Oil & Gas Basics: Master Service Agreements and Indemnity Overview

All right, today we're talking about master service agreements and indemnity. Let's get into it. Quick disclaimer, I am not an attorney and this presentation does not provide any legal advice. For legal questions or specific situations consult a qualified attorney. This material is for general informational purposes only and for the training and education of general MSA indemnity and insurance concepts. All right, quick question. If something happens on job site, who could get sued? And the answer won't surprise you, it's everyone. So we're talking about today. So you don't need to become an attorney, just get familiar with the basic concepts. And that's really the whole point of this presentation.

Indemnity is a fundamental principle found in both master service agreements and insurance policies. Indemnity attempts to ensure that an insurance policy holder is compensated for a covered loss Restoring them to their pre-loss financial position. It prevents overcompensation and ensures that insurance is a safeguard, not a profit-making tool. So ultimately, MSAs define the contractual relationship between two parties, two or more parties, and insurance policies are written to protect the party that paid for the coverage, not everyone else. All right, two definitions. First, we have indemnity, which is the party receiving indemnification. Or protection from liability. This is typically the owner group, the owner or the party with greater negotiating leverage.

Then we have the indemnitor, which is the party providing indemnification. So they're assuming responsibility for certain losses. This is typically the contractor, the subcontractor or the party accepting the work. All right, it's important to note here, the indemnity is the party with the greater negotiating leverage. We're gonna talk about that a little bit more later. So to indemnify means to compensate someone for a loss or protect them from financial liability. And this is where I got hung up. So I read this in a book about indemnity. It says the indemnitor indemnifies the indemnity. And that pretty much sent me spinning trying to figure out how to unravel that. And that's why I ultimately made this presentation.

But a really easy way to think about this is that the indemnity is free from liability. So it rhymes, indemnity has two E's, free has two E's. You can use that right down to keep this organized going forward. All right, another concept is burden of proof. So burden of proof is the obligation to show that a claim or a defense is valid. In indemnity, it defines or determines who must prove responsibility for a loss. Typical MSA structure, and I know I'm going through this quickly. But the contractor or service provider agrees to indemnify the owner group or the client for liabilities arising from the contractor's own negligence, employees or operations. In rare cases, a contractor might be the indemnity, such as when the indemnity is mutual or when the contractor is harmed due to the operator's negligence and the MSA includes reciprocal provisions.

Based on the type of indemnity clause included in the contract, as some clauses shift liability depending on the circumstances. So there's three indemnity clauses we're gonna talk about today, three that are used previously in three more updated versions. All right, speaking of a brief history of indemnity clauses. So these are still taught in a lot of insurance courses and sometimes you'll find applications of them today, but for the most part, we'll be using the updated ones. We're gonna go through these real quick. So the first one is broad form or sole negligence. This type of indemnity requires the contractor to indemnify the owner for all losses related to the contractor's work, even if the loss results solely from the owner's negligence.

It includes language stating that the contractor must indemnify the owner regardless of fault. The second one is an intermediate form or contributory fault. This requires the contractor to indemnify the owner for all losses related to the contractor's work, except when the loss is due solely to the owner's negligence. So if the contractor is even 1 % responsible, it must indemnify the owner for the entire loss. And the last one, number three, limited form or comparative fault. So based on comparative fault, this indemnity requires the contractor to indemnify the owner only to the extent of the contract. For example, if the contractor is found 1 % responsible, it is only liable for 1 % of loss.

So think of a pie chart, right? Each person is going to take a portion Alright, so no indemnity clause is ideal, but why did these three need revision? The legacy indemnity clauses focused on assigning fault, but often led to disputes, unfair risk transfer, and enforcement issues under modern law. So the law changed, I would say society even changed, and these needed to be adjusted. So modern clauses were developed for better enforceability, clear insurance alignment, and to reflect real world operational control. So who's in charge of the job site? Who's in charge of actually getting it done? Despite the updates and changes, indemnity cases and corresponding claims are complex and often messy.

So what are the updates? Control-based, fault-based, and knock for knock. We're gonna go through each of these. All right, so over time, you'll start to recognize patterns within MSAs for indemnity clauses and insurance requirements. So... As I'm going through these, yes, I'm reading definitions. I hope that hearing it and reading it at the same time is helpful, but be looking at the patterns. Okay, don't focus on all the words, focus on what specifically in these clauses is gonna help you identify what they are. So the first one is control-based indemnity, which assigns the risk of loss to the contractor while allowing them the opportunity to demonstrate that the loss resulted from the owner group's negligence.

If proven, the subcontractor's indemnification is proportionally reduced, so it's reduced based on the owner's degree of fault. In this arrangement, the burden of proof typically falls on the contractor. So with control-based indemnity and fault-based indemnity, it's focused on the burden of proof. In control-based, the burden of proof is on the contractor. We're gonna see that it's gonna flip in fault-based, okay? A good way to remember control-based indemnity is that the contractor... often controls the work site and would thus have more exposure and control of the risks than the owner. This is what the MSA will look like. So the contractor shall indemnify the owner group. You're going to see the paragraph is going to start with that.

And somewhere in there, you'll see contractors indemnification obligation shall be reduced in accordance with principles of comparative responsibility. All right. Fault-based indemnity. So fault-based indemnity assigns the risk of loss to the contractor, but only if the owner group can prove that the contractor was at fault. In this arrangement, the burden of proof typically rests on the owner group. Okay, so on the control base where the contractor has the burden of proof, fault-based indemnity, the burden of proof is on the owner group. All right, so if you're making a chart, flip those around. This is what you're gonna see on the MSA. Contractor shall indemnify owner group, and then somewhere in there, but only to the extent caused by the negligent acts or omissions of the contractors.

There's a qualifier. Last one's knock for knock indemnity. So knock for knock indemnity assigns risk based on the party that each party is responsible for its own losses, regardless of whether another party's negligence contributed. So in this arrangement, the burden of proof is irrelevant as fault does not impact liability. Quick note on this is the most common type of indemnity agreement and generally preferred by insurance carriers because it should prevent either party from placing the other at fault. This allows each party to stand on their own in terms of risk and coverage. This is the pattern. There's two paragraphs. The first will say, contractor shall indemnify owner group. The other paragraph is somewhere in there, and the MSA is going to say, owner group shall indemnify contractor group.

So they're going to flip. They're both going to be equally, equally liable here. Okay. Here's an example from a carrier. So insurance carriers have appetite guides. That's what they call them. But this is basically what they're looking for with a client profile. So the carrier does want to insure companies that have a revenue below 6 million. They want companies with employee numbers below 25. The carrier doesn't want any work not carried out on a knock for knock basis. So they want knock for knock contracts for a majority of the contracted work. They want work carried out that is not within the oil and gas industry or outside of the USA. And they don't want subcontractors, though this can be considered with proper 1099 agreements.

So they don't want to have company that is subcontracting work. Okay. Now I've real quick, I've highlighted the words majority within and proper. These are all ambiguous terms, which lets me know that we might be able to negotiate coverage terms. So what is exactly a majority of contracted work? Is that 60 % is that 80 % is at 99 % right? What are those MSAs look like? Are you within the oil and gas industry? What is within, right? Let's define what that means. Are they adjacent to, are they working with oil and gas companies and subcontractors, right? What's a proper 1099 agreement? What are the requirements that makes it proper, right? So those are ambiguous. Those are ways that we can actually negotiate and get terms from more carriers.

Just wanna sidebar that. All right, anti-indentity. So anti-indentity refers to laws or contract clauses that limit or prohibit one party, usually the contractor, from indemnifying another party, which is usually the owner group, for that party's own negligence. These laws are common in construction and oilfield contracts and are designed to prevent risk shifting that is considered unfair or excessive. Specifics will vary by state and industry, so we're going to focus on a couple different states here that are in the oil and gas industry specifically. So here's a simplified version of anti-indemnity. Anti-indemnity means you can't make someone else pay for a mess you caused. For example, if you spill paint on the floor, you can't make your friend clean it up just because they were helping you.

Some contracts will try to do that and the anti-indemnity rules say, nope, you have to go clean up your own mess. Makes me think of my six-year-old and my two-year-old. Each of them wants to have the other person do the work. An owner group can't make a contractor indemnify them for something they caused and vice versa. Important to note here. Okay. So anti-indentity makes it so that risk can't be pushed downhill with the intent to protect lower tiered parties and their insurers by limiting unfair risk. You think back to indemnity and indemnitor we're going through who has the negotiating power, right? So the indemnity typically has more negotiating power as the owner group. The indemnitor is typically the contractor and they're looking for the work.

So the contractor will say, Hey, look, I'll take on more risk because I need the work. Right. And that puts them at a disadvantage. So anti-indemnity is intended to help soften that. It doesn't always work that way, but that's the intent. Another note here. So knock for knock is a mutual agreement between two parties or more on an MSA while anti-indemnity is a legal restriction. So anti-indemnity prevents you from making others pay for your fault. And knock for knock means each party covers its own people and stuff, no matter who caused the harm. Just want to I guess make note of that delineation. So there's four oil field anti-indemnity states. There's Texas, Louisiana, Wyoming, and New Mexico.

And there's about 40 other states with laws that broaden indemnity and construction and infrastructure work, but we're gonna focus on the oil field ones right now. All right, so Texas. In Texas, the Texas Oil Field Anti-Indemnity Act restricts how much risk a contractor can require to assume for owner groups negligence in all... oil field contracts. So the law avoids indemnity provisions that require a contractor to identify an owner group for the owner group's negligence beyond half a million dollars unless insurance is provided. If the owner group is seeking indemnity above half a million, it must be backed by insurance, which is how most operators will structure their contracts anyways. As a result, Texas is a weak anti-indemnity state because you can circumvent that cap through insurance.

Louisiana and New Mexico are going to be more strict. Louisiana so Louisiana has the oil field anti indented the act which invalidates indemnity agreements and contracts related to oil gas or water wells that Obligate a party to identify another for the indemnities own negligence or fault the act only prohibits defense indemnity for and all three of these things have to happen for one and indemnities own negligence or fault to that causes bodily injury or death and Three in arrangements pertaining to a well for oil gas water or drilling for minerals So if the indemnity and insurance is not being sought to indemnify against the parties negligence, then prohibitions under the act will not apply.

However, there is often a fight about the liability on the front end of these conversations anyways. In addition, there's something called the Marcel Agreement. So in Louisiana, the act generally prohibits oil operators from requiring subcontractors to indemnify them for the operators own negligence and oil and gas contracts. We just covered that, all right? But under the Marcell exception, if the subcontractor obtains insurance specifically covering the indemnity obligation, the indemnity provision can still be enforced. This exception comes to the Marcell versus Placid Oil Co. Case where the court held that the indemnity is allowed if the insurance is in place to fund it. So as a result, okay, and this has been since 1986, as a result, many oil operators in Louisiana use Marcell agreements.

Which requires subcontractors to carry tailored insurance policies, effectively restoring indemnity provisions despite the Act's restrictions. And sometimes this is as simple as a single piece of paper with an invoice. Other times it can be more detailed. Not complicated to get around though. So basically in my opinion, the Act is really easy to circumvent through this Marcell agreement. Right, the other two states are Wyoming and New Mexico. So Wyoming, They have anti-indemnity statutes declaring certain indemnity clauses in oilfield contracts void, particularly those that require indemnification for a party's own negligence. And New Mexico, so similar to Texas and Louisiana, New Mexico has enacted statutes that limit enforceability of indemnity provisions in oilfield contracts, aiming to prevent the transfer of liability for a party's own negligence.

Always the party's own negligence, okay? All right, action over. We are almost done here. So action over. These are third, party over actions brought by injured workers against non-employer parties, like operators. When a contractor's employee sues an operator for damages beyond workers' compensation, the operator seeks indemnification from the contractor under existing hold harmless provisions. This effectively erodes the employer's exclusive remedy protection by allocating liability back through indemnity clauses. If you're confused, that's totally fine. We're going to go through a couple different versions of this. First, a simplified version. So a contractor's employee gets injured on the job site.

The contractor's work comp policy pays out for the claim to take care of their employee. But then the contractor's employee sues the owner for additional damages above and beyond the work comp. So the owner takes that and he passes the liability back to the contractor. And that's going to be through the liability clause, the indemnification clause that's used. Two things here. So workers comp exclusivity. This is often called the exclusive remedy doctrine. It's a foundational principle of workers compensation in the United States. So employees receive guaranteed no fault benefits if injured on the job, and employers are protected from lawsuits by injured employees, even if the employer's negligence contributed to the injury.

So work comp cases are messy to begin with. But you have the exclusive remedy doctrine that gets brought in as a core principle of that structure. So this arrangement eliminates the need for injured workers to prove fault and gives employers predictability and liability and cost. And there's a whole story about how this came to be, but we'll set for another time. A note on general liability. So the general liability carrier would also be notified of any action over claims in most cases on the indemnity side as protection. All right. So here's how it works. Go through another example. So in oil field, in third party over or action over claims. These arise when an injured worker barred from suing their employer due to work comp exclusivity, sues another party involved in the project, typically the operator or general contractor.

So although the injured employee can't sue their direct employer, they can sue third party like the oil operator for damages beyond workers comp benefits. If a hold harmless clause exists between the employer and the operator may then seek indemnification from the employer for those damages. Not covering hold harmless right now. I just want you to understand how this works, how these pieces go together. All right. So this creates a legal back channel around the workers comp exclusivity rule. The injured worker sues the operator and the operator shifts the liability back to the employer through the indemnity clause. How would this look? Alright, so the contractor has a subcontract with the owner group.

The contract includes a hold harmless provision where the contractor agrees to indemnify the operator for any claims arising from the contractor's work. Okay, a hold harmless cause in the NSA states that one party agrees not to hold the other party legally or financially responsible for certain damage lost to the contractor. Alright, so one of the contractor's employees Walter wounded, he's injured on site and collects workers' comp from the contract. All right, but that employee can't sue his employer for more, right? Because of the work comp exclusivity. So Walter sues the operator alleging an unsafe work site. But the contractor agreed to hold the operator harmless for any claims. Under the indemnity agreement, the operator passes the liability back to the contractor.

And the degree of the contractor's responsibility depends on the form of indemnity in the contract, either fault-based or control-based. So the action over refers to Walter wounded suing the operator for damages above the work comp, right? And then the contractor agreed to hold the operator homeless. So they pass that back to the employer and that fault is not determined by what indemnity clause was in the contract. Right. So lots going on there, but if you just get a basic framework of that, you'll be set. So best practice ideas here, right? At one point it was asking the question like, what do we even do, right? But here's some best practice ideas. Avoid broad form indemnity agreements and prefer to use knock for them.

Negotiate mutual hold harmless clauses and MSAs, exclude indemnity obligations with carve outs for third party over claims for the indemnity sole negligence, ensure the general liability policy includes contractual liability coverage that responds to the indemnity obligations. Add specific action over exclusion endorsements and review for action over coverage and general liability excess and umbrella policies in monopolistic States like North Dakota, Ohio, Washington, Wyoming, purchase stop gap coverage to fill gaps for the work comp a state run. That's another topic. Work with a broker and insurance carrier that understands your specific business and rights policies that are appropriate. Okay.

That's what I would do at least start there. All right. So risk transfer and insurance. All right. First of all, I understand that insurance is something you hope you never have to use. We all have to get it to meet contracts. We all have to have it just to function as a society with how litigious everything is, especially in the United States. But again, insurance is something you hope you never have to use. But insurance is a great risk transfer tool. So effective risk transfer requires coordination between indemnity obligations and insurance requirements. The party responsible for indemnity should also be responsible for ensuring that exposure. Insurance serves multiple purposes, guarding against indemnitor insolvency, providing coverage when indemnity obligations are invalid, and easing tensions.

And think that's the most important one when working parties, between working parties during loss events. So can imagine when a bunch of people get served, a bunch of companies get served, tensions immediately increase on the job site. And insurance really exists as a buffer between that to help people work through it. Okay. Additional key concepts include savings clauses to handle conflicting statutory requirements, primacy clauses to establish hierarchy among contract documents, and careful attention to consequential damage waivers that may not cover all intended losses. So you're going to review MSAs and insurance for alignment. Right. So review the MSA to compare insurance requirements with our client's current coverage and there is only gaps or carve outs for certain claims.

So that's our role as an insurance broker. The insurance policy will have requirements of the MSA and the MSA will have requirements of the insurance policy and coverage. So they're gonna say, here's the indemnity clause in the MSA, here's the insurance limits, right? And then the insurance is gonna turn on say, we need to make sure that this is in place on the MSA in order for things to check out. So one of two things will happen, you'll have compliance is confirmed, your existing policies will meet all the MSA requirements and can be reflected on a certificate of insurance, or you'll have non-standard requirements, right? So sometimes the indemnity includes unusually high limits or non-standard terms.

For example, a company that's doing 2 million a year in sales, they're being asked to carry a $20 million umbrella. And we might ask to get that brought back down to 10 million or 5 million or something more reasonable. And in those cases, we'll recommend pushing back and negotiating more reasonable terms. And more often than not, the owner group or the operator, they want to work with good contractors and they're gonna be flexible on those things. All right, so what aren't we talking about today? There's other things that we haven't covered, which is hold harmless, additional name insured, choice of law and jurisdiction, waiver of subrogation, primary non-contributory wording, COI requirements and deficiencies, and there's a lot more.

They all add to the complexity of these documents. So again, this is a high level, even though it seems like we got kind of deep on these things, this is a high level review of MSA identity and the insurance relationship. So one takeaway, don't sign or start work under an MSA without having your attorney and insurance broker review it first. If you have any questions or you're looking for more resources, send me an email. I'm peter at falconwest.com. Thanks.