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Untangling Master Service Agreements: How to Plan for Coverage Needs 1/16/2018

Service Agreement

By San Smith, Senior Executive Advisor – Midland

Some time ago, a good friend who is also a client came to me with an interesting challenge. He is a plugging contractor and had been offered a large contract to plug abandoned oil wells across the state of Texas. The caveat was that he had a $2 million general liability policy, and the Master Service Agreement for the project mandated that he carry $20 million in coverage. I ran the numbers and provided him with quotes on the additional insurance. The result? He would have lost money on the project, because of the added premium expense. In the end, what looked like a great opportunity simply wasn’t profitable, and he turned it down.

Oil and gas industry operators, like Exxon, Chevron and Pioneer, have long used Master Service Agreements (MSAs) to hire contractors for specific project needs. However, the size and scope of these documents has changed dramatically in recent years, creating challenges for both contractors and their insurance brokers to fulfill the coverage requirements. Whereas a generation ago, a typical agreement previously comprised three or four pages, today an MSA can be 30 pages long and cover everything from payment terms to indemnification, contractual obligation, intellectual property, force majeure, and other legalese that has little to do with the contractor’s services. In their haste to win the business, contractors rarely read the agreements in detail, and often are unaware of the steep coverage limits and other requirements when they submit their bid. Consequently, they may seriously underbid the project, or find they are unable to meet the stated limits to become a qualified vendor.

A New Player in the Mix
In Texas, regulatory changes have added to the complexity of meeting operator requirements for contract work. Historically, a broker would review the insurance requirements in an MSA and complete the operator’s forms for the certificates of insurance. Although the forms could be lengthy and often requested detailed information about the vendor, communications between the insurance provider, contractor and operator were relatively streamlined. Several years ago, however, the state legislature passed new guidelines mandating that operators use standard ACORD form certificates of insurance instead of customized forms. As a result, larger operators began hiring certificate management companies to act as an intermediary and collect additional data from the contractor. The introduction of these intermediaries into the mix has created new challenges for insurance agents to get certificates approved, and placed a heavy burden on the contractors themselves to meet sky high coverage limits.

The main intermediaries for oil and gas operators in West Texas are IS Networld, Insurance Certificates of America (ICA), Complyworks, and CertCon. These firms are hired to manage operator certificates and their agreements with their contracting group, in most cases shifting the exposure from the operator to the contractor. Because the requested certificates of insurance are different for every operator and intermediary, a brokerage firm cannot simply create a template to meet the coverage requirements. Consequently, it’s very common for a certificate to be rejected due to missing information, triggering a series of back-and-forth communications between the broker and intermediary to ensure that all of the policy forms are in compliance. In other cases, the insurance carrier may have difficulty meeting the coverage requirements due to policy limits, or the firm may not want to raise the coverage amount to meet the terms of the MSA, because it brings more exposure than when the carrier first wrote the account. In the meantime, the clock is ticking for the contractor, who on the one hand could lose the contract, and on the other could be burdened with onerous premiums that eat up all of their profits.

A Trusted Ally on Your Side
At Marsh & McLennan Agency, we guide our customers through the complexities of Master Service Agreements by educating them about the coverages most operators require, and helping them obtain the right insurance for their current needs and future growth.

By asking customers about the operators they currently serve and prospective business they’re working on, we can add the appropriate endorsements from the get go. This eliminates time-consuming communications with intermediary certificate management companies and ensures our customers won’t be scrambling to meet complex coverage requirements when a new opportunity presents itself. Our firm has deeper relationships with insurance companies than most small and mid-sized agencies, and more resources to obtain the proper endorsements through our extensive carrier network, as well as excess markets. Similarly, our experience navigating the information management systems for the different intermediaries ensures that we complete the process quickly, so our customers can get to work and be successful.

Marsh & McLennan Agency also insures several operators in West Texas and other parts of the country. We advise them on the kind of language that should be in the Master Service Agreement, and the types of coverage requirements that are most appropriate for a given project, based on regional or national benchmarking data. If a contractor does not want to comply with a particular requirement, we can reach out to our contacts at the different operators directly to request a variance and speed the approval process with the certificate management firm. Having an agent who understands both sides of the equation and works directly with the intermediary can help balance the needs of the operator and contractor to ensure compliance with the Master Service Agreement for everyone’s benefit.

As large oil and gas operators streamline operations by shrinking their vendor lists, and as certificate management companies shift exposure to the contractors, our team is there to help you navigate the changing landscape of MSAs. With foresight and planning, we help ensure that your business stays profitable, and you can get the job done.

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