I love John Oliver. He’s smart, funny, and has an uncanny way of breaking down complicated issues into hilarious bite-sized jokes. But on Sunday night, while tackling North Dakota’s relationship with oil companies, Mr. Oliver included a bit about North Dakota’s lack of an anti-indemnity statute that was slightly off the mark. Mr. Oliver argued that the ability to contract for full indemnity, including indemnity for one’s own negligence, allows oil companies to avoid responsibility for unsafe conditions. He says about indemnity agreements:
Theoretically, even if [the oil company] were negligent and found completely at fault, [the contractor]’s insurance company would find itself paying a chunk of [the oil company]’s settlement, which in this case, it did.
In his typical way, Mr. Oliver conveyed his outrage with a metaphor.
If every time you parked in front of a fire hydrant, someone else got a ticket, you’d probably be a lot less inclined to drive around the block looking for open parking spaces.
This makes it sounds like the oil company, which had no employees on site, is shirking its responsibility by requiring the on-site contractor to pay for the oil company’s negligence. But in reality, indemnity agreements like the one mentioned in the show are designed to shift risk to the party that is closest to the risk, or the party with the most control over the risk. It is not uncommon in the oil industry, like the construction industry, for companies to use contractors to perform work. In the tragic circumstances described by Mr. Oliver on his show, the oil company had no employees on site at the time of the accident. It paid a contractor to be there and perform the work. When something awful happens, it is appropriate that the liability is borne by those contractors responsible for safety at the site and that the responsible contractors protect the upstream parties from having to pay damages that weren’t in their control.
To use Mr. Oliver’s metaphor, the oil company is not the driver that parks illegally. It’s more like the rental company that rented the car to the driver. You would fully expect the rental company that receives a traffic violation in the mail to send the ticket to the driver and demand the driver pay the ticket. Otherwise, drivers would be incentivized to “let ‘er rip!” whenever driving someone else’s car.
But indemnification should have limits, and that is why many states have enacted anti-indemnity statutes. (Click here to view SDV’s survey of the anti-indemnity legislation in all 50 states). Generally, these statutes prohibit a party from contracting away its own liability. It is true that North Dakota has not enacted typical anti-indemnity legislation. But it does not allow one to contract away responsibility for fraudulent, willful, or illegal acts. So, you could not contract with someone to indemnify you from your parking tickets because parking in front of a fire hydrant is illegal. Likewise, an oil company who violates the law cannot contract away its liability that results from that illegal activity. Mr. Oliver’s issue with indemnity agreements is somewhat misplaced. States like North Dakota could prevent parties from shifting the risk of their own reprehensible behavior by enacting legislation prohibiting that behavior. This would achieve the result Mr. Oliver is after without upending principles, like freedom of contract, that underlie the use of indemnity agreements.
Oct 15, 2015
Michael V. Pepe