Texas Oilfield Anti-Indemnity

In the energy industry, it is routine for owners, operators, contractors, subcontractors and independent contractors to enter into agreements directing various oilfield operations.  Most often, these agreements are referred to as Master Service Agreements (“MSA”) and cover a specific job at one location.  

Introduction

Global MSAs are common in the energy industry for operators and contractors who regularly conduct business at various locations in tandem.  A MSA is a detailed contract expressly stating the obligations and responsibilities of each participating entity and can call for the contractor to indemnify the premises owner/operator against claims concerning the services or materials supplied—regardless of the cause of the incident.

These contractual indemnity agreements set in motion a scheme wherein the premises owner/operator is entitled to full defense and indemnity from the participating contractors regardless of the owner/operator’s own potential culpability following an accident.  While many states limit the reach of contractual indemnity agreements, some states have enacted statutes expressly prohibiting them.  In particular, Texas, Louisiana, Wyoming and New Mexico have enacted laws declaring cost-shifting indemnity agreements pertaining to oilfield operations void because these agreements are against public policy.  These laws are generally referred to as Oilfield Anti-Indemnity Acts.

Historical Overview

Prior to anti-indemnity acts, oil well owners/operators historically controlled the language contained in most MSAs.  The typical indemnity language found in such agreements required a contractor to provide defense and indemnity to the owner/operator in case of bodily injury, death or property damage—regardless of the owner/operator’s potential culpability.  State legislatures perceived these indemnity agreements as being the result of obvious bargaining inequities between the operator and the contractor.  These perceived inequities are, in part, the catalyst behind the Oilfield Anti-Indemnity Acts in Texas, Louisiana, Wyoming and New Mexico.

Texas Oilfield Anti-Indemnity Act “TOAIA”

The Texas Oilfield Anti-Indemnity Act (“TOAIA”) expressly prohibits:

  • any covenant, promise or agreement;
  • contained in, collateral to or affecting;
  • an agreement pertaining to a well for oil, gas, or water or to a mine for a mineral;
  • if it purports to indemnify a person for damage that results from the sole or concurrent negligence of the indemnitee;
  • arising from personal injury, death, or property injury. 

Tex. Civ. Prac. & Rem. Code § 127.003. 

One important distinction in TOAIA, as compared to similar acts of other states, is that contractual indemnity obligations are rendered void and unenforceable regardless of whether the underlying suit is seeking to recover damages for personal injury or for property damage.

Although defense and indemnity agreements relating to oil, gas, or water wells are presumably void, Texas provides exceptions to the general prohibitions against mutual or unilateral indemnity provisions.  Importantly, TOAIA is the only act which allows participants to circumvent the general prohibition by an express agreement to procure insurance covering the respective indemnity obligations.  Accordingly, where parties agree to mutual indemnity provision that are covered by insurance, the agreement is valid to the extent of the coverage and dollar limits each party has agreed to obtain for the benefit of the other party.  This does not require the parties to agree to provide a certain amount of insurance.  Instead, when the parties procure different levels of insurance, the indemnity obligations are limited to the lower amount of insurance obtained.

A unilateral indemnity obligation is an agreement where one party (as indemnitor) agrees to indemnify the other party (as indemnitee) but the indemnitee does not promise reciprocal indemnity to the indemnitor.  Where a unilateral indemnity obligation exists, the insurance limit is capped at $500,000.00.  Essentially, a contractor can indemnify an owner/operator for its own negligence without the owner/operator making a reciprocal obligation to the contractor so long as the insurance agreement is in writing and does not exceed $500,000.  Compared to other oilfield anti-indemnity acts, TOAIA is unique as it is the only Act which allows participants to circumvent the reach of the indemnity prohibition through written insurance obligations.      

Conclusion

The role of insurance in TOAIA is directly contradicted in the Oilfield Anti-Indemnity statutes in Louisiana, New Mexico, and Wyoming.  Those acts expressly prohibit insurance agreements which purport to circumvent the anti-indemnity statutes.  Moreover, Louisiana, New Mexico, and Wyoming courts consistently ignore choice of law provisions in oilfield contracts when the only purpose of the provision is to avoid state-specific indemnity prohibitions.  Future articles will discuss the particular provisions and exceptions of the Louisiana, New Mexico, and Wyoming anti-indemnity statutes in further detail.     

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