Academic journal article Defense Counsel Journal

Reciprocal Indemnification Agreements in the Oil Industry: The Good, the Bad and the Ugly

Academic journal article Defense Counsel Journal

Reciprocal Indemnification Agreements in the Oil Industry: The Good, the Bad and the Ugly

Article excerpt

RECIPROCAL or mutual indenmity agreements, (1) often referred to as "knock for knock" agreements, are frequently used in the oil industry to allocate risk by contract, rather than through the vagaries of the legal system. Under these agreements, "each party (as 'indemnitor') agrees to indemnify the other party ('indemnitee') and the indemnitee's contractors for claims arising from injuries to the indenmitor's employees, regardless of fault." (2) In other words, each party agrees to take full responsibility for all bodily injury or property damage claims made by its own employees, regardless of which party may actually be responsible for the injury.

While a contractual allocation of risk based on who makes the claim, rather than who is at fault, is contrary to the traditional risk allocation method under our legal system, such agreements can be very beneficial to both parties. The fact that mutual indemnity agreements have been and remain so popular in the oil industry attests to the beneficial aspects of such agreements. Unfortunately, as in the movies, good things often bring with them bad and sometimes ugly consequences. Accordingly, this article discusses some of the pros and cons of reciprocal indemnity agreements and finishes by briefly reviewing recent cases where courts in Texas have interpreted indemnity arrangements in interesting ways.

I. The Good--Benefits of Reciprocal Indemnity Agreements

Reciprocal indemnity agreements offer several significant benefits to contracting parties. The specific benefits enjoyed by contracting parties will often depend on the circumstances applicable to the object of the agreement. However, as a general rule, such agreements can reduce costs to both parties, help to strengthen the relationship between contracting parties and allow parties to work together against a common enemy, rather than against each other.

A. Reduced Costs

Even without complications, the search for oil and gas is expensive and always involves risk. Litigation inevitably increases the cost of the effort. Accordingly, one of the primary benefits of reciprocal indemnity agreements can be a reduction in cost to both parties.

When parties enter into a knock for knock agreement, potential liability is established at the time of contract for both parties through the contract. If an accident occurs causing an injury to the employee of either party to the agreement, the parties can avoid disputes between themselves regarding their relative responsibility for the accident. As between the two parties to the contract, the reciprocal agreement will have already established liability--Company A will be responsible for all claims made by its employees, and Company B will be responsible for all claims made by its employees--regardless of who is at fault. The parties can, therefore, avoid costs that might otherwise be incurred to establish their respective responsibility.

Furthermore, a reciprocal indemnity agreement allows one party to take over responsibility for both contracting parties and retain one lawyer to defend both parties. For instance, if an employee of a contractor for Company A is injured as a result of an accident caused by both Company A and Company B, the third party contractor employee would generally bring suit against both companies to determine liability. In maritime cases, where the employer is not protected by workers' compensation laws, suit is often filed directly against both companies by their own employees. In either case, without a reciprocal agreement, both companies would have to hire their own attorneys and incur the cost of separate defenses. However, if the parties had in place a reciprocal indemnity agreement, one attorney would be able to defend both parties. Thus, mutual indemnity agreements not only diminish the need for litigation between the contracting parties, but can also reduce overall litigation costs, should suit arise. …

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