The Fifth Circuit's recent opinions in Cimarex Energy Co., et al. v. CP Well Testing, L.L.C. (2022) and Century Surety Co. v. Colgate Operating, L.L.C. (2024) provide divergent interpretations of how the Texas Oilfield Anti-Indemnity Act (TOAIA) applies in limiting indemnity obligations.
Key Takeaways
- When parties contractually agree to support their mutual indemnity obligations with a "minimum" amount of insurance, they set a floor on their indemnity obligations under Texas law.
- The Fifth Circuit has provided differing views on how courts should determine the ceiling on those parties' contractual indemnity obligations under Texas law.
- The Fifth Circuit's recent opinion in Century Surety Co. v. Colgate Operating, L.L.C. provides that the minimum limits of insurance both parties agree to obtain in support of their indemnity obligations in an oilfield service contract should be considered both the floor and the ceiling for indemnity obligations under Texas law.
Background
Oil and gas companies frequently enter into master service agreements (MSAs) and other oilfield contracts wherein the parties agree to support their indemnity obligations with a minimum amount of insurance. These companies often believe that the minimum amount of insurance they agree to obtain in support of their indemnity obligations will limit their ultimate indemnity exposure under TOAIA to that minimum amount of insurance.
In its current form, TOAIA provides that agreements pertaining to a well for oil, gas or water, or to a 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 § 127.003. However, TOAIA offers an exception. TOAIA will not operate to void indemnity agreements that purport to indemnify parties against liability for their own negligence if the parties agree in writing that the "indemnity obligation will be supported by liability insurance coverage to be furnished by the indemnitor...." Tex. Civ. Prac. & Rem. Code § 127.005(a). Where two 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." Tex. Civ. Prac. & Rem. Code § 127.005(b).
Thus, a mutual indemnity provision in Texas will be limited by TOAIA to the lowest level of insurance both parties contractually agree to obtain in support of their indemnity obligations. Ken Petroleum Corp. v. Questor Drilling Corp., 24 S.W.3d 344 (Tex. 2000). This is sometimes called the "lowest-common-denominator" rule.
What, then, is the lowest level of insurance both parties have contractually agreed to obtain in support of their indemnity obligations when the subject MSA requires only that the parties obtain the minimum amount of insurance or insurance with "at least" the coverages or limits detailed in the MSA? The Fifth Circuit has sought to provide an answer in two recent cases.
Cimarex Energy Co., et al. v. CP Well Testing, L.L.C.
Cimarex Energy Co., et al. v. CP Well Testing, L.L.C. concerns an MSA executed by Cimarex, the owner and operator of a well in Oklahoma, and a contractor, CP Well Testing, retained to perform flowback services at the well. 26 F.4th 683, 685 (5th Cir. 2022). The MSA contained a mutual indemnity provision requiring Cimarex and CP Well to indemnify the other against claims for personal injury, illness or death of any member of their "group" as defined in the MSA, and it further required both parties to obtain the minimum amount of insurance specified in the MSA. Id. at 685-86. Under the MSA, Cimarex was required to obtain a minimum of $1 million in general liability coverage and $25 million in excess liability coverage ($26 million in total) to support its indemnity obligation, while CP Well was required to obtain a minimum of $1 million in general liability coverage and $2 million in excess liability coverage ($3 million in total) to support its indemnity obligation. Id. at 686. At issue in Cimarex was whether CP Well's indemnity obligation was limited by TOAIA to the $3 million minimum in coverage required under the MSA or if, because a minimum does not limit the amount of coverage the parties agreed to obtain in support of their indemnity obligations, CP Well's indemnity obligation extended to the amount of insurance CP Well actually carried – $11 million. Id. at 686-87.
Writing for the panel, Judge Cory Wilson framed the central question before the court as follows:
Given the MSA's silence on this issue, 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 indemnitee."
Id. at 688.
The Fifth Circuit answered this question with two significant holdings. First, the Fifth Circuit held that when parties agree to obtain the minimum amount of insurance to support their mutual indemnity obligations, the parties agree only to a floor and not a ceiling on their indemnity obligations. Id. Second, the Fifth Circuit held that to determine the ceiling on the parties' indemnity obligations under TOAIA, the court must look to the prospective indemnitor's insurance policies. Id. at 689.
Ultimately, the Fifth Circuit concluded that CP Well's excess liability policy effectively set the indemnity coverage ceiling at the same level as the floor expressed in the MSA – $3 million. Id. at 690. The remaining $8 million of CP Well's excess liability was not "obtained for the benefit of" Cimarex, and thus application of TOAIA to the parties' MSA could not result in $11 million of indemnity exposure for CP Well. Id. However, in reaching this conclusion, the Fifth Circuit established that the "minimum" language so common to contracts throughout the oilfield industry fails to limit the parties' indemnity obligations as intended.
Century Surety Co. v. Colgate Operating, L.L.C.
In Century Surety Co. v. Colgate Operating, L.L.C., a contractual indemnity dispute arose between Colgate Operating LLC and Triangle Engineering LLC after an oilfield incident resulted in an injury at a Colgate-operated well. 116 F.4th 345 (5th Cir. 2024).
As in Cimarex, the MSA between the parties contained a mutual indemnity provision requiring Colgate and Triangle to indemnify the other against claims arising from their work and to provide insurance in support of their indemnity obligations. Id. at 347. The parties' MSA specifically required each party to purchase insurance with limits "not less than $5 million" or "the maximum amount which may be required by law, if any, without rendering this mutual indemnification obligation void, unenforceable, or otherwise inoperative." Id.
Colgate purchased a $1 million general liability insurance policy and a $75 million excess liability policy. Id. Triangle purchased a $1 million general liability policy and a $5 million excess liability policy. Id.
Consistent with the Fifth Circuit's ruling in Cimarex, the district court ruled that the parties' contractual obligation to obtain insurance with limits of "not less than $5 million" set a floor on the parties' indemnity obligation, not a ceiling. Id. at 348. However, on appeal to the Fifth Circuit, Judge Jones, sitting by designation, rejected the district court's reasoning and affirmed on different grounds. Id. at 350. Specifically, the court found that language in the MSA requiring the parties to obtain insurance with limits of "not less than $5 million" set both a floor and a ceiling on the parties' indemnity obligations since the MSA did not explicitly require the parties to obtain more than $5 million in insurance to support their indemnity obligations. Id. In doing so, the court stated that it would be inappropriate to look to the parties' insurance policies to determine the limits of insurance obtained in support of the parties' indemnity obligations. Id.
Cimarex's and Colgate's Conflicting Views on Determining Indemnity Limits Under TOAIA
In Colgate, the Fifth Circuit seems to recognize that it is taking a diverging position on both the significance of minimum insurance requirements to support indemnity obligations and the need for extrinsic evidence to determine indemnity limits under TOAIA. In an effort to distinguish the facts in the two cases, the Colgate opinion points out that, in Cimarex,the MSA spelled out a discrete and distinct dollar amount of insurance that the two parties were required to obtain ($3 million and $26 million, respectively), whereas in Colgate, the parties agreed to obtain the same minimum amount of insurance. Id. at 351. However, little explanation is given as to how this might meaningfully change the court's analysis.
Ultimately, the Fifth Circuit's most recent ruling on the significance of minimum insurance requirements is likely to prompt further appeals and engender even greater interest in an eventual dispute before the Texas Supreme Court on the same issue.
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