What Landmen Need To Know About The Texas Anti-Indemnity Statute
by C. Randy King and Jacqueline Moy
Porter & Hedges, L.L.P.
Landman 2, The American Association of Professional Landmen Magazine
Landmen are frequently asked to take part in the negotiation of master service contracts and other oil-field contracts which may contain indemnity and insurance provisions. For that reason, landmen need a working knowledge of the Texas OilField Anti-Indemnity Act (the “TAIA”). See TEX. CIV. PRAC. & REM. CODE § 127.00l—.007 (Vernon 1997). This statute can cause the expressly stated terms of such contracts to be void and unenforceable as a matter of law.
The TAIA governs indemnity provisions in any “written or oral agreement or understanding concerning the rendering of well or mine services; or an agreement to perform a part of those services, including furnishing or renting equipment, incidental transportation, or other goods and services furnished in conjunction with the services.” See TEX. CIV. PRAC. & REM. CODE § 127.001 at (1)(A) (Vernon 1997). This includes a number of services related to drilling wells, such as “drilling, deepening, reworking, repairing, improving, testing, treating, perforating, acidizing, logging, conditioning, purchasing, gathering, storing, or transporting oil, brine water, fresh water, produced water, condensate, petroleum products, or other liquid commodities” and services rendered in connection with mine shafts, such as “designing, excavating, constructing [or] improving” a mine shaft. See id. at (4)(A). Joint operating agreements are specifically excluded from the rules of the statute. See id. at (1)(B).
The statute makes void and unenforceable any agreement that purports to indemnify an entity against loss or liability for personal injury, death or property damage that is caused by the sole or concurrent negligence of that entity or any agent or employee of that entity. See id. at 127.003. The statute does, however, make an exception for “agreement[s] that provide for indemnity if the parties agree in writing that the indemnity obligation will be supported by liability insurance coverage.” See Tex. Civ. Prac. & Rem. Code at § 127.005 (Vernon Supp. 1997). Such indemnity provisions can either be mutual obligations, such that each party to the agreement agrees to provide insurance as the indemnitor of the other party, or a unilateral obligation, whereby one party agrees to indemnify the other, but not vice versa. See id.
Under the TAIA, the indemnity obligation in mutual indemnities is limited to the extent of coverage and dollar limits each party has agreed to obtain for the benefit of the other. See id. In Ken Petroleum Corp. v. Questor Drilling Corp., the Texas Supreme Court clarified that this section of the statute mandates only that the mutual indemnity obligations are limited to: (i) if the parties agree to provide differing amounts of coverage, the lower amount of insurance or (ii) if the agreement specifically states the dollar amount of insurance one party is to provide, but is silent as to the other party’s specific obligation, the amount of insurance that is equally provided. 24 S.W.3d 344, 350-51 (Tex. 2000) (overruling Weber Energy Corp. v. Grey Wolf Drilling Co., 976 S.W.2d 766 (Tex. App-Houston [lst Dist.] 1998) and Ken Petroleum Corp. v. Questor Drilling Corp., 976 S.W.2d 283 (Tex. App-Corpus Christi 1998)). It is important to note that the insurance exception for a unilateral indemnity obligation is $500,000. See TEX. CIV. PRAC. & REM. CODE § 127.005(c) (Vernon Supp. 1997).
Contracts between operators and oilfield service companies are a prime example of how the TAIA can effect oil-patch contracts. Frequently, parties to oilfield service contracts, including master service contracts, attempt to pass off liabilities for their own negligence to the other party. Often this occurs in mutual indemnity provisions in which each party agrees to indemnify the other party for all claims and causes of action that arise from their respective employees and subcontractors. Under these so-called “knock for knock” provisions, each party agrees to indemnify the other party for personal injury to its own employees and subcontractors. Since these personal injuries could be caused by the other party, a mutual transfer of liability for one’s own negligence is at issue. The TAIA will, as a matter of law, cause such mutual indemnity provisions to be void and unenforceable unless the contract requires them to be supported by insurance in equal amounts.
Another legal rule affecting indemnities in Texas is the so called “express negligence rule.” Landmen should be aware of that body of law as well, since it too can cause indemnity provisions in oil-patch contracts to be unenforceable. More to come on that in additional articles.
Finally, the rules pertaining to indemnity provisions are more complex when offshore drilling is involved and the scope of this article is too narrow to include this topic. The authors hope to regale the readers with another entertaining article covering indemnity provisions in offshore drilling and production contracts in a future issue of this publication.
This article was previously published in the Houston Association of Professional Landmen Bulletin in September 2002.