In a case of first impression, the U.S. 5th Circuit recently held that the Louisiana Oilfield Anti-Indemnity Act (LOAIA) does not contain a universal well requirement.
Louisiana is only one of four states that has passed an oilfield anti-indemnity act. Enacted in 1981, the LOAIA renders “null, void and unenforceable” certain indemnification provisions in “agreement[s] pertaining to a well for oil, gas, or water, or drilling for minerals which occur in a solid, liquid, gaseous, or other state.” The Louisiana Supreme Court has explained that the LOAIA “arose out of a concern about the unequal bargaining power of oil companies and contractors and was an attempt to avoid adhesionary contracts under which contractors would have no choice but to agree to indemnify the oil company, lest they risk losing the contract.”
Traditionally, Louisiana courts have engaged in a two-step test to determine the applicability of the LOAIA. First, there must be an agreement that “pertains to” an oil, gas, or water well. Second, the agreement must be related to the exploration, development, production, or transportation of oil, gas, or water.
However, in QBE Syndicate 1036 v. Compass Minerals Louisiana, 95 F.4th 984 (5th Cir. 2024), the 5th Circuit Court, in a unanimous decision written by Judge Higginson, clarified the scope of the LOAIA and held that the rule that an agreement must pertain to a well only applies if the agreement does not otherwise pertain to “drilling for minerals.” In other words, only if a party is invoking the ‘wells for oil, gas, or water’ clause does it need to show a nexus to a well.”
The case involved the death of a contractor at the Cote Blanche salt mine in St. Mary Parish, which was owned and operated by Compass Minerals Louisiana. QBE, the insurer of two local companies that contracted to perform fire prevention and electrical support at the salt mine, brought a declaratory judgment action in the Western District of Louisiana seeking a judgment that the LOAIA invalidated the indemnity and additional insured provisions in the contract between Compass and the contractors. Specifically, QBE argued that Compass used a “drill-and-blast mining method” at the salt mine which constituted “drilling for minerals” under the LOAIA. The district court rejected QBE’s argument and ruled that the LOAIA only applied to agreements “pertaining to a well” and that it is undisputed that the mining operations at the salt mine did not involve a well.
On appeal, the Fifth Circuit recognized that prior panels have stated “in broad terms” that the LOAIA requires an agreement to pertain to a well. However, the Court noted that neither the Fifth Circuit nor the Louisiana Supreme Court has addressed the question in this case – specifically, does the LOAIA applies to only those contracts that “pertain to a well,” even if those agreements involve “drilling for minerals”? The Fifth Circuit made an Erie guess and held “[a]n agreement that ‘pertain[s] to … drilling for minerals’ need not also pertain to a well.” As such, the Fifth Circuit reversed the district court’s ruling and remanded to the district court to determine if the agreements in the case pertain to drilling for minerals.