Policyholder Pulse
Just as the oilfield fuels the modern economy, master service agreements (MSAs) fuel the modern oilfield. But while almost every MSA contains indemnity and insurance clauses, experienced oilfield lawyers will advise their clients that no two are identical. Determining how these unique contractual provisions apply to losses and interact with available liability coverage is a nuanced process that frequently results in litigation.
Courts have traditionally relied on the plain language of indemnity agreements and insurance policies to determine their meaning, leaving ample room for parties to argue about reasonable interpretations and who should ultimately cover the loss. And while ambiguity often benefits those parties seeking indemnity, the Fifth Circuit’s recent holding in Century Surety Company v. Colgate Operating, LLC is a stark reminder for corporate policyholders to word their indemnity agreements carefully, lest they risk losing millions of available liability coverage otherwise available to them.
The Colgate case involved an indemnity dispute between Colgate Operating, LLC and Triangle Engineering, LLC, an oilfield consulting firm, after a worker sustained injuries while unloading equipment at a Colgate-operated well. Both companies’ insurers contributed to settle the injury claim. Afterward, Triangle’s excess insurer, Century Surety, sued Colgate in subrogation in federal court, seeking reimbursement for the amount it paid in settlement, arguing that Colgate was contractually obligated under the MSA to indemnify Triangle.
Under their MSA, both Colgate and Triangle agreed to mutually indemnify each other for claims arising from their work, and to procure insurance to cover those obligations. Specifically, the MSA required each party to purchase indemnity insurance with limits (i) “not less than $5 million,” or (ii) “the maximum amount which may be required by law, if any, without rendering this mutual indemnification obligation void, unenforceable or otherwise inoperative.” Both companies complied with their undertakings to purchase liability insurance, and indeed exceeded their respective obligations: Colgate purchased a $1 million general liability policy and a $75 million excess liability policy, and Triangle purchased a $1 million general liability policy and a $5 million excess liability policy.
The district court, applying Texas law, determined that the MSA’s “not less than $5 million” language set a minimum insurance requirement, but imposed no contractual limit on indemnity. Despite this, the court ultimately ruled in Colgate’s favor, applying the “lowest common denominator” rule established by the Texas Supreme Court in Ken Petroleum Corp. v. Questor Drilling Corp. Under that rule, when parties to a mutual indemnity agreement purchase differing amounts of insurance coverage, the indemnity obligation is capped at the lower coverage limit. So, the district court concluded that Colgate’s indemnity obligation was capped at Triangle’s $6 million coverage limits. Because Colgate’s insurers had contributed $6 million toward the settlement, the district court held that Colgate owed no additional indemnity obligation and dismissed Century’s claims.
The Fifth Circuit affirmed the district court’s decision, but on other grounds. Specifically, it found that the “not less than $5 million” clause in the MSA set both a floor and a ceiling for indemnity obligations, as the MSA did not require either party to provide coverage beyond that amount. Since the MSA did not require either party to secure more than $5 million in coverage, the Fifth Circuit concluded that the district court’s “lowest common denominator” analysis was improper, and that Colgate’s indemnity obligation was limited to $5 million—one million less than the district court determined that Colgate owed.
The Fifth Circuit’s application of Texas law in Colgate is likely to engender future challenges, as the Texas Supreme Court had not previously found the “not less than” language in the MSA to constitute a ceiling on indemnity obligations. Regardless, the Fifth Circuit’s reasoning should serve as a cautionary tale to corporate policyholders. Any ambiguity in indemnity clauses, no matter how minor, can lead to unexpected financial exposure and limit access to broader insurance coverage when it is needed most. Therefore, policyholders should be careful to review their MSAs regularly with experienced counsel, and draft them precisely to avoid disputes and ensure that liability coverage will respond as expected when losses occur.