Despite recent setbacks, a number of U.S. offshore wind projects remain on the books and on track. A recurring issue with these projects concerns what contractual indemnity scheme should apply. For offshore oil and gas projects in the United States and internationally, and for offshore wind projects outside the United States, the parties almost uniformly utilize some iteration of a “knock-for-knock” indemnity scheme, whereby each party picks up the full tab for any personal injuries, illnesses, or deaths of its employees and for any damage to or loss of its property, regardless of the cause or the fault of any party. Each party is also responsible for the people and property of their respective “group,” including underlying subcontractors, who should also have the same knock-for-knock indemnity obligations.
The knock-for-knock indemnity scheme is efficient and effective, particularly if it includes no carve-outs and is applied uniformly across all of the contracts for parties that have personnel and/or property involved in the project. This setup provides the parties with more certainty of their liability exposure and avoids duplicative insurance coverage. In most cases, each party with personnel or property involved in the project will also be required to have insurance coverage that names the counterparty and its “group” as an additional insured and waives the underwriters’ rights to pursue subrogation against them.
However, even in the U.S. offshore oil and gas industry, there have been some hiccups in adopting knock-for-knock indemnity. For example, Texas and Louisiana each adopted regulations to ensure equitable division of liability exposure with contractual indemnity provisions in offshore projects, limiting where knock-for-knock can be used. Also, some jurisdictions find indemnity for an indemnitee’s gross negligence or willful misconduct to be void, as against public policy, or to require specific notice to the indemnitor.
A carve-out for gross negligence and willful misconduct in the knock-for-knock provisions complicates issues, particularly in personal injury causes of action in the United States. Unlike many other jurisdictions in the world, it is not at all uncommon in the United States for a personal injury plaintiff to name every entity potentially involved in an accident and to allege that the defendant’s gross negligence and willful misconduct contributed to his/her injury. In such a case, there is no certainty as to whether the employer’s indemnity obligation will stand, and all parties must engage counsel and participate in defending against the claims. Nonetheless, even with these carve-outs, knock-for-knock indemnity remains common in the U.S. offshore oil and gas industry and is quite effective at limiting risk, particularly for property damage.
All of the U.S. offshore wind projects currently in active development are located along the middle or northern East Coast. Several states on the East Coast, including New Jersey, New York, and Virginia, have regulations that effectively bar contractual indemnity for an indemnitee’s own negligence. Thus, knock-for-knock is essentially unavailable where those states’ laws are or may be applicable to the project operations onshore and on the outer-continental shelf. For vessel charter parties, on the other hand, where the U.S. general maritime law applies, knock-for-knock indemnity is, for the most-part, enforceable. However, a physical structure built on the outer-continental shelf is effectively deemed to be an “island” of the adjacent state, with federal law adopting the law of the adjacent state to apply to any casualty on or impacting that structure. Thus, when a vessel is positioned next to an offshore installation on the outer-continental shelf, people and property can readily cross between the application of maritime law and state law, further complicating the enforceability of contractual indemnity obligations.
This has become a conundrum for developers and contractors alike, and a variety of strategies have been considered, including:
- Simply adopting negligence-based indemnity obligations for all.
- Adopting knock-for-knock indemnity provisions with respect to maritime contracts (perhaps carving out gross negligence and willful misconduct) and negligence-based indemnity obligations for non-maritime contracts.
- Contractual choice-of-law provisions calling for the application of the U.S. general maritime law or an alternate state law for the indemnity provisions. For example, although the law of New York state may generally apply to a contract, the indemnity provisions will be governed by the general maritime laws of the United States or the laws of the State of Texas, where the general maritime law is inapplicable. There is some question whether a court in New York, in this example, would enforce this sort of choice-of-law provision if the contract is not deemed to be “maritime in nature” and there is no obvious connection to Texas.
- Adopting negligence-based indemnity provisions but then seeking to accomplish essentially the same thing as knock-for-knock via insurance provisions, i.e., naming and waiving a counterparty’s group. This is more effective for property loss or damage than for personal injury or death.
As the U.S. offshore wind industry develops, we expect U.S.-based contracting parties, as well as the relevant courts and state legislatures, will become more familiar with contractual issues, and hopefully a more uniform method of contracting for liability will emerge for construction on the U.S. outer-continental shelf. In the meantime, attorneys and insurance brokers will remain busy…trying to determine whether these terms are enforceable.