Contractual Risk Allocation in a Post-

Macondo 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
Company
Contractor

Subs, if any

Drilling Wireline Vessel Casing Helicopter

 Drilling

16 2/3 %

Wireline Mud Logging

16 2/3 % 16 2/3 %

Company

16 2/3 % 16 2/3 %
Helicopter Vessel

16 2/3 %

Casing
 WhatHappensWithoutaPass
ThroughProvision
ForeveryinstanceinwhichanOperatorowesa
broadreciprocal indemnity,buttheunderlying
contracthasnopassthrough provision,the
Operatorwillhavenorecourse!!!!
Foremanv.Exxon ContractualSituation
(Indemnity)
Diamond M Exxon

y)
nit
m
de
(In
Offshore Wireline Vessel
Caterer
Contractor (Charter)

Employee
Foreman v. Exxon - Contractual Situation
(Indemnity)
Diamond M Exxon
(55%) (10%)

)
ity
mn
de
( In
Offshore Wireline Vessel
Caterer
(35%) Contractor (Charter)

Employee
 Foremanv.Exxon Result
Diamond M (Indemnity) Exxon
(85%) (15%)
(55%) (10%)

)
ity
mn
de
(I n
Offshore Wireline Vessel
Caterer
(35%) Contractor (Charter)

Employee
 Foreman v. Exxon - Result
Exxon (Indemnity) Offshore
(85%) (15%)
(55%) (10%)

)
ty
ni
m
de
(I n
Offshore Wireline Vessel
Caterer
(35%) Contractor (Charter)

Employee
 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