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Don't Lose Sight of the Big Picture -- Making Sure the Indemnity and Insurance Provisions in Your Various Contracts Fit Together

William W. Pugh, Oil & Gas Agreements: The Exploration Phase (2004)

Risk management for an oil and gas company starts with identifying and evaluating particular risks. Once needs and risks have been evaluated, it is imperative that the company allocate risk in accordance with its underlying contracts and insurance program. Contractual risk allocation through indemnity and insurance provisions is an important part of a company's approach to managing risk. In addition, it is critical that the risk allocation provisions in different contracts fit together; this is often most effectively accomplished through the use of a “pass-through” provision (whereby indemnity protection is passed through the contracting party to other beneficiaries). However, enforceability always remains a potential pitfall, which requires that the company constantly scrutinize the scope of the risk assumed. Moreover, insurance protections should dovetail with indemnity provisions, and in some cases, insurance may provide more protection than indemnity. Ultimately, an oil and gas company will have many contracts in place at the same time, and this paper will examine the most effective ways to integrate these various contracts to maximize protection and minimize the risk of a “bad fit.”