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Louisiana’s Oilfield Anti-Indemnity Act: A balanced approach to indemnity obligations in the oil-and-gas sector

MARITIME

11/24/2015

By: Miles Thomas

Following the discovery of oil and gas in the Gulf of Mexico off Louisiana’s coast in the late 1940s, oil companies turned to third-party contractors for servicing and equipping their offshore operations. This led to formal contracts that, in addition to routine issues, expanded to include defense and indemnity obligations, along with insurance requirements.

By the 1970s, a pattern had emerged in which large oil companies were using their superior bargaining power to force contractors into bearing the risk of the oil companies’ negligence backed up by the contractors’ insurance. Contractors typically had no option but to agree to the oil companies’ terms.

In an effort to protect contractors, state lawmakers passed the Louisiana Oilfield Anti-Indemnity Act in 1981. The LOIA, as the statute is known, nullifies any indemnity for liabilities that arise out of personal injuries caused by negligence or fault on the part of the indemnitee.

Disputes over the application of the LOIA, whether upstream or down, are often litigated as declaratory judgment actions. Courts use a two-part test to determine the applicability of the LOIA to an agreement. First, they determine whether the agreement actually pertains to a well. If so, judges ask whether the agreement involves operations related to the exploration, development, production or transportation of oil, gas or water.

The first determination, handled on a case-by-case basis, is key, since the inquiry ends if there is no connection to a well. The U.S. Fifth Circuit Court established a list of 10 nonexclusive factors that focus on the facilities involved in the contract and their relationship to oil and gas production.

The list includes, among other things, the geographical location of the facilities in question, whether they are part of an in-field gas-gathering system, whether they are part of a pipeline or closely involved with one, whether there are any intervening facilities or processes between the wellhead and the location in question, and any number of other details affecting the functional and geographic nexus between a well and the facility under scrutiny.

The LOIA was not intended to simplify contracts between oil companies and contractors. Indeed, disputes over its application emphasize both sides’ need for expert counsel when negotiating. Even with a contract in place, questions over indemnity and the LOIA’s potential impact are inevitable. When that happens, the first step in seeking answers is a thorough legal analysis.

Expertise with the LOIA, therefore, is critical. Clients must be able to rely on their attorneys’ analysis of the LOIA’s potential application when a demand for defense and indemnity is tendered to them. Likewise, if it appears that the LOIA may prevent indemnification of a client by a third party, attorneys must be able to offer viable alternatives. For example, it may be in a company’s best interest to pay insurance premiums for additional insured status.

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Lugenbuhl’s admiralty and maritime law team has extensive expertise with the LOIA. Our attorneys have successfully argued for and against the statute’s application as its interpretation has developed in Louisiana’s state and federal courts. We work closely with clients to draft and negotiate contracts in which the LOIA may apply. Lugenbuhl shareholders Miles Thomas, Rodger Wheaton, David Sharpe and Stanley Cohn focus heavily on admiralty and maritime law, and marine insurance coverage, providing a wide range of transaction and litigation services.

For more information about this topic, or to retain legal representation in the field of admiralty and maritime matters, contact us. To learn more about our admiralty and maritime practice, or to contact one of our attorneys with expertise in this area, click here.

The content of this article is not intended to serve as an exhaustive review of the laws, statutes or issues related to the Louisiana Oilfield Anti-Indemnity Act and is not intended to provide legal advice. The opinions expressed through this article may not reflect the opinions of the firm, individual attorneys or clients.