On December 19, 2014, the Federal District Court in Wyoming issued a decision in Lexington Insurance Company v. Precision Drilling Co., LP, et al. , D. Wyo., Case No. 12-cv-070-J, extending the reach of the anti-indemnity statute, Wyoming Statute §30-1-131, to preclude coverage of a drilling company that claimed to be an additional insured covered for its own negligence under a liability policy issued to a wellsite management company. The anti-indemnity statute at issue, like those enacted in other jurisdictions, was promulgated to preclude indemnification agreements in the oil & gas industry to the extent such agreements were found to improperly shield companies from the direct consequences of their own negligence. These statutes reflect important public policy concerns by eradicating disincentives in the form of indemnity for safe and responsible drilling activities.

According to the court, the defendants in the action sought to shift insurance/indemnification obligations arising from the oil company’s negligent conduct from the oil company’s own primary and excess insurers to the management company’s insurer under a claim and additional-insured endorsement. The court, however, found no substantive distinction between prohibited indemnification by contract and indemnification through insurance, thus extending the scope of the anti-indemnity statute.

Wyoming’s anti-indemnity statute was enacted with the goal of encouraging safe and responsible activities in the oil & gas industry in Wyoming. The statute makes void and against public policy:

All agreements, covenants or promises contained in or collateral to or affecting any agreement pertaining to any well for oil, gas or water, or mine for any mineral, which purport to indemnify the indemnitee against loss or liability for damages for: (i) Death or bodily injury to persons; (ii) Injury to property; or (iii) Any other loss, damage or expense arising under either (i) or (ii) from: (A) The sole or concurrent negligence of the indemnitee or the agents or employees of the indemnitee or any independent contractor who is directly responsible for such indemnitee; or (B) From any accident which occurs in operations carried on at the direction or under the supervision of the indemnitee or an employee or representative of the indemnitee or in accordance with the methods and means specified by the indemnitee or employees or representatives of the indemnitee.

Similar laws relating specifically to oil & gas or more broadly to construction, which may include oil & gas drilling operations, have been promulgated in Colorado, Utah, New Mexico, Kansas and Oklahoma as well as in many oil-producing states outside of the Tenth Circuit. These include Nebraska, Texas, North Dakota, South Dakota and Montana. Generally, these laws have not directly impacted insurance obligations whereby one entity agrees to name another entity as an additional insured on its liability policy. The December 19, 2014, decision in Lexington Insurance Company extends the reach of the Wyoming statute to indemnification by way of insurance.

Analysis

In reaching this conclusion, Judge Alan B. Johnson of the U.S. District Court, District of Wyoming relied heavily on a decision he rendered several years earlier in the case of Mid-Continent Casualty Company v. True Oil Company, 2005 U.S. Dist. LEXIS 48477 (D. Wyo. 2005), aff’d.Mid-Continent Casualty Company v. True Oil Company, 176 Fed. Appx. 645 (10th Cir. 2006); related proceedingMid-Continent Casualty Company v. True Oil Company, 767 F.3d 1000 (10th Cir. Sept. 18, 2014). The court concluded: “The limitation on what may often be permissible proper indemnification in arenas other than the oil, gas or water or mining industries may not be avoided by entering into an agreement to obtain insurance or add the contractor as an additional insured on a policy.”

True Oil involved a somewhat different insurance coverage dispute. In that case, the company precluded from obtaining indemnification for its own negligence through insurance was claiming coverage under a general liability policy for vicarious liability pursuant to the definition of an “insured contract.”  The company was not claiming to be an additional insured by endorsement as in the Lexington v. PrecisionDrilling decision. Accordingly, the defendants in the Precision Drilling dispute, comprising Precision Drilling and its own primary insurers, argued that True Oil was distinguishable. Essentially, they argued that the insurance requirement found in the contract in force between the drilling company and the wellsite management company was not the same as indemnity and, therefore, the anti-indemnity statute did not apply. The Precision Drilling court found this was a distinction without a difference, extending the decision in True Oil to Precision Drilling’s claim under the additional insured endorsement.

The court granted Lexington’s motion for summary judgment for its claims of declaratory relief and recovery of defense fees and costs expended in the defense of the underlying personal injury litigation. The decision also denied counterclaims against Lexington by Precision Drilling’s primary insurers for contribution toward a multimillion-dollar settlement in the underlying action.

Practice Pointer

The Precision Drilling decision confirms the broad reach of anti-indemnity statutes, which must be carefully considered with respect to all forms of indemnity, including insurance. Admittedly, the decision is not a definitive statement of Wyoming law. It represents the opinion of a federal district court interpreting a Wyoming statute. It is, of course, possible that future decisions from Wyoming state courts – including the Wyoming Supreme Court – may reach a different conclusion. At the end of the day, however,  the Precision Drilling holding represents significant persuasive authority on the issue in Wyoming as well as other jurisdictions within the Tenth Circuit.

Wilson Elser’s Energy and Insurance Defense practices keep pace with these industries by closely monitoring new developments in evolving areas of the law, forecasting trends, and anticipating how our clients can fully comply with applicable codes and court decisions while containing their exposure. With offices in 27 locations, Wilson Elser is uniquely placed to address jurisdictional-dependent questions such as those raised in the Lexington v. Precision Drilling decision.

Disclosure: Cathleen H. Heintz (Of Counsel-Denver) represented Lexington Insurance Company in this dispute.