The issue in QBE Syndicate 1036 v. Compass Minerals Louisiana, LLC was whether the scope of the Louisiana Oilfield Indemnification Act applies to operations involving salt mining?
QBE issued a commercial general liability insurance policy to FSS and MC Electric. Clements, an employee of MC Electric, was electrocuted while working in the Cote Blanche salt mine owned by Compass Minerals, by touching a live electrical line. His heirs, plaintiffs in a wrongful death suit, alleged that an FSS technician erroneously advised Clements that the fire suppression system had been de-energized. Compass requested coverage, defense, and indemnity from QBE under both insurance policies. The request was based on indemnification provisions in purchase orders issued for the work Clements was engaged in.
QBE responded that the indemnification provisions were unenforceable under the LOIA, which was enacted to protect Louisiana oilfield contractors (imagine your cousin Boudreau from Cankton with a two-man operation) from overreaching principals (imagine Exxon) to force the contractors through indemnity agreements to bear the risk of the principals’ negligence.
Whether the LOIA applied turned on a two-part test: First there must be an agreement that “pertains to” an oil, gas or water well. If there isn’t such an agreement, the query ends. If the contract has that nexus, the second step is to examine the contract’s involvement with “operations related to the exploration, development, production, or transportation of oil, gas or water.” An agreement pertains to a well under the LOIA if the services provided under the agreement are necessary to sustain the manpower or equipment needed to produce oil and gas from wells.
The agreement here did not satisfy the two-part test because it did not pertain to a well. Services were provided under purchase orders issued in connection with mining operations at the mine and those operations did not involve, nor did the services provided, pertain to a well.
QBE focused on one clause in the LOIA: an agreement pertaining to drilling for minerals which are in a “solid, liquid, gaseous or other state”. QBE argued that the term “minerals” covers all minerals, not just oil, gas or water.
The court described Compass’s “drill and blast” mining method. QBE argued that the agreements at issue pertained to drilling for minerals and are subject to the LOIA. QBE did not establish that Compass’s mining practices amounted to drilling for minerals as that phrase is used in the LOIA.
The court declined to construe the word “drilling” in the Act to cover any activity involving a drill, from a large offshore oil and gas drilling platform down to an industrial hand-operated drill. The court construed that in “drilling for”, use of the preposition “for” suggests drilling performed to create a well for the exploration and production of minerals. The clause in the anti-indemnification provision, “an agreement pertaining to a well for oil, gas or water”, appeared to the court to refer to an existing well. The drilling involved at the mine did not involve the creation of a well for purposes of exploring for producing salt. Rather, holes were drilled for the purpose of loading explosive charges to break the salt wall into smaller pieces. That drilling is but one step at a lengthier process of breaking down a salt wall for further processing.
Simply put, Compass did not “drill for salt” in the mine. The method did not involve creation of a well. Therefore, the purchase orders did not pertain to a well. The LOIA did not invalidate the indemnification provisions in the purchase orders.