The Four C’s of Risk Management for the Oil and Gas Operator

In what seems a lifetime of handling risk management and insurance for oil and gas operators (well, I guess it is a lifetime if you are under thirty-five years of age), I have come to the realization that the functions to protect the assets of an operator come under four separate but interwoven categories, namely:

Contracts
Coverages
Costs
Claims

Each facet is equally important but they should be addressed in that order, i.e., contracts, coverages, costs, and then claims.

Perhaps energy insurance is different from other fields of insurance. I am sure, however, that servicing an oil and gas operator should be handled with the same attention to the details of the operations of the client that any insurance professional should use in servicing his client in other avenues of industry. The difference, perhaps, is that the frequency of claims for the oil and gas operator is somewhat less than main street industry and, therefore, holes in the risk management program do not show up until the horse is out of the barn. And the cost of a claim can range from very expensive to very, very, very expensive, not including the aggravation of the litigation involved.

After a decade or so of doing expert witness work in litigation involving oilfield contracts and insurance, it has become abundantly clear that the primary reason lawsuits occur is because the broker/agent did not fulfill his responsibility of knowing his clients exposures and addressing them properly. The broker/agent is frequently not a defendant, but usually the culprit. He either failed to analyze exposures in a drilling contract or master service agreement, or did not have the insurance written correctly or, as one operator said, “He disappeared when the claim started.”

So, in order to give the reader a very brief guide on how to more fully service the needs of the oil and gas operator, this is the first of a series of articles on the subject.

Why study contracts first? Because the operator’s world revolves around contracts. Most brokers seem to begin their “servicing” with costs, thinking, perhaps, that: Someone else takes care of the contracts; and All coverages are the same.

Neither of these hypotheses is correct and should be discarded immediately, as they can lead to dire results.

To some extent problems occur because the broker believes that all contracts exist in a separate universe that should only be handled by attorneys.

This type of thinking is flawed because of three reasons:

It is the duty of the broker to point out the hazards to the client, no matter where they come from, e.g. drilling contracts, master service agreement, etc;

While the attorney may be capable of drawing up an airtight agreement, few have the expertise to weigh the results against available insurance coverage; and,

In a general statement, there are attorneys that handle contracts, and attorneys that handle insurance, but few bring the two together before the claim occurs. This is the job of the broker.

To be of value to the client, the broker must be able to understand the indemnifications that lie in all the agreements the operator encounters along the Contractual Exposure Trail, i.e., the Joint Operating Agreement, the Farmout Agreement, the Mineral Lease, the Drilling Contract, the Master Service Agreement, the Charter Agreement, and multiple other more innocuous appearing but still potent agreements.

It has been my view that most brokers have a reluctance to spend the considerable amount of time necessary to read, comprehend and respond to the exposures in these documents. To fulfill his duty to the client, this attitude must change. In future columns we will present an overview of the various contracts and their danger points, then discuss where coverages fit or miss protecting these areas. We will discuss how costs, rates and premiums, can be controlled, and, finally, what the broker’s job is in the event of a claim.

NOTE: While acknowledging there is a technical difference between a “broker” and an “agent,” and that in many states, such as Texas, this person is actually an agent, for future reference, the insurance representative that handles, recommends and places insurance for the client will be referred to as the “retail broker,” or “broker.”

Robert L. Carson, Jr. is vice president in the Energy Division of Higginbotham & Associates, a Fort Worth, Texas, insurance brokerage firm. He also does insurance consulting and serves as an expert witness.

His expertise is in oilfield contracts, well control and liability coverages. He is the author of the novel “Blowout.” Carson is currently at work on a new book, PRIMER, an acronym for Petroleum Risk and Insurance Management Educational Resource.