In the oil and gas sector, all policies are not the same

In previous articles on this subject I have preached the virtues of watching out for the four “C’s” of insurance protection for the oil and gas operator — contracts, coverages, costs and claims — and they remain as important areas of concentration as ever. The contracts identify the indemnities and liabilities in oilfield agreements; the coverages contain the nuances that set one policy apart from another; the costs include the choices that make one account more desirable to underwriters than another; and the claims hold the understanding and the presentation of the facts in order to get a fair settlement. An agent, broker or a consultant, as well as a risk manager, would do well to approach this field of study in that order.

In general, contracts and coverages go hand-in-hand but it is important to remember that all policies are not the same. Whether the difference is in the exclusions, the definitions, the endorsement wording or even openly in the insuring agreement, what may seem to be a standard policy can be totally at odds to what the agent or the insured had in mind.

Additional insureds and more
As a case in point, take the additional insured endorsement. If there is an agreement to name contractors as such in the operator’s drilling contracts or the master service agreements, and the policy has such an endorsement automatically naming anyone whom it has been contractually agreed upon to add, be sure to read (and understand) what the endorsement says. There are more than a half dozen ways automatic coverage can be added. For instance, the contractor may be added for work he does for the operator. That works, but in the endorsement he may be added for work the operator does for him. That doesn’t work. The operator hired the contractor, not vice versa. Check it out thoroughly.

There are similar fine distinctions in all of the main policies for the operator, i.e., the commercial general liability (CGL), umbrella, control of well, platform, charterers legal liability, etc., and even in “standard” coverages, such as automobile and workers’ compensation/employers liability.

Take the control of well policy. Most of the major excess and surplus lines (E&S) brokers have their own forms, and they are all different from the “standard” Lloyds of London Energy Exploration and Development (EED) form — some significant differences, some subtle. One thing to watch for: In some cases, “sophisticated” brokers lean heavily on the sales pitch that they do not go through an E&S broker but go straight to Lloyds. They often forget to add that they will have to use the EED form, which is the one favored by the underwriters, rather than a user-friendly form promulgated by the E&S broker.

Oil Industry Limitation Endorsement
Almost all umbrellas and some CGLs will have a large endorsement called “The Oil Industry Limitation Endorsement.” As previously stressed, all policies are not the same, and this is the most frequent form in which that statement is proven.
The idea behind this endorsement is to clarify certain activities that are not intended to be covered by the CGL, or to firmly and obviously state that even if they are covered by the CGL, the umbrella does not intend to cover them. A boxful of exclusions can be piled into this endorsement, some expected, some nonsensical and some that make you wonder if the underwriter understands the oil and gas business.

The main exclusions to coverage under the liability section of insurance coverage have to do more with clarification than actual coverage. For example, the endorsement will state that expenses involved in controlling a well out of control are excluded. Since the CGL and umbrellas are designed to cover third party damages, it should follow that control of well costs are actually first party damages and there is no coverage under the liabilities. However, a question concerning coverage for legal liability and the fact that the operator is legally liable for controlling the well can rear its ugly head, so to be on the safe side, the liabilities specifically exclude well control costs.

Likewise, the question concerning the exclusion for damage to property in your care, custody and control is put to bed by having a specific exclusion for damage to drilling rigs, drill pipe and other contractor’s equipment.

The Oil Industry Endorsement must be read carefully to make certain it excludes only those things that make sense and that you expect it to exclude. For example, one policy I read excluded bodily injury and property damage that occurred while controlling a well out of control — not control costs but bodily injury and property damage.

Usually in the umbrella these will be contingent exclusions for contractual liability, property damage caused by a blowout, etc., if such coverages are not carried in the underlying policies. These should be innocuous because any agent worth his/her salt will make certain they are in the underlying, but always check.

I remember reviewing a client’s coverage while serving as a consultant and I ran across a cover letter from his broker explaining the coverages that added almost as a post script, “and of course the coverage contains the standard Oil Industry Limitation Endorsement.” Such a statement reveals a real lack of a connection with the entire subject. There is no “standard” Oil Industry Limitation Endorsement!

‘Action over’ coverage
One of the latest problematic contract developments involves the “action over” coverage of a sub-contractor’s CGL. Most policies define contractual coverage as including a contract that is usual and customary to your business. Recently we have seen a short phrase inserted in the definition that excludes the sole negligence of the other party. This exclusion can play havoc with the “knock for knock” mutual indemnity agreement in most oilfield contracts.

How do you gird yourself from the slings and errors brought about by using less desirable coverage? As the fella said, “It ain’t easy.” Someone in your organization has to read each policy, discern the differences and make these differences known to the insured. You then must guide your client through the comparison of cost versus protection to arrive at the desired coverage position.

Discuss the differences with the underwriters and see if they will change them. Often they will not be adverse to changing the wording. Frequently — and particularly with smaller carriers new to the energy business — the endorsements used are ones filched from other carriers with no verification that they really say what is intended. We recently embarrassed an underwriter when we pointed out that his endorsement adding non-operating wells to the policy did not cover drilling wells, only producing ones. He had used an old endorsement that for years had not been corrected.

As I used to tell my son, “If you have no other advantage over your client than this, remember, the policy gets to your desk before it gets to his. Read it.” Some of these differences are extremely important, some inconsequential, but you should know them, if for no other reason than your own self-pride. Or, you can just be a guy that is hawking the cheapest coverage with no thought to how well it protects the buyer.

To be a professional in the energy insurance industry start with learning the problems in contracts, then concentrate on understanding the differences in coverages. The next discussion is learning what it takes to keep premium costs down.

(Editor’s note: This is the fourth article in a series by Robert Carson addressing insurance protection for the oil and gas operator. The third appeared in the March 20, 2006, issue of Insurance Journal-South Central. Carson took a long break from writing this series because of health reasons. Insurance Journal welcomes him back.)

Robert L. Carson, Jr. is vice president in the Energy Division of Fort Worth, Texas-based Higginbotham & Associates. He also serves as an insurance consultant and an expert witness. His expertise is in oilfield contracts, well control and liability coverages.

Topics Agencies Energy Oil Gas Contractors