Wednesday, March 18, 2015 Houston, TX. 9:30 10:45 a.m. COMMERCIAL GENERAL AND UMBRELLA LIABILITY INSURANCE

Transcription

1 Wednesday, March 18, 2015 Houston, TX 9:30 10:45 a.m. COMMERCIAL GENERAL AND UMBRELLA LIABILITY INSURANCE Presented by Theresa Fadul Energy Practice Director, Senior Vice President IMA of Colorado, Inc. This session will dig into the details of commercial general liability insurance for oil and gas risks. You will emerge with an understanding of how contractual liability works and its limitations, as well as other policy limitations imposed by exclusions such as the care, custody, and control exclusion. The session will explain the underground resources and equipment endorsement from both the operator s and contractor s perspectives. It will delve into the scope of sudden and accidental pollution liability coverage offered by various markets and explain the impact of waste and waste site exclusions. The speaker will also present information on specialty pollution legal liability policies and how they can sit excess and difference-in-conditions to fill important gaps in coverage. You ll understand the extension of coverage to non-operating working interest owners and why it s important for oil lease operators to have coverage for claims expenses that flow to them through the joint operating agreement. The session will present information on additional insured status, waivers of subrogation, and certificate of insurance management. Lastly, you will learn about some common problems in structuring umbrella/excess liability coverage over the primary liability program and how to correct them. Copyright 2015 International Risk Management Institute, Inc. 1

2 Notes This file is set up for duplexed printing. Therefore, there are pages that are intentionally left blank. If you print this file, we suggest that you set your printer to duplex. 2

3 Theresa Fadul Energy Practice Director, Senior Vice President IMA of Colorado, Inc. Theresa Fadul specializes in placing insurance and managing risk for both upstream and downstream energy business, with a primary focus in oil and gas lease operations. She handles all aspects of her clients property and liability insurance programs. She has spoken on various insurance topics at the Strategic Research Institute, Rocky Mountain Mineral Law Foundation, Colorado Chapter of COPAS, Association of Petroleum Landmen, KIOGA, and IPAMS. 3

4 Notes This file is set up for duplexed printing. Therefore, there are pages that are intentionally left blank. If you print this file, we suggest that you set your printer to duplex. 4

5 Commercial General Liability and Umbrella/Excess Liability Oil and Gas Industry Focus Presented by: Theresa Fadul, IMA, Inc. I. Overview II. Contractual Liability Exposures and Coverage III. Specific Events Carve-outs to MSAs: Hydraulic Fracing IV. Non-Operator Discussion V. Professional Services Exclusions VI. Underground Resources and Equipment Liability VII. Pollution Liability Coverage in the CGL and Umbrella/Excess VIII. Specialty Environmental Policies IX. Three Crucial Insurance Protections I. AI Status II. Waiver of Subrogation III. Primary/Noncontributory X. Umbrella Liability: Unique Requirements for Oil and Gas Exposures 2 5

6 The oil and gas industry faces Possibility of catastrophic loss (risk profile is typically severity, not frequency) Contractual liability transfer of risk under various industry contracts Drilling contracts Master service agreements (MSAs) Work orders and credit agreements Well site consulting agreements Leases: mineral, surface, equipment Rental agreements Joint operating agreements (JOAs) Purchase and sale agreements 3 Basic coverages Bodily injury and property damage liability, including pollution liability Pollution cleanup costs (addressed specifically in some forms) Personal injury liability Advertising injury liability Medical expenses Defense costs are in addition to or within the limits of liability depending on form 4 6

7 Insurance Services Office, Inc. (ISO), definition: Bodily injury means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time. Expanded definition: Some commercial general liability (CGL) policies expand the definition of bodily injury to cover mental anguish or other mental injury and in some cases emotional distress and loss of care and services, but only as a result of bodily injury, sickness, or disease of the person sustaining the physical injury. Some umbrella policies and specialty pollution policies provide coverage for mental anguish and emotional distress that are not tied to physical injury of the person. 5 ISO definition: Property damage means Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the occurrence that caused it. Diminution in value of tangible property is typically not covered by the CGL unless the property has been physically injured. 6 7

8 7 Unique liability exposures Severity risk inherent in the industry Contract indemnity provisions where risk at a multiparty work site is typically transferred without regard to fault (negligence) Each party takes responsibility for its people and property and often that of its contractors and subs of any tier One party contractually steps into the other party s shoes as respects that other party s negligence Except for third parties, where the indemnities are typically fault-based 8 8

9 Contractual Liability : covered through an exception to the contractual exclusion Exception: Contractual exclusion does not apply to an Insured Contract, defined (among other things) as: That part of a contract or agreement under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization. Important coverage when the insured accepts responsibility for loss that would not be its in the absence of the contract. 9 Broadened coverage: Coverage to include the named insured s passthrough liability by removing the word tort, thus eliminating tort liability requirement from the Insured Contract definition. Does not fix problem of direct liability in the absence of fault. 10 9

10 Three party: a party to a contract is asked to indemnify the other party for bodily injury or property damage to a third party (covered under contractual liability of CGL). Two party: the party is also asked to take direct responsibility and release the other party for certain risks. Example of two-party undertaking Operator under the International Association of Drilling Contractors (IADC) drilling contract takes direct responsibility for rig physical damage due to unsound location and environmental loss or damage, and sometimes for a rig stacked at location, without regard to fault. 11 Potential problems as respects property damage A two-party contractual undertaking does not fall under CGL s definition of an Insured Contract. So if operator is not negligent, CGL policy will not be triggered. Even if operator is negligent, an exclusion could potentially negate coverage e.g., Control of Property exclusion. For large property exposures, the CGL and umbrella cannot always be relied upon. Solution Specialty insurance is often required e.g., care, custody, and control (CCC) coverage for the operator as part of operator s extra expense policy

11 13 Party responsible for a particular exposure through contractual indemnity is also the party responsible for insuring that exposure. Insurance requirements of contracts must dovetail with the indemnity obligations. Typically indemnity obligations are not limited by the dollar amount of required insurance. Nor does insurance coverage limit the indemnity obligations. Policy forms are not created equal. There can be gaps and difficult coverage issues to navigate, especially as respects property and pollution

12 Exceptions to the knock-for-knock indemnity Usually affect operator The well Costs and expenses to control a well blowout and surface fire In-hole tools, fishing All equipment in CCC of operator Underground resource damage Pollution from the well MSAs can contain onerous carve-outs (specific events). Shift burden to operator for all losses arising from fire, explosion, a well out of control, and cratering 15 12

13 16 Other support equipment Flow back tanks Blow back manifold Supervisor, mechanics, instrument and electrical technicians, and crew vehicles Light plant Flameless heaters Frac tank manifold Frac equipment Pumps Blenders Chemical add units Treatment monitoring van High-pressure treating iron Sand storage units (mountain movers) Conveyor belt 17 13

14 Scenario Frac fleet is damaged due to negligence of frac company s sub while loading diesel. Operator assumed liability for damage to frac fleet due to fire and explosion without regard to fault under MSA with an onerous Specific Events carve-out. Concern CGL may not cover physical damage or loss of use of frac fleet. 18 What is the concern? This was a two-party contractual undertaking, so contractual liability coverage will most likely not apply. What about legal liability? Operator was not negligent, and so the CGL may not be triggered. Operator or its subs often are not negligent. Rather, the frac contractor, its subs, or equipment suppliers cause the loss

15 So, where would an operator look for coverage? Should be coverage under CCC section of operators extra expense (OEE)/control of well (COW) policy, but amendments to the standard endorsement are recommended: Broaden the scope of covered property to include property for which the insured is contractually liable: Not limited to leased or rented property in the insured s care, custody, and control Amend CCC exclusions to cover resultant loss or damage from the excluded perils:... explosion, rupture or bursting of engines, pumps, piping, tanks or pressure container from internal pressure; faulty design; mechanical failure or breakdown of equipment

16 21 Pollution forms Under certain forms, including stand-alone pollution legal liability (PLL) policies, contractual liability must be endorsed onto the policy. Action-over claims The ISO form includes an exception to the employee exclusion for action-over claims. Named insured contractually assumes responsibility (indemnifies) for bodily injury to its own employees. Under such a contractual undertaking, the named insured could have both a workers compensation claim and a CGL claim (indemnity)

17 23 How is coverage extended to non-operating partners when the named insured is the operator? Operator s CGL and umbrella should extend coverage to operator s nonoperating partners for their percentage working interest. When agreed and to the extent required under written contract (e.g., JOA or similar agreement) Coverage should be provided either within the policy or by endorsement

18 How is the named insured covered under its own policy when it s a non-operator? Claim expenses flow through the JOA for non-operator s proportionate share of a loss. Non-operators are responsible for their working interest share absent operator s gross negligence or willful misconduct. Primary liability coverage may or may not be provided under the JOA. Non-operators need their own insurance, either primary, if no coverage under the JOA, or excess of coverage provided by JOA. Non-operators are not typically named in a suit against the operator. Potential problem for non-operator to trigger coverage under its own CGL policy if this issue is not addressed in the form. 25 Where is this exposure addressed under a CGL policy? It is not specifically addressed under some policies. There have been carrier denials because exposure was not contemplated, even though premium was charged for non-op wells. Denials turned into lawsuits against the carriers. Best approach: Some carriers make an exception to the contractual exclusion such that the exclusion will not apply to the liability of named insured operating agent or any of its co-owners to pay damages if it has assumed such liability as operating expenses under a JOA or similar agreement

19 27 Contractual AI status Broad professional services exclusions 28 19

20 Exception to contractual liability exclusion does not extend to professional services. Definition of Insured Contract may specifically negate this idea. Insured should avoid indemnifying another party for professional services liability. May be no coverage under contractual liability of CGL. 29 Additional insured (AI) status cannot be extended under the CGL for professional services. Insured should avoid naming another party as AI for its professional services. As long as the insured does not directly indemnify or name another party as AI for professional services, should be no problem as respects the professional services limitations. Professional services should be carved out of the without regard to fault indemnities, or such contract indemnities should be fault-based

21 Best that operator s CGL or umbrella not contain a professional services exclusion. Potential problem when operator indemnifies for its group s negligence if Group includes someone who is providing professional services e.g., well site consultant. Remember that contractual coverage under the CGL is only as broad as the policy form. 31 Example: operator indemnifies driller for operator s broad Group (including the well site consultant). Other contractor worker injured during drilling operation. Is the well site consultant a professional engineer? Might the carrier try to deny a claim for indemnity under a broad professional services exclusion? 32 21

22 33 What does the ISO wording do? Definition of property damage is clarified to include loss of underground resources. Underground Resources and Equipment Hazard is defined to include property damage to: Oil, gas, water or other mineral substances which have not been reduced to physical possession above the surface of the earth or above the surface of any body of water; Any well, hole, formation, strata or area in or through which exploration for or production of any substance is carried on; Any casing, pipe, bit, tool, pump or other drilling or well servicing machinery or equipment located beneath the surface of the earth in any such well or hole or beneath the surface of any body of water

23 Damage to Property exclusion under Coverage A of the CGL is amended to not apply as respects the following: Personal property in the care, custody or control of the insured; That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the property damage arises out of those operations; That particular part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it. 35 Whether coverage will be triggered is a complex issue. The following must be there: An occurrence Covered property damage as defined When trying to understand coverage, you must review the policy in its entirety: Look at endorsements and exclusions in combination, not in a vacuum. Don t laser in on one endorsement or exclusion e.g., if underground resources and equipment endorsement does not amend the pollution coverage, and there s a pollution component to an underground loss, pollution terms and conditions will also come into play

24 Contractor s perspective In a two-party contractual undertaking where contractor takes responsibility without regard to fault, a stuck tool that damages the well might not trigger coverage if the contractor was not negligent. The claim will be adjusted specifically to that particular incident/situation. Remember that all policy terms, conditions, and exclusions must be considered. 37 Operator s perspective The form is designed to cover things like: Damage to the formation on a neighboring mineral lease if the insured is negligent and there s an occurrence (e.g., mistake while drilling or fracing). Loss of use of water in a well well or water must be replaced. Damage to a well or resources that is not pollution related. If pollution related, you must also review the pollution coverage terms, conditions, exclusions. For example, if an aquifer is damaged, does the pollution part of the policy cover underground property damage? Underground cleanup costs? If pollution exclusion does not apply, there s covered pollution physical damage and possibly underground cleanup

25 Operator s concern Two-party contractual undertaking without regard to fault For example, operator takes direct contractual responsibility for drill stem, directional tools, and motors under the IADC drilling contract without regard to fault If this in-hole equipment is lost or damaged due to the fault of the driller, there will most likely be no coverage for the operator. 39 Suits by co-owners In some policies, the underground resources and equipment endorsement is the only place where claims or suits by co-owners are excluded. Under other policies, there is a broad co-owner exclusion endorsement

26 41 Oil and gas insurance carriers typically provide some level of pollution coverage under their CGL and umbrella policies. Coverage varies from carrier to carrier and can vary between CGL and umbrella/excess forms. Examples of differences in forms Occurrence versus claims-made pollution forms (which provide some level of gradual pollution coverage) Time element: most forms are occurrence but subject to discovery and reporting requirements e.g., 30-day knowledge and 90-day reporting of pollution incidents from date of discovery

27 Examples of differences in forms Pollution cleanup costs coverage Some forms include this coverage but require legal liability (third-party claims). Other forms cover cleanup for first-party costs that are voluntarily incurred and don t require legal liability. Cleanup costs that are voluntarily incurred must be submitted to carrier within a certain time frame e.g., 1 year. 43 Waste exclusions Should amend definition of waste when possible to not include: Substances produced from the insured s wells Substances injected into the insured s wells Saltwater in the insured s gathering lines and pipelines Glycol used in the insured s operations 44 27

28 Waste exclusions: contractor s concern Although some forms provide coverage for owners/operators, there s often no coverage under the CGL for contractors for pollution loss while loading or unloading waste e.g., produced (brine) water. Look to auto policy and a Broadened Pollution endorsement. Operators should address in the insurance requirements in contracts with waste haulers (auto broadened pollution and contractor s pollution liability). 45 Waste site exclusions Amend waste site exclusions, especially if the insured disposes into third-party saltwater disposal wells, owns/operates saltwater disposal wells or pipelines, or reuses produced water. Loading/unloading at a saltwater disposal facility should also be addressed

29 Pollution coverage limitations under some forms Coverage for legal liability only and not contractual liability Sunset clauses: a claim must be brought within 3 years Punitive and exemplary damages excluded (compensatory damages only) Exclusion for wells out of control (can often be removed if OEE/COW policy purchased) Blanket AI endorsements, unless modified, do not receive benefit of the pollution coverage No exceptions to waste or waste site exclusions 47 Coverage difficulties under CGL and umbrella/excess policies related to allegations coming out of drilling and hydraulic fracturing operations. Coverage denied for reasons such as: Coverage not triggered injury or damage was not caused by an accident or event Time element discovery and reporting requirements not met Exclusion for expected or intended injury or damage Exclusion for underground pollution, especially cleanup, in umbrella/excess Denial of medical monitoring costs. Most policies require bodily injury to trigger medical monitoring costs coverage. Denial of mental anguish and emotional distress if no bodily injury. Denial of diminution of property value if no third-party property damage

30 49 Specialty environmental policies Can cover: First- and third-party cleanup costs Third-party bodily injury and property damage Sudden and gradual pollution Can sit Excess and Difference in Conditions to underlying policies including: CGL Umbrella OEE/COW Eliminates difficulty in making Other Insurance clauses work seamlessly 50 30

31 Broader coverage triggers than in CGL and umbrella/excess Coverage grants for: Natural resource damage e.g., fish, wildlife, air, groundwater Medical monitoring costs and mental anguish covered as bodily injury Diminished value of third-party property covered as property damage Waste disposal activities and nonowned disposal sites Transportation risks (first-party and third-party carriers) Emergency response, evacuation, and crisis management expenses Non-criminal fines, penalties, and punitive damages when allowed by law There is no exclusion for naturally occurring radioactive materials 51 Contractor s pollution liability policy Covers pollution incidents arising out of the insured s operations performed for a fee at a job site e.g., drilling, servicing, and/or equipment installation. First- and third-party cleanup costs Third-party bodily injury and property damage Defense costs Emergency response costs Transportation and disposal of waste or materials from the job site important extension as often not covered under CGL CPL coverage can be incorporated into an insured s PLL policy if, in addition to providing services, it also owns wells, pipelines, and other fixed assets 52 31

32 53 Insurance serves several important purposes: Backs up the indemnities with financial strength Guards against insolvency of the indemnitors Sometimes insurance is valid (AI status) when indemnity obligations might not be (e.g., certain situations involving Texas and Louisiana oil field anti-indemnity acts) Adequate insurance can ease tension between companies, which often still work together

33 AI status AI status generally mirrors the indemnity obligation. Each party should be named AI on the other party s insurance but only to the extent of the risks and liabilities assumed by that party. AI status provides important benefits: Potentially provides insurance protection even if indemnities fail. Increases available limits for a particular casualty. Insulates AI s own policy against negative loss history. Gives AI direct rights against the other party s insurer. AIs generally have the same rights as named insureds. May increase AI s ability to recover bad faith damages in coverage dispute. 55 Typically not available under certain policies Workers compensation/employers liability (alternate employer) OEE/COW unless there s an ownership interest (e.g., non-operators, farmers) or financial interest (e.g., lenders) First-party property (loss payee) Professional liability (waiver) 56 33

34 Ensure AI protection is not limited to: Acts or omissions of the insured or those acting on the insured s behalf; because risk if often allocated without regard to negligence, coverage is also needed for acts or omissions of the AI and AI s group Ongoing operations (also need completed operations) Vicarious liability Or specifically excludes sole negligence 57 Some AI wordings state, We will not extend any insurance coverage to any additional insured person or organization that is not provided to you (the Named Insured) in this policy. There s concern among brokers that contracts say the AI endorsement must cover certain things like sole negligence. Recommend alternative wording, shall not specifically exclude sole negligence. In Louisiana, to take advantage of the Marcel exception to the Louisiana Oilfield Indemnity Act, all material costs of extending AI protection must be paid by the indemnitee

35 All policies of each party to a contract should contain this protection. Otherwise, the risk allocation scheme could be frustrated if the insurer of one party can seek subrogation from the indemnitee. Prevents other party s insurer from asserting a claim against the indemnified party for its share of fault for a casualty. Can effectively provide some of the same benefits as AI status (e.g., an insurer cannot subrogate against its own policyholder). Can apply to policies where AI status is not available (e.g., property, work comp, OEE/COW, professional). 59 Policies contain other insurance clauses for the purpose of sharing losses. Insurers can rely on their policy s other insurance clause to reduce or even avoid coverage. Without a written requirement for primary and noncontributory, the other insurance clause could frustrate the parties intent that the indemnitor s policy respond first for losses allocated to it. Endorsements available to confirm parties intent

36 61 Umbrella/excess typically sits excess of the following: Commercial general liability per occurrence and aggregate limits (drops down if aggregate is depleted) Automobile liability Employer s liability Can sometimes sit excess of other specific underlying coverage: Maritime underlying limits e.g., maritime employers liability, nonowned and chartered vessel liability, Wharfinger s liability, etc. Aviation liability Important: Specific lines of coverage must appear on the schedule of underlying for coverage to apply

37 Pay special attention to the form of upper layer policies. Broader, follow form, or narrower than underlying? Especially review the pollution coverage e.g., some CGL policies provide for the following coverages, which are not in the umbrella: First-party, voluntary cleanup that does not require legal liability of your oil and gas lease sites and work sites Cleanup of underground pollutants Consider how pollution exclusion, especially total pollution exclusion, might impact the employers liability coverage in the umbrella. 63 Hydraulic fracing exclusions Marcellus exclusions Coverage limited to specific operations Narrower Contractual liability coverage Subsidence exclusions 64 37

38 Oil industry endorsements in the umbrella/excess liability layers should be carefully reviewed. Examples of coverage deficiencies are: Property damage to drilling rigs, drilling or production platforms, workover rigs, servicing rigs, drilling tools, pipes, supplies, collars, machinery and equipment leased by or rented to, or in the care, custody or control of any insured. Removal of wreck and debris

39 Not all policy forms are the same. Don t look at coverage in a vacuum. Insurance must support contractual undertakings. Understand what the contract issues are. Analyze limits independently; your peers aren t always right!

40 Notes This file is set up for duplexed printing. Therefore, there are pages that are intentionally left blank. If you print this file, we suggest that you set your printer to duplex. 40