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In a case of first impression, the 14th Court of Appeals held recently that a law the Texas Legislature enacted in 1973 to protect contractors in the oil patch from unfair indemnity obligations does not invalidate a mutual indemnity provision in a contract when an indemnitor’s insurer goes belly up. On March 16, the Houston appeals court held in Nabors Corporate Services Inc., Formerly Known as Pool Offshore Services v. Northfield Insurance Co. that for an agreement to be excluded from the purview of the Texas Oilfield Anti-Indemnity Act (TOAIA) — Chapter 127 of the Civil Practices and Remedies Code — the parties need only agree in writing that each will provide liability insurance to cover its indemnity obligation. “Once an agreement falls within the statute’s exception, there is no language in the TOAIA which would retroactively void the agreement,” Justice Eva Guzman wrote for the court. Justices Richard Edelman and Kem Thompson Frost joined Guzman in the decision. James Cornell, chairman of the State Bar of Texas insurance section and of counsel at Haynes and Boone in Houston, says that in the past, some parties, and especially insurance carriers, have tried to void oil and gas indemnity agreements after the fact by attacking the agreements on hypertechnical grounds. “This case is important because it says that such hypertechnical interpretations will not prevail and courts will look at the overall intent of the parties,” Cornell says. “As long as the indemnity agreement literally complies with the Texas Oilfield Anti-Indemnity Act, it will be enforced.” Cornell says the types of indemnities and master service agreements at issue in Nabors Corporate Services are pervasive in the oil and gas industry and are an important tool for allocating the risk of loss. “It is very important for the industry to be able to predictably and reliably allocate the risk of loss or injury and have confidence that the courts are not later going to void these indemnities,” he says. The 14th Court also rejected Pool’s argument that under the Texas Property & Casualty Insurance Guaranty Act (TPCIGA), Pool is entitled to legal indemnity from Abraxas Petroleum Corp. Pool appealed to the 14th Court after the 157th District Court in Houston dismissed all Pool’s claims. According to the 14th Court’s opinion, Abraxas hired Pool, a drilling company, to work on an oil and gas lease that Abraxas owns and operates in West Texas. The two companies entered into an agreement that included mutual indemnity provisions, whereby each company agreed to indemnify the other for any claims stemming from the deaths of or injuries to their employees. A Pool employee died, after suffering on-the-job injuries. His heirs filed a wrongful-death suit, and Pool’s excess carrier, Reliance Insurance Co., became insolvent before funding a settlement with the heirs. Pool paid a portion of the settlement and sought reimbursement from Northfield, which insures Abraxas. John C. Tollefson, lead counsel for Northfield, says that if the 14th Court had ruled in Pool’s favor, a contractor such as Pool could agree to purchase insurance but not purchase it and then seek to void the agreement under the TOAIA. What the 14th Court is saying, Tollefson says, is that an indemnitor had better buy the insurance that it agrees to buy and had better buy that insurance from a company that is solvent. “Otherwise, it’s going to be on you,” says Tollefson, a partner in Goins, Underkofler, Crawford & Langdon in Dallas. But James Tompkins, lead counsel for Pool, contends that the ruling allows the consequences of Abraxas’ alleged negligence to be visited on his client. “They’re asking [Pool] to be the insurer of its own insurer,” contends Tompkins, a shareholder in Houston’s Galloway, Johnson, Tompkins, Burr & Smith. Michael Orlando, attorney for Abraxas, says the court would have had to “make some leaps in logic” to side with Pool in this case. A plain reading of the TOAIA yields the same result that the court of appeals reached, says Orlando, managing director of Houston’s Meyer Orlando. A ruling in Pool’s favor, “would throw all the players in the oilfield in a state of turmoil,” Orlando says. “Everybody would have to rethink and amend their contracts.” Defend and Indemnify According to the opinion, Pool employee Michael Carter died in 1999 from injuries he suffered in an on-the-job accident. Carter’s heirs sued Abraxas in the 143rd District Court in Ward County, asserting that his death was the result of Abraxas’ negligence. Also according to the opinion, Abraxas presented the claim to Northfield, which hired an attorney who demanded that Pool defend and indemnify Abraxas in connection with the wrongful-death suit, Donna Carter, et al. v. Abraxas Petroleum Corp. Northfield alleged in its brief to the 14th Court that Pool hired “its own longtime lawyer,” Larry Bale, a partner in San Angelo’s Hay, Wittenburg, Davis, Caldwell & Bale, to investigate the claim and defend Abraxas. Bale already was representing Pool in connection with its investigation of the matter, as alleged in Northfield’s brief. As alleged by Northfield, Bale reported to Reliance, Pool’s liability insurer, which paid for his services. Northfield alleged that Pool knew of Reliance’s financial situation after receiving a report from Bale in June 2001. Bale stated in that report that it was his understanding that Reliance had filed for bankruptcy, as alleged in Northfield’s brief. Northfield further alleged that during negotiations in August and September 2001, Bale agreed to have “Abraxas and its insurers” fund $1 million of the $1.5 million settlement reached with Carter’s heirs. According to the 14th Court’s opinion, Reliance became insolvent before funding the settlement, and Carter’s heirs sued Abraxas to enforce the settlement. Abraxas sought $1 million from Pool to pay the settlement. Pool contended in its brief that because the purpose behind the TOAIA is to protect contractors from unfair indemnity obligations, the statute invalidated the indemnity provision in Pool’s agreement with Abraxas. Pool argued that it was no longer protected because its insurer was insolvent. The 14th Court noted that Pool paid $1 million to Carter’s heirs but demanded reimbursement from Northfield, which, in 2002, filed a declaratory judgment action against Pool in the 157th District Court. Pool filed a counterclaim against Northfield and a third-party claim against Abraxas � Pool v. Abraxas/Northfield � asserting that Abraxas and Northfield were “unjustly enriched” because the TOAIA invalidated the indemnity agreement. Pool also asserted in that petition that Abraxas failed to request that Northfield comply with the TPCIGA. Abraxas’ failure caused Pool to pay a debt that otherwise would be paid by Abraxas or Northfield, Pool alleged in its petition. In its brief to the 14th Court, Pool alleged that TPCIGA was intended to provide protection to those insured by impaired insurers and that requiring Pool to fund the settlement undermined legislative intent. Tompkins says Pool made that argument to show that the Legislature does not intend for innocent insureds to have to insure themselves. On appeal, however, the 14th Court in Nabors Corporate Services found that nothing in the plain language of the TPCIGA allows Pool to bring such a cause of action against Abraxas. The 14th Court’s decision is good news for Bale, whom Northfield had sued for alleged legal malpractice at the same time it filed the declaratory judgment action. Sam Houston, Bale’s attorney, says the 157th District Court severed the malpractice action and abated it pending the outcome of Pool’s appeal. Houston, a partner in Houston’s Cruse, Scott, Henderson & Allen, says the 14th Court’s decision does away with any case against Bale unless the ruling is reversed on appeal. “He did nothing wrong,” Houston says of Bale. Tompkins says his client is considering its next move.

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