Liability conversation from the "wall"

Oklahoma Mineral Rights Grady County, OK
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To keep this discussion intact and to try not to go so far off-topic on the wall, I moved it here. My apologies if I missed one of the posts on the topic. It was not at all intentional.

Comment by Dave greer

What are the liabilities of the mineral rights lessors, when a spill or damage occurs to the land?

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Comment by Gale Williams

I don't know much about the law, but if you sell gasoline to someone and they pour it on their yard and it polutes the land it isn't your responsiblity. I guess you could go to the point of arguing that the rights owner is irresponsible for bargaining their rights to some company that spills bad stuff and that it is irresponsible, much like a bartender selling a drink to someone that is obviously drunk.

With all the laws that companies have to comply with, I doubt that that would hold much water. Companies don't want the expenses so none of them do it on purpose. Basically I wouldn't worry about it.

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Comment by r w kennedy

Gale, the point at which that breaks down is that you have ownership in part of the oil produced. There is probably some language in your lease that the operator "may, from time to time, buy your oil". If there are transportation charges on your royalty check, the oil is still yours while it is being transported, not so? Why would you be paying to transport the operators oil? So, your oil, among others, is sitting on someones surface, endangering or wiping out the rare, endangered 7 legged spider. Now what?

Every oil and gas lease should have a hold harmless and agree to defend forever clause. Leasing is not necessarily safe. I have had discussions with people who wanted such clauses in their lease and the lessee resisted it vehemently. If the operator is going to take care of all problems anyway, why would they resist that clause so much?

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Comment by Gale Williams

I don't want to get into a make believe thought process that will scare people. Witch doctors do that, yes if I don't make my dance it won't rain, or if we don't throw Sally into the volcano something bad will happen. EPA stuff reminds me of that, if we don't pay carbon tax the planet will become a desert. Witch doctors have been growing fat for a long time off of scaring people.

Basically don't lease if your scared sell your rights or be force pooled by the state. Makes me no difference. Some that post here have motives to stir up resentment and fear of oil companies. Enough said.

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Comment by r w kennedy

Gale, I have no profit motive here, I have actually refused payment from every person from this forum who offered it for my help. What I would like most is that people would be prepared, and safe, poo-poo that if you like. I am sorry to learn that you consider lease protective clauses to be witchcraft. I hope you don't lease all your minerals or have all of your leases come into the hands of Chesapeake with no witchcraft clauses.

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Comment by Gale Williams RW

Just to set the record straight.

I didn't compare protective clauses to witchcraft. I never implied a specific motive for anyone as their are many. I wasn't actually directly addressing your arguments, just pointing out the obvious. The make believe reference was to my previous post.

I will address your argument now and clairfy my perspective.

A lot of the professionals here make money from leased rights, I wouldn't call them fools. If you, rw, can't get a hold harmless clause and they don't get a clause I'm not worried and I will conduct business as best I can.

Also you should note that even if you don't lease you get force pooled, you still have the same liablity if a liability exists.

Gale

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Comment by Sylvester W. Brock, Jr.

Gale: I wonder if a spill cannot be entirely on the head of the driller. An action for negligence ought to lie, to shift responsibility to the one who actively caused the damage. And who probably has the risk insured. Am I wrong?

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Comment by Adrian Madison

Sylvester,

In this day and age of suits and all, what happens initially is that everyone gets sued, and the courts and both sides narrow down the list of ones that are to blame. But they do have the "deep pocket" rule where they go after the one that has the most money to pay. I'd bet the mineral rights owner would get sued in the beginning though.

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Comment by Rick Howell

A hold harmless clause may not be worth the ink it took to put it on the paper. I can see where it could only keep the lessee from effectively suing you. It will not prevent ANYONE from suing you at all. You might win, but it would keep someone from actually filing a suit and you being named as a defendant. The driller/operator would be the most obvious target because they have deeper pockets. But, you never know.

While my primary concern was participation interests, it is one of the reasons we maintain a $2MM umbrella liability policy.

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Comment by r w kennedy

Rick, you left out the part about forever defend. If you think that the lessee paying your legal fees isn't worth the ink it's written with, I guess there is nothing I could say to convince you.

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<Man I can see where I miss-spellings on this one from being on my phone! lol >

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Comment by Rick Howell

So what is your recourse if they fail to "forever defend"? You sue them to defend you, correct? Do you think the oil company and/or operator would rather take on a lawsuit against me or the EPA, a large environmental group financed by the movie industry, or a community whose water source was contaminated by the havesting of our product on a "commision"?

I agree the chances are slim, but don't think there is no chance they won't sell the mineral owners out to protect their bottom line.

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Comment by r w kennedy

Rick, if you start saying that the clauses in the lease are worthless, you are getting to the point where the lease is worthless and people should probably stop leasing if that is so, which brings us back around to my contention that a lease does not mean safety. I think you made my point for me.

I don't know how people will read the above. It's not snide, it's sad.

I know how I would answer Gales last statement/question in another state and I think it would be the same in Oklahoma, but I would like to hear the answer from someone else.

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Comment by Chris Moore

Rick, if I may ask, do you have a standard liability umbrella that you are confident would cover O&G exploration liability or do you have a policy that specifically covers this? We carry a pretty standard umbrella as well but I sense is that it would exclude this kind of liability. Living in California I can imagine the blank stare my insurance folks are going to give me when I ask them :-)

We worry about these liability issues, and negotiate them heavily, when entering into a surface damages contract but have not focused on them in a general mineral lease. And in the few instances were I've participated, it has been through the pooling so there is no additional contract defining allocation of liability.

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Comment by Gale Williams

Sylvester,

The forced pooling law is based on the doctrine of correlative rights and prevention of waste. This was established in Oklahoma Statues in 1935. The Statue was found to be constitutionally valied in the case Patterson v. Stanolind Oil and Gas Co.

Despite all the current renditions of how things work... back when the processes of drilling were new, you had people that would buy one acre of mineral rights and hold hostage all the mineral rights owners and the oil companies doing the drilling. I won't go into the details of how that was abused, just like it would be today if we didn't have forced pooling. The case involved the greater good for society versus indiviual, most call that eminent domain. I won't go into that, just know that the court found for the greater good. Or the lesser of two evils if you want.

Since this arrangement of drilling is for the greater good, it would be hard to sue the landowner. As they are forced pooled and their rights are already infringed to acheive the greater good. The state compels and desires for you to enter into this relationship. I believe that in most cases you cannot be held liable for something the law compels you to do.The other part of your defense would likely be that the well is the transportation method and belongs only to the driller. The driller has produced all of that transportation. Any failure would be directly related to his work or the producers of the parts that are used.

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Comment by Gale Williams

Sylvester,

The final defense would be to get an environmentalist to argue that the oil companies are extracting oil from the earth, reducing future pollution problems and relieving pressure that would force the oil to spread if an earthquake created a big crack into an area where people get water. When the earth has earthquakes or erosion that exposes the oil and gas it won't pollute so much if we extract and use it. We should be thankful for the hard cleanup work our forefathers did they already got the stuff that was leaking up on top cleaned up. Now it's up to us to do our job.

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Robert,

RE: "if you start saying that the clauses in the lease are worthless"

I didn’t say that the clauses are worthless.

And in your previous comment “Rick, you left out the part about forever defend. If you think that the lessee paying your legal fees isn't worth the ink it's written with, I guess there is nothing I could say to convince you.” You left out the a key part “may not be” I said “ A hold harmless clause may not be worth the ink it took to put it on the paper”

I think clauses are worth including. I think a hold harmless clause is a good idea. But I still say that it is not going to stop you from getting sued. You may have to fork over funds for an attorney to represent you because it is not going to stop your name from appearing on the long list of defendants on a frivolous lawsuit. We are seeing more and more of it every day. They may not win, but it may cost you money. On the other hand, as crazy as our society and courts are getting, they may win.

If I’m not mistaken, I have seen you post your own experiences with having to sue an oil company to get them to do what the lease called for them to do.

What I am trying to convey to you is that a backup plan might be a good idea for some people, depending on their situation.

Clauses are negotiable on both ends. They may choose not to lease from you because of a clause. You have to decide the best route for you.

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Ok Rick, the lease may not be worth the ink it's written with....to the mineral owner. Which brings me back to, leasing isn't necessarily safe, as so many people seem to think it is and there are many who stampede to try and convince people it is safe. When was the last time you heard someone bring up the fact that leasing isn't safe?

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Chris

Any more I don’t know how confident I am. I really need to look at the policy closely for exclusions. I read the first one, but it was more of a skim. And that is not a good practice, I know.

What I do know:

I contacted my agent who I have a very good relationship with. I consider him a friend and neighbor more than an agent. He was also both before he was my insurance agent. I outlined our needs which included a trust, a LLC, an unoccupied house, a farm, mineral rights, production RI, and participating RI in oil and gas wells. He said he could not help me, and referred me to an agent who specialized in commercial business insurance. He got the same info.

We do require the lessee of the farm to maintain a $1MM policy naming the Trust, and us as Individuals as covered parties. Now that the house is rented, the occupants are also required to maintain renters insurance.

If your liability is tied to your standard Home Owners policy, it may not cover you. The chances that is does not may increase with the participating interest.

I plan on moving our participating interests into a separate LLC in the future. LLCs are so State dependent, I don’t know what that would change in your case. California law scares me! I’m not even sure of the entire process with foreign owned LLCs and property in the state of Oklahoma.

Remember I’m not an attorney or an insurance agent!!

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I agree it is not 100% safe. I'm sure there is case law out there where he mineral owners have been sued. But you really don't hear about it. I think someone with a participating RI is far more at risk than someone with a simple RI. I don't consider myself to be overly paranoid. But like I said, we carry a policy to limit our exposure and that was something I brought into the game when I started managing the family assets. If we get sued, I want other people involved with more skin in the game than we have in it.


r w kennedy said:

Ok Rick, the lease may not be worth the ink it's written with....to the mineral owner. Which brings me back to, leasing isn't necessarily safe, as so many people seem to think it is and there are many who stampede to try and convince people it is safe. When was the last time you heard someone bring up the fact that leasing isn't safe?

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Good enough Rick, I wasn't trying to mud sling.

I also went back through the wall looking and I never saw where I mentioned forced pooling or participating and that seemed to creep into every answer. I guess they were all directed to someone else who brought up forced pooling or participation because I didn't. I guess I'm type cast.

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I think it was worth discussing and I think there are different levels of exposure to litigation.

That actually was a topic of discussion at the NARO national convention this year. Limiting exposure for participating interests was overwhelmingly recommended. Exposure to a common mineral interest was discussed within it, lots of opinions but everyone seemed to be in agreement the it was there but at a much less chance of seeing litigation with it. There were representatives in there from all professions.

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I like the umbrella policy we used one with my mother’s church and it paid for an accidental death case and a tornado. Our exposure is low and the risk is small, however the check isn't likely to be, so I will consider a policy. If you don't mind me asking what size deductible do you think is good?

Gale

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Gale, the best I remember, I asked for $10K and they gave me $5K. The said it wouldn't make much difference. I may be confusing it with the Structure. I'd ask to target a couple of numbers on each side of what you think you could handle out-of-pocket. Then base it on the premium vs personal exposure. Considering the things we have covered, I thought it was cheap.

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California law scares me too! Thanks for your thoughts on this -- helpful as always!

Chris


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The wild card in all of this is the EPA, where fault is not considered. Even the land owner, who may not have any mineral rights left, is at risk.