CHAPTER 7 EXHIBIT "D" TO THE MODEL FORM OPERATING AGREEMENT
| Jurisdiction | United States |
EXHIBIT "D" TO THE MODEL FORM OPERATING AGREEMENT
Senior Vice President & Director of Energy
IMA Inc.
Denver, CO
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THERESA FADUL is Senior Vice President & Director of Energy at IMA Inc. in Denver, CO. With nearly 25 years of experience at IMA, Fadul is an expert in identifying risk, contract work and all aspects of the oil and gas industry, including upstream, midstream, and downstream. She has been recognized by the Denver Business Journal as a "Who's Who in Energy." Along with "Who's Who" honors in 2015, Fadul was recognized by the Denver Business Journal in 2015 as a "Top Woman in Energy" and in 2014 for winning "Who's Who in Energy" honors.
This paper addresses certain insurance issues presented by the A.A.P.L. Form 610 - 2015 Model Form Operating Agreement. Exhibit "D" to a Joint Operating Agreement ("JOA") is the part of the agreement that addresses the insurance coverage and limits to be carried by the operator for the benefit of the joint account. Exhibit "D" is referenced in the body of the JOA.
Introduction
Oil and gas operations present the potential for bodily injury and property damage, as well as pollution damage. JOA's provide a number of benefits to the co-owners, including sharing costs and risks. Operators and non-operators (to whom those liabilities in part will flow) attempt to allocate risk among themselves, and to ensure there is insurance to support those undertakings. However, participants in joint operations often rely too heavily on the boilerplate contract forms and fail to conform them to their own particular situations. Moreover, not all insurance policy forms are alike, and many companies do not recognize the potential for risks to slip through the cracks due to such differences. Consequently, the author recommends that participants in joint operations carefully consider the risks presented, the allocation scheme, and how that liability will be supported. This effort includes a detailed study of the available policy forms and a deliberate selection of particular insurance coverages to match each party's risk tolerance and the specific undertakings under the contract.
The AAPL form; basic provisions
Article V.D., entitled "Rights and Duties of Operator," addresses workers' compensation insurance and refers to Exhibit "D." Specifically, paragraph 9 ("Insurance"), provides the following:
At all times while operations are conducted hereunder, Operator shall comply with the workers compensation law of the state where the operations are being conducted; provided, however, that Operator may be a self-insurer for liability under said compensation laws in which event the only charge that shall be made to the joint account shall be as provided in Exhibit "C". Operator shall also carry or provide insurance for the benefit of the joint account of the parties as outlined in Exhibit "D" attached hereto and made a part hereof. Operator shall require all contractors engaged in work on or for the Contract Area to comply with the workers compensation law of the state where the operations are being conducted and to maintain such other insurance as Operator may require.
In the event automobile liability insurance is specified in Exhibit "D", or subsequently receives the approval of the parties, no direct charge shall be made by Operator for premiums paid for such insurance for Operator's automotive equipment.
The other articles in the 2015 Form JOA that address risk and the sharing of liability are as follows:
Article V.A., Designation and Responsibilities of Operator, states:
__________ shall be the Operator of the Contract Area, and shall conduct and direct and have full control of all operations conducted under this agreement as permitted and required by, and within the limits of this
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agreement. Operatorship is neither assignable nor forfeited except in accordance with the provisions of this Article V. In its performance of services hereunder for the Non-Operators, Operator shall be an independent contractor not subject to the control or direction of the Non-Operators except as to the type of operation to be undertaken in accordance with the election procedures contained in this agreement. Operator shall not be deemed, or hold itself out as, the agent of the Non-Operators with authority to bind them to any obligation or liability assumed or incurred by Operator as to any third party, except that Non-Operators hereby designate and appoint Operator as their agent and attorney-in-fact for the sole purpose of executing, filing for approval by a governmental agency as required under applicable law or regulation, and recording a declaration of pooling or communitization agreement to effectuate the pooling or communitization of the Oil and Gas Leases (to the extent legally allowed under their respective terms and conditions) to conform with a spacing order of a governmental agency having jurisdiction over any portion of the Contract Area. However, said agency shall only be exercised by Operator after providing written notice including a copy of the proposed pooling declaration or communitization agreement to Non-Operators, and shall be binding upon any Non-Operator failing to provide to Operator a written objection within ten (10) days after such notice. Operator shall conduct its activities under this agreement as a reasonably prudent operator, in a good and workmanlike manner, with due diligence and dispatch, and in accordance with good oilfield practice, and in compliance with applicable law and regulation. However, in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred in connection with authorized or approved operations under this agreement except as may result from gross negligence or willful misconduct.
Article VII.A., Liability of Parties, says:
The liability of the parties shall be several, not joint or collective. Each party shall be responsible only for its obligations, and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area. Accordingly, the liens granted among the parties in Article VII.B. are given to secure only the debts of each severally, and no party shall have any liability to third parties hereunder to satisfy the default of any other party in the payment of any expense or obligation hereunder. It is not the intention of the parties to create, nor shall this agreement be construed as creating, a mining or other partnership, joint venture, agency relationship or association, or to render the parties liable as partners, co-venturers, or principals. In their relations with each other under this agreement, the parties shall not be fiduciaries or to have established a confidential relationship but rather shall be free to act on an arm's-length basis in accordance with their own respective self-interest, subject, however, to the obligation of the parties to act in good faith in their dealings with each other with respect to activities hereunder.
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Exhibit "D"
Exhibit "D" typically starts as a blank form that must be completed without any real guidelines except those found in other JOAs. It is often a landman or attorney who is responsible for the task of drafting the Exhibit "D" language. These individuals are typically not insurance experts, a fact that can make the task somewhat dangerous. The Exhibit "D" wording is often borrowed from another JOA, sometimes one based on an older JOA form. Given the complexity of establishing a solid insurance structure for the joint account, it is important to involve someone in the company who is knowledgeable about the company's insurance program and risk management philosophy. The company's insurance broker should be involved, as they can provide appropriate insurance terminology and explain the pros and cons of important insurance decisions.
Negotiations will differ depending on whether the landman or attorney is representing the operator or non-operator. It is important for an operator to think through the coverages it wishes to extend to the joint account, especially for liability policies for which there is an aggregate limit that could be impaired or depleted in the event of a large loss. For example, the operator's Commercial General Liability and Umbrella/Excess Liability policies provide "per occurrence" limits, but are subject to "aggregate" limits for the policy term, typically an annual term. The aggregate limit protects the operator, but also everyone else to whom coverage is extended, across all the operator's operations. So a loss under one JOA could deplete the aggregate that would otherwise be available under the other JOA that is being negotiated. It is recommended that operators add a statement such as the following: "The parties acknowledge and agree that the Commercial General Liability and Umbrella/Excess Liability policies provided for in this exhibit for the benefit of the joint account apply to all of the Operator's operations and not just the operations of this joint account." An operator should clearly set forth just those policies and limits of insurance it wishes to extend. The operator should comment on certain policies for which either coverage or higher limits will not be extended for the benefit of the joint account so that there are no surprises if a loss occurs.
Non-operators to a JOA should set forth in Exhibit "D" the insurance protection they wish to receive as respects both coverage and limits. Besides the insurance provided to them under the JOA, non-operators should carry their own liability insurance, including Commercial General Liability, Automobile Liability, and Employer's Liability/Worker's Compensation. Non-operators should also carry some level of Umbrella/Excess; this is because their own...
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