Oilfield Service Contracts: Knock-for-Knock Indemnity and the Insurance Behind It

What is knock-for-knock indemnity in an oilfield master service agreement?

Knock-for-knock indemnity in an oilfield master service agreement is a reciprocal arrangement in which the operator and the service contractor each take responsibility for injuries to their own employees and damage to their own property, regardless of which party caused the loss. If your crew member is hurt on location, you and your insurers handle it, even if the operator contributed. The logic is efficiency. Wellsites have many contractors working side by side, and fault disputes after every incident would be slow and costly. Many agreements extend the structure to each party's "group," which can include affiliates and subcontractors, so read those definitions closely.

• Each party covers injury to its own personnel and group.
• Each party covers damage to its own property and equipment.
• Responsibility applies regardless of fault.
• Group definitions drive how far the promise reaches.

Why does insurance need to support the indemnity in an oilfield service contract?

Insurance needs to support the indemnity in an oilfield service contract because an indemnity promise is only as strong as the money behind it, and most service contractors could not fund a serious injury claim from their own balance sheet. The key piece is contractual liability coverage, included in a standard commercial general liability policy for "insured contracts," which lets your policy respond when you assume another party's liability in writing. Operators also commonly require additional insured status, a waiver of subrogation, and primary and non-contributory wording. Each should be confirmed by endorsement, not assumed.

• Contractual liability coverage for liability assumed under the agreement.
• Additional insured status for the operator and its group.
• Waiver of subrogation, which stops your insurer from suing the operator after paying your claim.
• Primary and non-contributory wording, meaning your policy pays first without seeking contribution from the operator's insurance.

How do state oilfield anti-indemnity laws affect knock-for-knock agreements?

State oilfield anti-indemnity laws can limit or void indemnity provisions that require a contractor to cover an operator's own negligence, so a knock-for-knock clause may not be enforceable exactly as written in some oil-producing states. Texas, Louisiana, New Mexico, and Wyoming are among the states with anti-indemnity statutes aimed at oilfield work, and each works differently. Texas, for example, generally allows mutual indemnity when it is supported by insurance the parties agree to carry, limited to the extent of that coverage. Other states apply stricter rules, and some also restrict related terms such as additional insured status or waivers of subrogation. Which law applies can depend on the well location and contract terms, so pair your insurance review with review by qualified legal counsel.

How is pollution responsibility usually split in an oilfield service agreement?

Pollution responsibility in an oilfield service agreement is commonly split so the service contractor is responsible for pollution originating from its own equipment above the surface, while the operator is responsible for pollution originating below the surface, from the well or reservoir. Contractors control their own fuel, fluids, and equipment, while operators control the well and formation. Standard general liability policies contain broad pollution exclusions, so contractors often buy contractors pollution liability or an oilfield general liability form with limited sudden and accidental pollution coverage. The line between surface and downhole is where disputes tend to arise.

• Contractor: spills from its own tanks, trucks, and equipment on the surface.
• Operator: pollution from the well, reservoir, or formation.
• Sudden and accidental coverage often has short discovery and reporting windows.

What insurance limits do oil and gas operators require from service contractors?

Oil and gas operators commonly require service contractors to carry commercial general liability limits of at least $1 million per occurrence and $2 million aggregate, auto liability of $1 million, workers compensation at statutory limits with employers liability of $1 million, and umbrella or excess liability often from $5 million to $10 million or more. Requirements rise with the hazard of the work and the size of the operator. Many requirements can be met cheaply in advance but are hard to fix after a claim.

Ready to review your oilfield service contract insurance program?

If you have an MSA on your desk or want to confirm your current program lines up with the agreements you have already signed, we would be glad to review them with you. Schedule a conversation at calendly.com/grandbayfinancial.