Contractual Risk Allocation in a Post- Macondo Environment

Transcription

1 Contractual Risk Allocation in a Post- Macondo Environment Michael A. Golemi William W. Pugh Willis 2012 North America Energy Conference May 16, 2012 A Professional Law Corporation New Orleans Lafayette Houston 1

2 Overview Significant Macondo decisions Setting up a risk allocation program Basic indemnity and insurance issues Restrictions on indemnity and insurance in the oilfield Texas Construction Anti indemnity Act

3 Survey: Top 4 Texas Country and Western Songs from Texas Risk Managers 4. How Can I Miss You... If You Won't Go Away? 3. You Got The Ring... And I Got The Finger 2. I Still Miss You Baby... But My Aim's Gettin' Better And the # 1 song is If I Had Shot You When I First Wanted To... I'd Be Out Of Prison By Now

4 Significant Macondo Decisions Insurance and Indemnity

5 In re Oil Spill 11/15/2011 Order re Insurance BP sought declarations that it was an additional insured under Transocean s insurance policies and that the scope of coverage was governed by the policies without reference to the drilling contract. BP also sought declaration that its additional insured status reached the pollution liabilities BP incurred with respect to the Macondo well.

6 In re Oil Spill 11/15/2011 Order re Insurance Court distinguished cases refusing to consider underlying contract because policy at issue referenced Insured Contract in the additional insured provision. Court also distinguished cases invalidating limitations found in additional insured provisions of underlying contract because additional insured provision at issue referenced indemnities within the contract as opposed to extra contractual indemnity provisions. Court also reasoned that additional insured provision was not separate from and in addition to indemnities because it limited the additional insured coverage requirement to liabilities assumed in the contract.

7 In re Oil Spill 11/15/2011 Order re Insurance Court held that BP is an additional insured under Transocean s policies; however, the scope of BP s additional insured status is limited to the risks assumed by Transocean in the drilling contract. Pollution risks were allocated to BP, so BP does not have insurance coverage under Transocean s policies.

8 In re Oil Spill 1/26/2012 Order re BP argued: Indemnity indemnification for Transocean s gross negligence is against public policy indemnity for punitive damages and civil fines/penalties under CWA is also against public policy Transocean s breach of drilling contract invalidates indemnity no attorney s fees for pursuit of indemnity no duty to assume defense of Transocean

9 In re Oil Spill 1/26/2012 Order re Court held: Indemnity indemnification for gross negligence is not against public policy for compensatory damages; however, no indemnity for punitive damages against public policy indemnity for civil fines/penalties is also against public policy (due to punitive nature) no attorney s fees for pursuit of contractual indemnity no duty to assume defense of Transocean Court deferred breach of drilling contract issue

10 Post Macondo World Significant emphasis on contracts Regardless of fault indemnity approach likely to remain the same Carve outs and add ons to base indemnities will be more difficult to negotiate Insurance coverages and provisions will require more scrutiny

11 Developing a Risk Allocation Program

12 Keys to Contractual Risk Allocation Understand the big picture Recognize the impact of drilling contracts Consider different reciprocal indemnity approaches Prepare your pass through protection plan Develop your master service agreements (MSAs) and analyze how other contracts will come into play Coordinate with your risk management department and insurance broker

13 Anticipating the Broad Reciprocal Indemnity In a common workplace, indemnities will generally apply regardless of fault Drilling contract or other major contract is often the key contract Drilling contractor will want indemnity for Operator s people and property and people and property of Operator s other contractors (Broad Group) Operator will owe indemnity to drilling contractor every time there is an accident involving anyone other than the drilling contractor

14 Broad Reciprocal in Drilling Contract Necessitates a Pass Through Provision Indemnity scheme in drilling contract (and other major contracts) affects all underlying contracts (with common workplace) An Operator must have pass through provisions in its underlying contracts (to pass indemnity from other contractors to the drilling contractor) Indemnity without a pass through mechanism won t solve the problem Always be aware of enforceability issues

15 Contractor s View COM PANY CONTRACTOR OTHER CONTRACTORS SUBCONTRACTOR

16 Operator s View Company Mud Logging Contractor Subs, if any Drilling Wireline Vessel Casing Helicopter

17 Drilling 16 2/3 % Wireline 16 2/3 % 16 2/3 % Mud Logging Company Helicopter 16 2/3 % 16 2/3 % Vessel 16 2/3 % Casing

18 What Happens Without a Pass Through Provision For every instance in which an Operator owes a broad reciprocal indemnity, but the underlying contract has no pass through provision, the Operator will have no recourse!!!!

19 Foreman v. Exxon Contractual Situation Diamond M (Indemnity) Exxon (Indemnity) Caterer Offshore Wireline Contractor Vessel (Charter) Employee

20 Foreman v. Exxon - Contractual Situation Diamond M (55%) (Indemnity) Exxon (10%) (Indemnity) Caterer Offshore (35%) Wireline Contractor Vessel (Charter) Employee

21 Foreman v. Exxon Result Diamond M (85%) (55%) (Indemnity) Exxon (15%) (10%) (Indemnity) Caterer Offshore (35%) Wireline Contractor Vessel (Charter) Employee

22 Exxon (85%) (55%) Foreman v. Exxon - Result (Indemnity) Offshore (15%) (10%) (Indemnity) Caterer Offshore (35%) Wireline Contractor Vessel (Charter) Employee

23 Options for Obtaining Pass Through Protection Three Options For Pass Through Protection: 1) Include contractual liability within scope of indemnity but see (but see Colony Nat l Ins. Co. v. Manitex, L.L.C. (5th Cir. 2/20/12) 2) Extend indemnity protection to those to whom you owe contractual indemnity 3) Extend indemnity protection to customers and subcontractors or other contractors and subcontractors (and others) as indemnified parties (broad Group) Use a broad defined term (such as Company Group ) to refer to a broadly defined group of indemnitees Each option has pros and cons

24 Basic Indemnity and Insurance Protections

25 Indemnity Basics MSA is a building block for most operations Must have valid magic language to obtain indemnity for one s own negligence Indemnity (and magic language ) must be broad enough to extend to all intended beneficiaries Anticipate and address possible restrictions on indemnity Be aware of any issues relating to the scope of the indemnity or the scope of the MSA Deepwater Horizon indemnity for gross negligence (as opposed to release) is not against public policy under maritime law indemnity for punitive damages is

26 Carefully Consider Who Should be the Indemnitees Use defined term such as Company Group Consider all parties you may want protected Include contractors and subcontractors or use another approach to provide pass through protection Expand use of Company Group Allows consistent and uniform risk allocation scheme Use same definition in insurance requirements and certificate of insurance Use same definition in other contracts if at all possible

27 Anticipating Carve Outs, Add ons, and Other Exceptions Avoid carve outs and add ons if possible Limit carve outs to the actual risk intended (such as well control costs) as opposed to all claims arising out of... [a blowout] Well Control Pollution Loss of Reservoir Gross Negligence

28 Insurance Basics Named as additional insured Waiver of subrogation Coverage must be primary (at least for risks assumed by naming party) Insurance not a limit on indemnity Dovetail insurance with indemnity extend to same parties Insurance may provide more protection in some instances

29 Insurance may provide more protection than indemnities Insurance may provide more protection in some instances due to anti indemnity laws Texas Getty and Oryx Comply with Texas insurance language Include Getty language

30 Insurance may provide more protection than indemnities (cont d) Louisiana consider application of Marcel LHWCA insurance protection is enforceable even if indemnity is invalid under 905(b) State that minimum limits are not a limitation or restriction on indemnity

31 Critical Maritime Endorsements Endorse P&I Insurance: To provide full protection to Company Group additional insureds without limitation as to liability as owner of the vessel (and delete any as owner restrictions) To prohibit reduction of limits for Company Group in the event of limitation of liability

32 Restrictions on Indemnity and Insurance

33 Effect of Applicable Law Maritime law indemnity and insurance generally fully enforceable Drilling contract for jack up is maritime Be aware of 905(b) of LHWCA Determining applicable law is complicated and important in view of anti indemnity laws Oilfield Anti Indemnity Acts Texas Louisiana New Mexico Wyoming

34 Louisiana Oilfield Indemnity Act ( LOIA ) LOIA restricts indemnity and insurance LOIA only applies to contracts relating to a well Different analysis depending on whether onshore or offshore Applies to personal injury/death, not property damage No insurance exception unless Operator pays contractor s insurance premium under Marcel v. Placid Oil Co.

35 Texas Oilfield Anti Indemnity Act Applies to property damage and personal injury/death Exceptions for indemnity supported by insurance Unilateral indemnity ($500,000) Mutual indemnity (up to amount of insurance obtained for the benefit of the other party as indemnitee ) no longer required to specify equal amounts Act does not apply to insurance that does not directly support the indemnity Getty & Oryx

36 Texas Construction Anti Indemnity Act

37 Legislative History Bill submitted to address problem for Owner Controlled Insurance Programs ( OCIPs ) Wanted to make sure OCIP policy would provide insurance protection for some minimum period of time beyond performance

38 OCIP Bill was Hijacked All that remains of original bill is Section requires OCIP policy that provides general liability insurance coverage to provide completed operations insurance coverage for a minimum period of three years Section added to prohibit indemnity provisions and certain insurance protection

39 SUBCHAPTER A. GENERAL PROVISIONS Sec DEFINITIONS. In this chapter: (1) "Consolidated insurance program means a program under which a principal provides general liability insurance coverage, workers' compensation insurance coverage, or both that are incorporated into an insurance program for a... construction project. (8) "Principal" means the person who procures the insurance policy under a consolidated insurance program.

40 Sec DEFINITIONS (cont d) (2) "Construction project" means construction, remodeling, maintenance, or repair of improvements to real property. The term includes the immediate construction location and areas incidental and necessary to the work.... (3) "Contractor" means any person who has entered into a construction contract or a professional services contract and is enrolled in the consolidated insurance program.

41 Sec DEFINITIONS (cont d) (5) "Construction contract" means a contract, subcontract,... entered into or made by an owner, architect, engineer, contractor,... for the design, construction, alteration,... repair, or maintenance of, or for the furnishing of material or equipment for, a building, structure,... or other improvement to or on... real property, including moving, demolition, and excavation connected with the real property. (6) "Indemnitor" means a party to a construction contract that is required to provide indemnification or additional insured status to another party to the construction contract or to a third party.

42 SUBCHAPTER C. REQUIREMENTS RELATED TO INDEMNIFICATION Sec APPLICABILITY. (a) This subchapter applies to a construction contract for a construction project for which an indemnitor is provided or procures insurance subject to: (1) this chapter; or (2) Title 10. (b) Subsection (a) applies regardless of whether the insurance is provided or procured before or after execution of the contract.

43 Sec AGREEMENT VOID AND UNENFORCEABLE. Except , a provision in a construction contract, or in an agreement collateral to..., is void and unenforceable as against public policy to the extent that it requires an indemnitor to indemnify, hold harmless, or defend a party, including a third party, against a claim caused by the negligence or fault, the breach or violation of a statute, ordinance, governmental regulation, standard, or rule, or the breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee....

44 Sec EXCEPTION FOR EMPLOYEE CLAIM. Section does not apply to a provision in a construction contract that requires a person to indemnify, hold harmless, or defend another party to the construction contract or a third party against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier.

45 Sec UNENFORCEABLE ADDITIONAL INSURANCE PROVISION. (a) Except as provided by Subsection (b), a provision in a construction contract that requires the purchase of additional insured coverage, or any coverage endorsement, or provision within an insurance policy providing additional insured coverage, is void and unenforceable to the extent that it requires or provides coverage the scope of which is prohibited under this subchapter for an agreement to indemnify, hold harmless, or defend. (b) This section does not apply to [an OCIP policy]

46 Sec EXCLUSIONS. This subchapter does not affect: (1) an [OCIP] insurance policy... ; (3) indemnity provisions contained in loan and financing documents, other than construction contracts to which the contractor and owner's lender are parties... ; (7) agreements subject to [TOAIA];

47 Where Are We Now?

48 CAIA Impact Largely Limited to Property Indemnity/insurance available for bodily injury/death claims What protection for property damage? Current industry approach Owner carries property insurance on its own property and gives some benefit to the contractor Owner either carries or self insures liability for damage to the work (but usually caps contractor s exposure)

49 Best Case Argument CAIA does not prohibit owner of property from insuring its property and releasing its claim against the other party Releases are not prohibited No prohibition of waivers of subrogation Arguably nothing to prevent property owner from releasing all claims, regardless of fault, and requiring its insurers to waive subrogation

50 Rationale Statute only prohibits indemnity and additional insured, which address liability claims An owner should always be able to release his own claim and require his insurer to do the same Consistent with standard practice Avoids duplicate insurance

51 Conclusion

52 Conclusion Develop a plan for contracts to fit together Understand the need for pass through protection and the impact of different reciprocal risk allocation provisions Design the MSA to obtain maximum flexibility while still maximizing protection

53 Conclusion (cont d) Try to anticipate and guard against carveouts, gaps, and enforceability issues Indemnity and insurance are important risk allocation tools, but they must fit with an overall plan to be effective Contracts may be more difficult to negotiate in a post Macondo world Texas CAIA raises some difficult questions

54 Conclusion (cont d) Best protection is understanding and anticipating the risks Choose the best option under the circumstances If there is a problem...

55 55

56 If Problems do Occur Learn to Cope Flooding in Ireland