Contractual Risk Allocation in a PostMacondo Environment

Michael A. Golemi
William W. Pugh

Willis 2012 North America Energy Conference

May 16, 2012

AProfessionalLawCorporation

NewOrleans|Lafayette|Houston|1

Overview

SignificantMacondodecisions
Settingupariskallocationprogram
Basicindemnityandinsuranceissues
Restrictionsonindemnityandinsurancein
theoilfield
TexasConstructionAntiindemnityAct

Survey:Top4TexasCountryandWesternSongs
fromTexasRiskManagers
4.

HowCanIMissYou...
IfYouWon'tGoAway?

3.

YouGotTheRing...
AndIGotTheFinger

2.

IStillMissYouBaby...
ButMyAim'sGettin'Better

Andthe#1songis...
1.

IfIHadShotYouWhenIFirstWantedTo...
I'dBeOutOfPrisonByNow

SignificantMacondoDecisions
InsuranceandIndemnity

InreOilSpill11/15/2011Orderre
Insurance
BPsoughtdeclarationsthatitwasan
additionalinsuredunderTransoceans
insurancepoliciesandthatthescopeof
coveragewasgovernedbythepolicies
withoutreferencetothedrillingcontract.
BPalsosoughtdeclarationthatits
additionalinsuredstatusreachedthe
pollutionliabilitiesBPincurredwith
respecttotheMacondowell.

InreOilSpill11/15/2011Orderre
Insurance
Courtdistinguishedcasesrefusingtoconsider
underlyingcontractbecausepolicyatissuereferenced
InsuredContract intheadditionalinsuredprovision.
Courtalsodistinguishedcasesinvalidatinglimitations
foundinadditionalinsuredprovisionsofunderlying
contractbecauseadditionalinsuredprovisionatissue
referencedindemnitieswithinthecontractasopposed
toextracontractualindemnityprovisions.
Courtalsoreasonedthatadditionalinsuredprovision
wasnotseparatefromandinadditiontoindemnities
becauseitlimitedtheadditionalinsuredcoverage
requirementtoliabilitiesassumedinthecontract.

InreOilSpill11/15/2011Orderre
Insurance
CourtheldthatBPisanadditional
insuredunderTransoceanspolicies;
however,thescopeofBPsadditional
insuredstatusislimitedtotherisks
assumedbyTransoceaninthedrilling
contract.
PollutionriskswereallocatedtoBP,soBP
doesnothaveinsurancecoverageunder
Transoceanspolicies.

InreOilSpill1/26/2012Orderre
Indemnity
BPargued:

indemnificationforTransoceansgrossnegligence
isagainstpublicpolicy

indemnityforpunitivedamagesandcivil
fines/penaltiesunderCWAisalsoagainstpublic
policy
Transoceansbreachofdrillingcontractinvalidates
indemnity
noattorneysfeesforpursuitofindemnity
nodutytoassumedefenseofTransocean

InreOilSpill1/26/2012Orderre
Indemnity
Courtheld:

indemnificationforgrossnegligenceisnotagainst
publicpolicyforcompensatorydamages;however,
noindemnityforpunitivedamages againstpublic
policy

indemnityforcivilfines/penaltiesisalsoagainst
publicpolicy(duetopunitivenature)
noattorneysfeesforpursuitofcontractual
indemnity
nodutytoassumedefenseofTransocean
Courtdeferredbreachofdrillingcontractissue

PostMacondoWorld
Significantemphasisoncontracts
Regardlessoffaultindemnity
approachlikelytoremainthesame
Carveoutsandaddonstobase
indemnitieswillbemoredifficult
tonegotiate
Insurancecoveragesandprovisions
willrequiremorescrutiny

DevelopingaRiskAllocation
Program

KeystoContractualRiskAllocation
Understandthebigpicture
Recognizetheimpactofdrillingcontracts
Considerdifferentreciprocalindemnity
approaches
Prepareyourpassthrough protectionplan
Developyourmasterserviceagreements
(MSAs)andanalyzehowothercontractswill
comeintoplay
Coordinatewithyourriskmanagement
departmentandinsurancebroker

AnticipatingtheBroadReciprocal
Indemnity
Inacommonworkplace,indemnitieswillgenerally
applyregardlessoffault
Drillingcontractorothermajorcontractisoftenthe
keycontract
DrillingcontractorwillwantindemnityforOperators
peopleandpropertyand peopleandpropertyof
Operatorsothercontractors(BroadGroup)
Operatorwilloweindemnitytodrillingcontractor
everytimethereisanaccidentinvolvinganyone
otherthanthedrillingcontractor

BroadReciprocalinDrillingContract
Necessitates aPassThrough
Provision
Indemnityschemeindrillingcontract(andothermajor
contracts)affectsallunderlyingcontracts(with
commonworkplace)
AnOperatormusthavepassthrough provisionsinits
underlyingcontracts(topassindemnityfromother
contractorstothedrillingcontractor)
Indemnitywithoutapassthroughmechanismwont
solvetheproblem
Alwaysbeawareofenforceabilityissues

ContractorsView
COMPANY

CONTRACTOR

OTHER CONTRACTORS

SUBCONTRACTOR

OperatorsView
Mud Logging
Contractor

Company

Subs, if any

Drilling

Wireline

Vessel

Casing

Helicopter

Drilling

16 2/3 %

Wireline

Mud Logging
16 2/3 %

16 2/3 %

Company

Helicopter

16 2/3 %

16 2/3 %

16 2/3 %

Casing

Vessel

WhatHappensWithoutaPass
ThroughProvision
ForeveryinstanceinwhichanOperatorowesa
broadreciprocal indemnity,buttheunderlying
contracthasnopassthrough provision,the
Operatorwillhavenorecourse!!!!

Foremanv.Exxon ContractualSituation
(Indemnity)
Exxon

(In
de
m

nit
y)

Diamond M

Caterer

Offshore

Employee

Wireline
Contractor

Vessel
(Charter)

Foreman v. Exxon - Contractual Situation

(Indemnity)
Exxon
(10%)

( In

de
mn
ity
)

Diamond M
(55%)

Caterer

Offshore
(35%)

Employee

Wireline
Contractor

Vessel
(Charter)

Foremanv.Exxon Result
Diamond M

(Indemnity)

Exxon

(15%)

(55%)

(10%)

(I n

de
mn
ity
)

(85%)

Caterer

Offshore
(35%)

Employee

Wireline
Contractor

Vessel
(Charter)

Foreman v. Exxon - Result

Exxon

(Indemnity)

(85%)

Offshore

(15%)

(55%)

(I n

de
m

ni
ty

(10%)

Caterer

Offshore
(35%)

Employee

Wireline
Contractor

Vessel
(Charter)

OptionsforObtainingPass
Through Protection
ThreeOptionsForPassThroughProtection:
1) Includecontractualliabilitywithinscopeofindemnity but
see(butseeColonyNatlIns.Co.v.Manitex,L.L.C.(5thCir.
2/20/12)
2)Extend indemnityprotectiontothosetowhomyouowe
contractualindemnity
3) Extend indemnityprotectionto customersand
subcontractorsorothercontractorsandsubcontractors
(andothers)asindemnifiedparties(broadGroup)
Useabroaddefinedterm(suchasCompanyGroup)
torefertoabroadlydefinedgroupofindemnitees
Eachoptionhasprosandcons

BasicIndemnityandInsurance
Protections

IndemnityBasics
MSAisabuildingblockformostoperations
Musthavevalidmagiclanguage toobtainindemnityfor
onesownnegligence
Indemnity(andmagiclanguage)mustbebroadenoughto
extendtoallintendedbeneficiaries
Anticipateandaddresspossiblerestrictionsonindemnity
Beawareofanyissuesrelatingtothescopeoftheindemnity
orthescopeoftheMSA
DeepwaterHorizon indemnityforgrossnegligence(as
opposedtorelease)isnotagainstpublicpolicyunder
maritimelaw indemnityforpunitivedamagesis

CarefullyConsiderWhoShould
betheIndemnitees
UsedefinedtermsuchasCompanyGroup
Considerallpartiesyoumaywantprotected
Includecontractorsandsubcontractorsoruseanother
approachtoprovidepassthroughprotection
ExpanduseofCompanyGroup
Allowsconsistentanduniformriskallocationscheme
Usesamedefinitionininsurancerequirementsand
certificateofinsurance
Usesamedefinitioninothercontractsifatall
possible

AnticipatingCarveOuts,Addons,
andOtherExceptions
Avoidcarveoutsandaddonsifpossible
Limitcarveoutstotheactualriskintended(suchas
wellcontrolcosts)asopposedtoallclaimsarising
outof...[ablowout]
WellControl
Pollution
LossofReservoir
GrossNegligence

InsuranceBasics
Namedasadditionalinsured
Waiverofsubrogation
Coveragemustbeprimary(atleastforrisksassumed
bynamingparty)
Insurancenotalimitonindemnity
Dovetailinsurancewithindemnity extendtosame
parties
Insurancemayprovidemoreprotectioninsome
instances

Insurancemayprovidemore
protectionthanindemnities
Insurancemayprovidemoreprotectionin
someinstancesduetoantiindemnitylaws
Texas Getty andOryx
ComplywithTexasinsurancelanguage
IncludeGetty language

Insurancemayprovidemore
protectionthanindemnities(contd)
LouisianaconsiderapplicationofMarcel
LHWCA insuranceprotectionis
enforceableevenifindemnityisinvalid
under 905(b)
Statethatminimumlimitsarenota
limitationorrestrictiononindemnity

CriticalMaritimeEndorsements
EndorseP&IInsurance:
ToprovidefullprotectiontoCompanyGroup
additionalinsuredswithoutlimitationastoliabilityas
ownerofthevessel(anddeleteanyasowner
restrictions)
ToprohibitreductionoflimitsforCompanyGroupin
theeventoflimitationofliability

RestrictionsonIndemnityand
Insurance

EffectofApplicableLaw
Maritimelaw indemnityandinsurancegenerallyfully
enforceable
Drillingcontractforjackupismaritime
Beawareof 905(b)ofLHWCA
Determiningapplicablelawiscomplicatedandimportant
inviewofantiindemnitylaws
OilfieldAntiIndemnityActs
Texas
Louisiana
NewMexico
Wyoming

LouisianaOilfieldIndemnityAct
(LOIA)
LOIArestrictsindemnityandinsurance
LOIAonlyappliestocontractsrelatingtoawell
Differentanalysisdependingonwhether
onshoreoroffshore
Appliestopersonalinjury/death,not property
damage
NoinsuranceexceptionunlessOperatorpays
contractorsinsurancepremiumunderMarcel
v.PlacidOilCo.

TexasOilfieldAntiIndemnityAct
Appliestopropertydamageand personal
injury/death
Exceptionsforindemnitysupportedby
insurance
Unilateralindemnity($500,000)
Mutualindemnity(uptoamountof
insuranceobtainedforthebenefitofthe
otherpartyasindemnitee) nolonger
requiredtospecifyequal amounts
Actdoesnotapplytoinsurancethatdoesnot
directlysupporttheindemnity Getty &Oryx

Texas
ConstructionAntiIndemnityAct

LegislativeHistory
Billsubmittedtoaddressproblemfor
OwnerControlledInsurancePrograms
(OCIPs)
WantedtomakesureOCIPpolicywould
provideinsuranceprotectionforsome
minimumperiodoftimebeyond
performance

OCIPBillwasHijacked
AllthatremainsoforiginalbillisSection151.051
requiresOCIPpolicythatprovidesgeneral
liabilityinsurancecoveragetoprovide
completedoperationsinsurancecoveragefora
minimumperiodofthreeyears
Section151.151addedtoprohibitindemnity
provisionsandcertaininsuranceprotection

SUBCHAPTERA.GENERALPROVISIONS
Sec.151.001. DEFINITIONS. Inthischapter:
(1) "Consolidatedinsuranceprogram meansa
programunderwhichaprincipal providesgeneral
liabilityinsurancecoverage,workers'compensation
insurancecoverage,orboththatareincorporated
intoaninsuranceprogramfora...construction
project.
(8) "Principal"meansthepersonwhoprocuresthe
insurancepolicyunderaconsolidatedinsurance
program.

Sec.151.001 DEFINITIONS(contd)
(2) "Constructionproject"meansconstruction,
remodeling,maintenance,orrepairofimprovements
torealproperty. Thetermincludestheimmediate
constructionlocationandareasincidentaland
necessarytothework... .
(3) "Contractor"meansanypersonwhohasentered
intoaconstructioncontractoraprofessionalservices
contractand isenrolledintheconsolidatedinsurance
program.

Sec.151.001 DEFINITIONS(contd)
(5) "Constructioncontract"meansacontract,subcontract,..
.enteredintoormadebyanowner,architect,engineer,
contractor,...forthedesign,construction,alteration,...
repair,ormaintenanceof,orforthefurnishingofmaterialor
equipmentfor,abuilding,structure,...orother
improvementtooron...realproperty,includingmoving,
demolition,andexcavationconnectedwiththerealproperty.
(6) "Indemnitor"meansapartytoaconstructioncontract
thatisrequiredtoprovideindemnificationoradditional
insuredstatustoanotherpartytotheconstructioncontract
ortoathirdparty.

SUBCHAPTERC.REQUIREMENTSRELATED
TOINDEMNIFICATION
Sec.151.101. APPLICABILITY.
(a) Thissubchapterappliestoaconstruction
contractforaconstructionprojectforwhichan
indemnitorisprovidedorprocuresinsurancesubject
to:
(1) thischapter;or
(2) Title10.
(b) Subsection(a)appliesregardlessofwhetherthe
insuranceisprovidedorprocuredbeforeorafter
executionofthecontract.

Sec.151.102. AGREEMENTVOIDAND
UNENFORCEABLE.

Except...151.103,aprovisioninaconstructioncontract,
orinanagreementcollateralto...,isvoidand
unenforceableasagainstpublicpolicy totheextentthatit
requiresanindemnitortoindemnify,holdharmless,or
defendaparty,includingathirdparty,againstaclaim
causedbythenegligenceorfault,thebreachorviolation
ofastatute,ordinance,governmentalregulation,
standard,orrule,orthebreachofcontractofthe
indemnitee,itsagentoremployee,oranythirdparty
underthecontrolorsupervisionoftheindemnitee....

Sec.151.103. EXCEPTIONFOR
EMPLOYEECLAIM.
Section151.102doesnotapplytoaprovisionina
constructioncontractthatrequiresapersonto
indemnify,holdharmless,ordefend another
partytotheconstructioncontractorathirdparty
againstaclaimforthebodilyinjuryordeathofan
employeeoftheindemnitor,itsagent,orits
subcontractorofanytier.

Sec.151.104. UNENFORCEABLEADDITIONAL
INSURANCEPROVISION.
(a) ExceptasprovidedbySubsection(b),aprovisionina
constructioncontractthatrequiresthepurchaseof
additionalinsuredcoverage,oranycoverageendorsement,
orprovisionwithinaninsurancepolicyprovidingadditional
insuredcoverage,isvoidandunenforceable totheextent
thatitrequiresorprovidescoveragethescopeofwhichis
prohibitedunderthissubchapterforanagreementto
indemnify,holdharmless,ordefend.
(b) Thissectiondoesnotapplyto[anOCIPpolicy]

Sec.151.105. EXCLUSIONS.
Thissubchapterdoesnotaffect:
(1) an[OCIP]insurancepolicy...;
(3) indemnityprovisionscontainedinloanandfinancing
documents,otherthanconstructioncontractstowhichthe
contractorandowner'slenderareparties...;
(7) agreementssubjectto[TOAIA];

WhereAreWeNow?

CAIAImpactLargelyLimitedtoProperty
Indemnity/insuranceavailableforbodilyinjury/death
claims
Whatprotectionforpropertydamage?
Currentindustryapproach
Ownercarriespropertyinsuranceonitsown
propertyandgivessomebenefittothecontractor
Ownereithercarriesorselfinsuresliabilityfor
damagetothework(butusuallycapscontractors
exposure)

BestCaseArgument
CAIAdoesnotprohibitownerofpropertyfrom
insuringitspropertyandreleasingitsclaimagainst
theotherparty
Releases arenotprohibited
Noprohibitionofwaiversofsubrogation
Arguablynothingtopreventpropertyowner
fromreleasingallclaims,regardlessoffault,and
requiringitsinsurerstowaivesubrogation

Rationale
Statuteonlyprohibitsindemnityand
additionalinsured,whichaddressliability
claims
Anownershouldalwaysbeabletorelease
hisownclaimandrequirehisinsurertodo
thesame
Consistentwithstandardpractice
Avoidsduplicateinsurance

Conclusion

Conclusion
Developaplanforcontractstofittogether
Understandtheneedforpassthrough
protectionandtheimpactofdifferent
reciprocalriskallocationprovisions
DesigntheMSAtoobtainmaximum
flexibilitywhilestillmaximizingprotection

Conclusion(contd)
Trytoanticipateandguardagainstcarve
outs,gaps,andenforceabilityissues
Indemnityandinsuranceareimportantrisk
allocationtools,buttheymustfitwithan
overallplantobeeffective
Contractsmaybemoredifficulttonegotiate
inapostMacondoworld
TexasCAIAraisessomedifficultquestions

Conclusion(contd)
Bestprotectionisunderstandingandanticipatingthe
risks
Choosethebestoptionunderthecircumstances
Ifthereisaproblem...

55

IfProblemsdoOccur
LearntoCope

FloodinginIreland