Mr./Ms. Negotiator/scrivener/reviewer of Master Service Agreements: When did you last review your go-to indemnity provision? In light of Century Surety Company v. Colgate Operating LLC., perhaps you should do it now. The court deemed an innocuous-seeming indemnity provision to impose a ceiling on indemnity obligations under an MSA. Is your MSA consistent with your intentions?
The MSA
Operator Colgate and consultant Triangle entered into an MSA after Colgate hired Triangle to work on a well in Pecos County, Texas.
The mutual indemnity provision required each party to indemnify the other for claims “… arising out of, resulting from, or in any way incident, to, directly or indirectly, any transaction subject to this Agreement.”
In order to support the indemnity obligations, the MSA required the parties to purchase indemnity insurance with limits of the lesser of (1) not less than $5 million or (2) “the maximum amount which may be required by law, if any, without rendering this mutual indemnification obligation void, unenforceable, or otherwise inoperative.” The MSA complied with the Texas Oilfield Anti-Indemnity Act.
Colgate purchased a $1 million-dollar general liability insurance policy and a $75 million excess liability policy from Markel. Triangle purchased a $1 million general liability policy from Hallmark and a $5 million excess liability policy from Century.
To settle a suit by an injured employee of a Colgate contractor, Hallmark paid $1 million, Century paid $5 million, and Markel paid $6 million for the benefit of Triangle and Triangle’s consultant. Century, as Triangle’s subrogee, sued Colgate for failure to indemnify Triangle, seeking reimbursement for the $5 million paid towards the settlement.
The district court
The district court concluded that the MSA provided a floor for coverage for mutual indemnity purposes but did not provide a ceiling, invoking the Texas Supreme Court’s “lowest common denominator” rule under a prior version of the statute: When parties agree to provide differing amounts of coverage, the mutual indemnity obligations are limited to the lower amount of insurance. The result was that Century was not entitled to recover the $5 million from Colgate.
Fifth Circuit affirms for a different reason
The current version of the statute limits mutual indemnity obligations to the amount of coverage that each party as indemnitor has agreed to obtain for the benefit of the other party as indemnitee.
The only amount of insurance expressly required by the MSA was $5 million, which served as both a floor and a ceiling. The words “not less than” stipulated a required minimum and the MSA did not provide a clear maximum.
The district court had turned to the insurance policies to answer the question. The Fifth Circuit said that was not necessary. Triangle’s only rights existed within the MSA and indemnification under the MSA was not the same as insurance coverage. According to TOAIA’s terminology, the remaining $71 million of Colgate’s excess liability coverage was not obtained for the benefit of Triangle. Triangle had no right of indemnity under the Markel policy itself and Colgate was under no obligation to pay any more than the $5 million it agreed to pay under the MSA.
The parties could have spelled out discrete and distinct dollar amounts of insurance that each was required to obtain in general liability and excess coverage but they declined to do so.