Does knock-for-knock indemnity cover gross negligence?

Under a knock-for-knock (mutual indemnity) clause, each side takes care of its own people and its own property, regardless of who was at fault. If your hand is injured on location, your company and your comp carrier handle it, even if the operator's crew caused it. If the operator's equipment is damaged, the operator handles it, even if your crew caused it.

That only works in Texas if the clause gets past two hurdles: the fair notice rules courts apply to indemnity, and Chapter 127, the Texas Oilfield Anti-Indemnity Act. More on the full structure at knock-for-knock indemnity.

Texas courts will not read an indemnity for someone's own negligence into a contract by implication. Two rules from the Texas Supreme Court control:

• Express negligence. In Ethyl Corp. v. Daniel Construction Co., 725 S.W.2d 705 (Tex. 1987), the court required that intent to indemnify a party for its own negligence be stated in specific terms within the four corners of the contract.
• Conspicuousness. In Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993), the court held the clause must also be conspicuous, meaning something on the face of the contract has to attract the attention of a reasonable person. Dresser applied both requirements to releases as well as indemnities.

Those are general rules about negligence. Whether they are enough to cover gross negligence is where it gets less clear.

There is no clean answer we can point to. In Van Voris v. Team Chop Shop, LLC (Tex. App. Dallas 2013), the court said these issues "have not been answered directly by the Texas Supreme Court, and courts of appeals have reached different conclusions." That court held a release that did not mention gross negligence did not reach the gross negligence claims, and reasoned that Texas policy against pre-injury releases applies at least equally to gross negligence. That case involved a release in a gym membership, not an oilfield MSA, but courts look at the same principles.

This is the reason MSAs are drafted the way they are. Many say the knock-for-knock indemnities apply "regardless of the sole, joint or concurrent negligence" of the indemnified party, then carve out gross negligence and willful misconduct, so each party keeps its own exposure for its worst conduct. Some MSAs go the other way and try to include it. Which version you signed matters a great deal, and it is a question for your attorney.

Indemnity is a contract question. Insurance coverage is a separate one. In Fairfield Insurance Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653 (Tex. 2008), the Texas Supreme Court held that Texas public policy did not prohibit coverage of exemplary damages for gross negligence under the workers compensation and employer's liability policy at issue. The court was careful to keep it narrow: it declined "to make a broad proclamation of public policy" and noted that "extreme circumstances may prompt a different analysis." It looks first at the policy language, then at whether the Legislature has made an explicit policy choice.

What that means in practice: whether your GL, employers liability or umbrella will pay punitive or exemplary damages starts with the wording of those policies. Some policies exclude punitive damages, some are silent. That is something we can check.

Separate from fair notice, Chapter 127 voids oilfield indemnities for the indemnitee's sole or concurrent negligence unless the indemnity is supported by insurance the parties agreed to carry. For mutual indemnities, the obligation is limited to the coverage and limits each side agreed to obtain. That ties the indemnity directly to your insurance limits. See the Texas Oilfield Anti-Indemnity Act and whether Chapter 127 requires mutual insurance.