Fifth Circuit Opinion: Applying the Texas Oilfield Anti-Indemnity Act, a contractor’s indemnity obligation under the contract between the contractor and the owner-operator of a well the contractor worked on was limited to the $3 million of insurance the contractor was required to maintain under the contract, even though the indemnity obligation was unlimited in amount and the contractor had purchased $11 million in total insurance coverage.
Summary: Cimarex Energy Company, et al. v. CP Well Testing, L.L.C., No. 20-50892 (5th Cir. Feb. 14, 2022) involved a Master Service Agreement (“MSA”) between an owner-operator, Cimarex, and a contractor, CP Well. An employee hired by CP Well was injured in a flash fire at a Cimarex well. Cimarex settled a lawsuit that the employee brought against it for $4.5 million. The MSA included a mutual indemnity provision that required CP Well to obtain a minimum of $3 million in liability insurance. CP Well refused to indemnify Cimarex for the remaining $1.5 million. The Texas Oilfield Anti-Indemnity Act (“TOAIA”) applied to the MSA in this case. TOAIA limits mutual indemnity obligations to the coverage amount that the indemnitor has agreed to obtain for the benefit of the indemnitee. The Fifth Circuit analyzed the plain language of the MSA to determine whether CP Well’s insurance coverage in excess of the $3 million minimum was for the benefit of Cimarex or for the independent benefit of CP Well. Because the MSA was silent as to indemnity obligation limits, the Fifth Circuit turned to the terms of CP Well’s liability insurance policy, which the Fifth Circuit concluded effectively set the indemnity coverage “ceiling” at the same level as the MSA’s “floor.” The Fifth Circuit affirmed summary judgment for CP Well and held that CP Well had no obligation to indemnify Cimarex beyond the $3 million minimum insurance required in the MSA.
What Owner-Operators Need to Know: Owner-operators that regularly enter into contracts that include mutual indemnity obligations supported by minimum insurance coverage should be aware that a court may limit the amount of a contractor’s indemnity obligations under your contract with that contractor to the minimum amount of insurance the contract requires the contractor to maintain, regardless of how much liability insurance the contractor actually maintains. Instead of relying on the same contractual minimum for every contract, owner-operators should carefully consider the risks of each project and adjust the minimum insurance coverage on a case-by-case basis in proportion with the risk. In other words, owner-operators should contract for the indemnity coverage they think they might need. As always, consulting with an attorney specializing in indemnification issues is a smart practice, and one that can protect you should you find yourself seeking indemnification.
The opinion can be found here.
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