What you need to know.
Master Service Agreements (MSAs) and vital for service contractors in the Oil & Gas industry, but often come with one-sided indemnity obligations that increase risk and insurance costs. Contractors lacking legal support tend to sign these agreements without review, leading to financial strain. Ross & Yerger specializes in MSAs review and negotiation, helping contractors lower risk and expenses over 25 years of experience.
Contractors can secure better pricing for resources.
Contractors can build deeper client relationships.
MSAs can adapt to changing project needs.
They reduce the paperwork and negotiation associated with project contracts.
Primary Drivers for MSA Risk
1. Breach of Representations and Warranties
Most Oil & Gas Companies today agree to indemnify and hold harmless the service company. However, at a time of loss, the allegation can be made that the service company violated the representation and warranties conditions of the MSA. This type of allegation results in the Oil & Gas Company having the ability to not honor its indemnity obligation to hold the service company harmless. These conditions can be very broad and can be easily alleged to be violated.
2. Bodily Injury
You might be familiar with "knock for knock indemnity" in oil and gas service agreements. It essentially means, "I'm responsible for my team, and you are for yours." However, many MSAs with this language fall short in providing the expected protection. When operators only hold service contractors harmless for injuries to their direct employees, the real risk lies in the lack of protection for injuries to employees of other contractors on the site. Typically, there are many employees and subcontractors on-site, and with an MSA limited to direct operator employees, you lack indemnity protection for any of these individuals. This leaves you exposed to claims from injured employees of fellow contractors.
3. Property Damage
Contractors are also exposed to claims for property damage coming from fellow contractors when the company doesn’t agree to hold each of its contractors harmless for damage to all of its other contractors’ property.
In both these situations a contractor entered a jobsite thinking that everyone on that jobsite would be responsible for injury to their own employees and damage to their own property. Making an incorrect assumption about this could severely impact a contractor’s loss history, driving up its insurance costs and impacting its contractor scores for years.
4. Underground Damage Liability
This risk applies to contractors that perform work down hole that can cause damage to the well casing or the well bore which in turn blocks access to underground resources.
Contractors send their tools and equipment down hole but rarely control the conditions that exist there. If an accident occurs which blocks access to underground resources and the company then places responsibility for the value of its lost resources onto the contractor, the loss could financially cripple the contractor over a risk the contractor could not control.
To properly allocate this risk, Ross & Yerger’s Oil & Gas Services Division reviews each MSA and, if missing, adds a provision explicitly releasing the contractor from liability for damage to or inability to access underground resources.
5. Wild Well
For oilfield service companies, the misconception that well blowouts are solely an operator's concern can be costly. In reality, well blowouts pose a threat to any contractor working on a well site. What exacerbates the issue is that most contractor insurance policies do not cover well control costs or additional expenses like evacuations. These costs can quickly escalate and significantly impact even financially stable service companies.
However, operators often have Operator's Extra Expense insurance to address this risk, making them willing to release their contractors from liability related to well blowouts.
6. Damage to the Hole
For Oilfield service contractors working near or over the hole, they have the risk of causing damage to the hole or the well casing. As with Blowouts, contractors usually don’t have control over the conditions that would lead to a loss, and the damage to the well can be catastrophically expensive.
Most operators recognize that they have control over the well site and commonly agree to hold the oilfield contractor harmless for damage to the hole. The result of this helps eliminate a major source of risk for contractors, and relieves underwriting pressure on the General Liability insurance.
7. Pollution Liability
Most oil & gas service contractors grapple with pollution liability risks, including auto accidents, equipment malfunctions, pipeline leaks, and catastrophic blowouts. Their general liability insurance often incorporates time element pollution coverage, addressing abrupt pollution incidents reported within a specific timeframe, typically 30 days of discovery and 90 days for reporting. Auto policies typically cover vehicle-related pollutants, not equipment-related spills.
8. Sound Location
If you are a contractor who is bringing its high-valued equipment onto the jobsite, you typically hold the operator harmless for any damage to that equipment via the mutual indemnities of the master service agreement you entered with that operator. However, we have seen several instances where this broad waiver can create a problem for the service contractor.
9. Tools and Equipment Rented without an Operator
In most MSAs, oil & gas service companies typically offer comprehensive hold harmless indemnity, releasing the oil & gas company from claims regarding damage to the service company's property. This reciprocal agreement also protects the service company's property and that of other contractors on the job.
However, these broad mutual hold harmless agreements can be problematic for contractors renting equipment. Rented equipment is beyond the contractor's control and often isn't covered by their equipment insurance while in the possession of the renting company. Compounding this issue, the service company can't seek compensation for damaged rental equipment from the customer due to the previously mentioned hold harmless agreement.
10. In-Holes Tools & Equipment
Contractors face potential uncovered losses when equipment goes underground, as insurance policies typically don't cover such losses. While operators often pay for recovery and repairs or replacements, they aren't bound to do so under most Master Service Agreements.
In a typical oilfield MSA, the contractor provides broad hold harmless indemnity to the oil & gas company or operator, waiving claims for property damage. This trade is generally favorable when the company also holds the service contractor harmless for property damage, including other contractors' property.
Consequential damages pose a potentially huge, catastrophic risk. When an incident or loss occurs on a job site, we have already discussed how a contractor could already be facing a large loss due to injury to its employees, loss of equipment, and damages assigned to it from injury or damage to others at the jobsite (that hasn’t been transferred through the provisions already discussed in other articles).
Another aspect of loss could come in the form of indirect losses. These losses might include downtime for the operator and other contractors at the job site. These expenses can balloon to massive sizes and are highly unpredictable.
12. Insurance Limitation
A Contractor has two separate contracts to worry about: the MSA and the insurance contract (policy). Each or these are separate contracts and don’t necessarily “talk” to each other. By adding your customer as an additional insured to your insurance policies, you are providing them complete access to your coverage and limits, coverage that should be very broad. While we (Contractor) want very broad coverage, we only want to limit our exposure and insurance coverage to that which supports the Contractor’s indemnity obligations.