti-Indemnity Act and codified the Court’s holding to erase any doubt about the status of insurance coverage. As amended, the Act now provides in pertinent part:
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 subsections A and B of this section, be void, is against public policy and void.

Unlike the Louisiana and New Mexico statutes, the Wyoming Oilfield Anti- Indemnity Act contains no language or provision specifically addressing the effect of the Act on insurance coverage for an indemnity agreement prohibited under the Act. The only reference to insurance in the Wyoming Act is the statement that: “This provision shall not affect the validity of any insurance contract or any benefit conferred by the Worker’s Compensation Law of this state.”
The New Mexico Oilfield Anti-Indemnity Act contained the identical sentence before it was amended in 1999. As noted above, the New Mexico Supreme Court interpreted this sentence as allowing only insurance purchased by the indemnitor to protect its own interest and prohibiting insurance purchased by the indemnitor to protect the interest of the indemnitee against the indemnitee’s own negligence.

Wyoming’s courts have not yet interpreted this portion of the Act, but based on the similar language of the Wyoming and New Mexico Acts, Wyoming courts would presumably follow New Mexico’s lead and conclude that insurance coverage of an indemnity agreement that is void under the Wyoming Oilfield Anti-Indemnity Act is also void.

In contrast to Louisiana, New Mexico and Wyoming, Texas expressly permits limited insurance coverage of those indemnity agreements which otherwise are deemed invalid under the Texas Oilfield Anti-Indemnity Act. Specifically, if an oilfield contract contains a mutual indemnity obligation pursuant to which the operator and contractor agree to indemnify each other, the Texas Oilfield Anti-Indemnity Act permits insurance coverage of the indemnity agreement “to the extent of the coverage and dollar limits of insurance or qualified self-insurance each party as indemnitor has agreed to obtain for the benefit of the other party as indemnitee.”
However, if the oilfield contract contains only a unilateral indemnity agreement pursuant to which only one party, presumably the contractor, agrees to indemnify the other, presumably the operator, then the indemnity agreement and the amount of insurance coverage of the indemnity agreement allowed is limited to $500,000.

The Texas Act’s allowance of insurance coverage when there are mutual indemnity obligations has led to litigation in those circumstances where each party to the oilfield contract provides different levels and/or types of coverage to the other. Generally, where this circumstance exists, the party, or its insurer, from which indemnity is being sought has argued that since the indemnity obligation is not mutual in every respect, the entire indemnity obligation and its insurance coverage are void. However, the Texas courts have rejected this argument and instead held that the lowest common denominator of insurance coverage, in terms of the dollar amount of insurance coverage and the type of coverage, provided by the parties to each other is the maximum amount and type of indemnity permitted under the Texas Oilfield Anti-Indemnity Act.

Texas courts have held that the mutuality of the indemnity obligation is not negated by the subsequent insolvency of the insurer from which coverage was obtained. In fact, one Texas court held that once the parties agree in writing to mutual indemnity obligations and also agree to provide insurance to support their indemnity obligations, the safe harbor provisions of the Texas Oilfield Anti-Indemnity Act are met and the agreement can not be voided retroactively by subsequent events, such as the insolvency of an insurer. This decision suggests that the indemnity provision would also be enforceable even if one of the parties breaches its promise to procure insurance to support the indemnity obligation.

The Texas Supreme Court has also held that the Texas Oilfield Anti-Indemnity Act does not invalidate a provision requiring the indemnitor to name the indemnitee as an additional insured under the indemnitor’s insurance policy when the additional insured provision is a stand alone obligation of one or both of the parties, as opposed to being included to support an indemnity obligation.

Contractual provisions in certain agreements in the oilfield requiring one party to indemnify the other party against its own negligence are specifically prohibited under Texas, Louisiana, New Mexico and Wyoming law. Attempts to circumvent this prohibition through insurance coverage, either by insuring the indemnitor’s contractual indemnity obligation or including the indemnitee as an additional insured under the indemnitor’s insurance policy, are also expressly prohibited by Louisiana and New Mexico and implicitly by Wyoming. Texas, on the other hand, permits insurance coverage of otherwise invalid indemnity provisions under certain proscribed circumstances.
Robert Redfearn, Jr. is a partner in Simon, Peragine, Smith & Redfearn, a regional law firm with offices in New Orleans, La., and Mississippi. He can be reached via e-mail at Redfearnjr@spsr-law.com.

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Insurance Journal West August 22, 2005
August 22, 2005
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