Oil and gas operators typically enter into master service agreement (MSA) contracts that have minimum insurance requirements for liability protections relating to cross-indemnities. The Fifth Circuit recently held that in Texas, under the Texas Oilfield Anti-Indemnity Act (TOAIA), the “minimum” amounts established in the MSA to support indemnity obligations set a floor—but not a ceiling—on indemnity obligations under Texas law. See Cimarex Energy Co. v. CP Well Testing, LLC, 26 F.4th 683 (5th Cir. 2022) (Cimarex v. CP Well case). As discussed in this article, the result reached by the Fifth Circuit may result in unintended consequences in situations where one party seeks indemnity from another party under an MSA. For example, it can limit insurance coverage available to a party to the MSA even where the other party to that contract has more insurance available. Or it can allow a party to receive more than the minimum amount stated in the MSA, even where the other party is expecting the “minimum” amount in the MSA to act as a ceiling.
The typical MSA in the oil and gas world contains reciprocal indemnity provisions to shift risks and liabilities of the parties—often characterized as “knock for knock” indemnities. The indemnity obligation is based on ownership of property and personnel (including subcontractors) as opposed to allocating risk based on fault. Each contracting party agrees to take responsibility for and to indemnify the other party against injury and loss to its own property and personnel (including its contractors). MSAs therefore include language to support those indemnity obligations with a “minimum” amount of insurance.
In Texas, the TOAIA provides that agreements pertaining to a well for oil, gas, or water, or to mine for a mineral, are void as a matter of public policy if they purport to indemnify a party against liability for its own negligence. Tex. Civ. Prac. & Rem. Code Ann. § 127.001 et seq. To circumvent this prohibition, parties can agree to mutual indemnity provisions, which are covered by insurance. Id. § 127.005(a). The TOAIA expressly provides that in situations where parties agree to support their mutual indemnity obligations with liability insurance, those obligations are “limited to the extent of the coverage and dollar limits of insurance or qualified self-insurance each party as indemnitor has agreed to obtain for the benefit of the other party as indemnitee.” Id. § 127.005(b) (emphasis added). Case law interpreting that statute holds that the provision does not require parties to a mutual indemnity agreement to have insurance in the same dollar amount, but rather that the indemnity obligation is limited to the amount of insurance that is equally provided by both parties. Ken Petroleum Corp. v. Questor Drilling Corp., 24 S.W.3d 344, 350 (Tex. 2000). In situations where parties agree to provide different amounts of insurance coverage, the mutual indemnity obligations are limited to the lower amount of insurance provided by the party with the lowest coverage requirement. Id. at 351.
There are also instances where parties fail to establish insurance limits, and in those cases where the express provisions of a contract do not limit a party’s insurance obligation to a set dollar amount, but the parties agree to support their indemnity obligation by “available liability insurance . . . or [being] voluntarily self-insured,” TOAIA will limit the parties’ indemnity obligation to the maximum amount of insurance carried by both parties. Id. at 352–53 (holding that the parties had a valid mutual indemnity obligation of up to $16 million where the contract required one party to have $16 million in insurance applicable to the indemnity obligation but did not contain a similar provision regarding the amount required for the other party, although the other party had secured $16 million of coverage in support of its indemnity obligation).
Under the MSA at issue in the Cimarex v. CP Well case, to support the mutual indemnity obligations, Cimarex Energy Co. (Cimarex) was required to obtain a minimum of $1 million in general liability insurance and $25 million in excess liability insurance. CP Well Testing, LLC (CP Well), was required to obtain a minimum of $1 million in general liability and $2 million in excess liability insurance. 26 F.4th at 686. While Cimarex secured the $26 million of liability coverage required by the MSA, CP Well obtained $1 million of general liability insurance and $10 million of excess insurance (i.e., $8 million more than the minimum coverage required by the MSA). Id.
During the course of operations under the contract, an employee of a subcontractor of CP Well was severely burned while working at the wellsite and sued Cimarex, CP Well, and another contractor. Cimarex and its insurers settled that lawsuit for $4.5 million. Id. at 685. After the settlement, Cimarex sought indemnity from CP Well for the full $4.5 million. CP Well refused to pay Cimarex more than $3 million, relying on the language of the indemnity provision that required CP Well to provide a minimum of $3 million in coverage. Cimarex then filed suit against CP Well to recover the additional $1.5 million it had paid in settlement, as well as seeking a declaration that CP Well had a contractual duty to defend and indemnify Cimarex against the plaintiff’s claims up to the total $11 million in insurance coverage CP Well had secured. Id. at 686.
The district court concluded that, by agreeing to a minimum amount of insurance, the parties “merely agreed to a floor” of agreed-upon indemnity coverage and that the MSA did not set a specific level of coverage. Because the MSA did not limit the amount of coverage the parties agreed to obtain to support their indemnity obligations, the court looked to the TOAIA to determine “the lowest common denominator of insurance coverage between the parties” and centered that analysis on “the amount of coverage CP Well agreed to obtain for Cimarex’s benefit.” Id. CP Well argued that it had only agreed to maintain the $3 million to meet its indemnification obligation under the MSA, and therefore that the remaining $8 million in excess liability coverage was “not for the benefit of Cimarex.” Cimarex disputed this conclusion, arguing that because CP Well obtained a total of $11 million in coverage, it effectively agreed to maintain that full amount in indemnity coverage for Cimarex’s benefit. Id. at 686–87.
Since the MSA did not set a specific level of coverage (it only set the “floor”), the district court looked to the terms of CP Well’s excess liability policy to resolve the dispute. The excess liability policy provided that the most the insurer would pay to the person to which CP Well was obligated by written contract to provide insurance was the lesser of the limits of the $10 million excess policy or the minimum limits of insurance CP Well agreed to procure in such written contract—in this case, the $3 million. Id. at 687.
On appeal, the Fifth Circuit agreed that the MSA set the floor (the minimum amount of insurance) that CP Well and Cimarex each agreed to obtain. Id. The court stated that the “rub” was that the MSA sets the floor, but not the ceiling, and while CP Well was free to obtain more than the $3 million in total coverage and voluntarily increase its indemnification coverage for Cimarex’s benefit, it was not required by the MSA to do so. Id. at 688. In fact, the MSA did not speak to how the parties’ mutual obligations were to be determined where one party obtains more coverage than the MSA’s required minimum. Id. The Fifth Circuit thus agreed with the district court that the operative question “is how to determine how much of CP Well’s additional $8 million in excess liability coverage was ‘for the benefit of [Cimarex] as the indemnitee.’” Id. Further, applying Texas law, the Fifth Circuit agreed it was proper to consider extrinsic evidence outside of the MSA because courts in this circuit routinely consider the terms of insurance policies to determine whether a party is entitled to coverage. Id. at 689. In looking at the excess policy language, the Fifth Circuit agreed that CP Well’s excess liability policy “effectively set the indemnity coverage ‘ceiling’ at the same level as the MSA’s ‘floor’ [the $3 million].” Id. at 690. The Fifth Circuit concluded that the remaining $8 million of CP Well’s excess policy was not obtained for the benefit of Cimarex, and therefore Cimarex was only entitled to the $3 million minimum that was agreed to in the MSA. Id.
So why does this matter? Parties should look at their MSAs to make sure that the language in the MSAs properly set forth the insurance obligations—both the minimum and/or maximum amounts—for which they believe they are contracting. Under the decision in the Cimarex v. CP Well case, if your company’s form oilfield contract contains mutual indemnity provisions and language that requires the parties to obtain minimum amounts of liability, that language only sets the floor for indemnity coverage if the MSA is otherwise silent about the specific level of coverage required. As a result, the determination about the “ceiling” then becomes an analysis under Tex. Civ. Prac. & Rem. Code Ann. § 127.005(b) of what each party as indemnitor has agreed to obtain for the benefit of the other party as indemnitee. That could involve extrinsic evidence, or reliance on an underlying insurance contract that your company may not have negotiated—and may not limit the liability exposure to the minimum amounts negotiated in the MSA. On the other hand, as in the Cimarex v. CP Well case, the result could be that although the other party has more insurance than the “minimum” requirements in the MSA, your company may not be entitled to the benefit of that additional insurance since the applicable insurance policy may provide that the “minimum” is also the ceiling. In either case, the unintended consequences could mean either losing out on coverage you thought your company had or, alternatively, having to pay much more than you thought you had negotiated. You don’t want to end up in that position, so make sure that your contract is clear. Don’t rely on the “minimum insurance requirements” in the MSA as the cap to your exposure, and don’t rely on the amount of insurance coverage the other party has secured as the measure of the full extent of coverage to which you believe your company will be entitled if that party owes it indemnity.
