{"id":9792,"date":"2026-02-08T03:37:44","date_gmt":"2026-02-08T03:37:44","guid":{"rendered":"https:\/\/usatrustedlawyers.com\/blog\/when-skin-in-the-game-meets-uninsurable-risk-rethinking-knock-for-knock-carve-outs-haynes-boone\/"},"modified":"2026-02-08T03:37:44","modified_gmt":"2026-02-08T03:37:44","slug":"when-skin-in-the-game-meets-uninsurable-risk-rethinking-knock-for-knock-carve-outs-haynes-boone","status":"publish","type":"post","link":"https:\/\/usatrustedlawyers.com\/blog\/when-skin-in-the-game-meets-uninsurable-risk-rethinking-knock-for-knock-carve-outs-haynes-boone\/","title":{"rendered":"When \u201cSkin in the Game\u201d Meets Uninsurable Risk: Rethinking \u201cKnock-for-Knock\u201d Carve Outs | Haynes Boone"},"content":{"rendered":"\n
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In the offshore oil and gas sector, procurement contracts have long served as sophisticated risk management tools designed to promote commercial certainty by clearly defining parties\u2019 obligations and allocating risks in a predictable and insurable manner.<\/p>\n

Central to this framework is the knock-for-knock indemnity regime, under which each party assumes responsibility for its own and its group\u2019s personnel, property, consequential losses and pollution from its property, regardless of fault. Operators also typically indemnify contractors for catastrophic events such as blowouts, well control incidents and major spills. This structure has long promoted efficient project delivery by reducing disputes and simplifying insurance arrangements.<\/p>\n

However, since the Deepwater Horizon oil spill in 2010 and the oil price collapse in 2014, operators have increasingly introduced carve outs and exceptions to these well-established regimes where a loss is said to arise from the contractor\u2019s \u201cgross negligence\u201d or \u201cwilful misconduct\u201d.<\/p>\n

A Shift in Risk and Responsibility<\/strong><\/p>\n

Although presented as measures to enhance accountability, these carve-outs can expose contractors to substantial, uninsurable liabilities that far exceed the value of their contracts. Under English civil law, \u201cgross negligence\u201d has no fixed legal meaning distinct from negligence. However, when the term \u201cgross negligence\u201d is used in an English law contract without being defined, English courts will interpret its meaning in the context of the contract. If the term is defined in an English law contract, English courts will normally look to that definition. Definitions of \u201cgross negligence\u201d and \u201cwilful misconduct\u201d vary widely between contracts and jurisdictions. Courts must therefore interpret these concepts on a case-by-case basis, particularly in complex, high value scenarios. This uncertainty increases the likelihood of disputes following major incidents.<\/p>\n

Gross Negligence\/Wilful Misconduct (GM\/WM) carve outs undermine the traditional knock-for-knock model by introducing unpredictability into a regime designed to provide stability and insurability for both parties and the wider supply chain.<\/p>\n

Insurance Gaps and Commercial Impact<\/strong><\/p>\n

Contractors generally do not insure against losses relating to the operator group\u2019s personnel, property or catastrophic events, as these risks are traditionally assumed by operators. Contractors may not be able to procure adequate insurance for such losses in the case of their \u201cgross negligence\u201d or \u201cwilful misconduct.\u201d Standard liability policies typically exclude cover for wilful misconduct and may exclude gross negligence, leaving contractors without adequate protection. Contractors often cannot fully pass carve outs down to their supply chain, widening the insurance and liability gap.<\/p>\n

Contracting Complexity and Cultural Risks<\/strong><\/p>\n

GN\/WM carve outs complicate negotiations and turn standard indemnity terms into extended debates over definitions, liability caps and exclusions. This increases transaction costs, prolongs dealmaking and strains commercial relationships. GN\/WM carve outs also increase the likelihood, cost and duration of disputes by shifting resolution from insurers to litigation focused on intentions and degrees of fault.<\/p>\n

There are cultural implications as well. In a safety-critical industry, transparency and timely incident reporting are essential. Fear of liability can encourage defensive behaviour or under-reporting, undermining the collaborative safety culture essential to offshore operations.<\/p>\n

Balancing Accountability and Practicality<\/strong><\/p>\n

While some argue that GN\/WM carve outs promote accountability, they often do so at the expense of commercial clarity and insurability. Effective accountability is better achieved through strong prevention systems, early reporting and shared responsibility. A focus in contracts on managing risk effectively rather than assigning blame supports transparency, trust and collaboration.<\/p>\n

Toward a More Balanced Approach<\/strong><\/p>\n

Rather than defaulting to GN\/WM carve outs, industry participants should reevaluate the principles underlying offshore risk allocation. Potential improvements include:<\/p>\n