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Contract Risk Allocation and Insurance

Cynthia A. Holub, William R. Lee, Oil & Gas Agreements: Contracting for Goods, Services, and People (2013)

The oil and gas industry is a risky business. Among other risks, are those for personal injury, death and damage to property. Industry participants manage the inherent risks through contractual risk shifting clauses such as indemnity agreements, waivers of subrogation and insurance provisions. Lawyers and industry participants often put much time and effort into negotiating various contracts between exploration and production companies and service contractors, but sometimes give little attention to the contract's insurance exhibit and even less attention to the actual policies purchased by the service contractors. This paper discusses two of the most important insurance tools necessary for management of contractually assumed obligations: coverage for contractual indemnity claims and additional insured coverage. However, before one can draft appropriate insurance specifications necessary to obtain the proper contractual indemnity and additional insured status, it is necessary to have a working understanding of key coverages for oil and gas related contracts. Therefore, this paper first discusses general types of insurance coverage pertinent in oil patch contracts.

II. Basic Insurance Concepts

A. The Difference Between First Party and Third Party Coverage

First party insurance is a policy that protects the insured from its own actual losses and expenses