The oil and gas industry is an industry of high risk and high reward, and where there is risk, insurance follows. These risks  exist for upstream, midstream, and downstream companies alike. To offset this risk, oil and gas companies require various insurance levels for themselves and their contractors. Unfortunately, not all companies are on the same page when it comes to deciding what insurance is required and how much their insurance policies should cover. The typical coverages and limits of insurance that are required by Operators are often more than a Contractor is willing to acquire. Thus, the insurance requirements of a Master Services Agreement (“MSA”) often become the most redlined and negotiated piece of the agreement, but tiered insurance programs are a great way to grease the skids of MSA negotiation.

To bridge the gap caused by this disconnect between Operators and Contractors, Operators are utilizing tiered insurance programs that shield all parties from risk while keeping costs low for Contractors not backed by the large policy limits preferred by Operators. A tiered insurance program satisfies the needs of both parties by outlining the specific coverage needs of the Operator relative to the services the Contractor will provide. Tiered insurance programs allow Contractors to customize their coverage based on their specific services. This approach enables Contractors to obtain more cost-efficient insurance and enhances risk management for higher-risk services, allowing them to scale back coverage for lower-risk services. For example, in a tiered insurance program, an Operator may require all Contractors to attain “tier one” coverage, which would include basic coverages such as commercial general liability coverage, automobile coverage, worker’s compensation coverage and a relatively low umbrella or excess policy. Moderate-risk Contractors would need “tier one” and “tier two” coverage, adding in higher umbrella or excess limits, along with pollution coverage, professional liability insurance or other specialized coverage. High-risk Contractors would require the previous tiers and additional tiers of coverage that include higher umbrella or excess limits and potentially more advanced or targeted insurance. Tiered programs like these allow Contractors to right size their insurance program based on the type of services they provide and can make the MSA negotiation process flow more smoothly and efficiently for all parties.

For more guidance on insurance and everything else commercial contracting, reach out to the team at RR&A!

Check out the latest episode of RR&A’s podcast, An Ounce of Prevention, Episode 1, featuring guest Phil Lukefahr as he dives into the complexities of MSAs with Tiered Insurance Programs. Tune in, rate, and subscribe now on Spotify, Apple Podcasts, YouTube, and Amazon Music!