Wednesday, March 6, 2013 Houston, TX. 10:15 11:30 a.m. COMMERCIAL GENERAL AND UMBRELLA LIABILITY INSURANCE

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1 Wednesday, March 6, 2013 Houston, TX 10:15 11:30 a.m. COMMERCIAL GENERAL AND UMBRELLA LIABILITY INSURANCE Presented by Teresa Fadul Energy Practice Director - Senior Vice President IMA of Colorado, Inc. This session will dig into the details of commercial liability insurance for oil and gas risks. You will emerge with an understanding of the limitations imposed by the care, custody, and control exclusion, saline substances contamination exclusion endorsement, and underground resources and equipment exclusion endorsement. You ll also understand the extensions provided by the underground resources and equipment coverage endorsement and the nonoperating working interests additional insured endorsement. Lastly, you will learn common problems in structuring umbrella/excess liability coverage over the primary liability program and how to correct them. Copyright 2013 International Risk Management Institute, Inc. 1

2 Brokers deserve face time with a senior leader who understands their region and local business needs. Ron Gleason, Senior Vice President, Regional Executive If you agree, we d like you to meet Ron. We work, so you work. Ironshore is structured so our broker partners have direct access to our senior executives. Leaders who average 30 years of experience. Our entrepreneurial model gives our top people like Ron Gleason the freedom to consistently respond to our clients needs on a local level. Regardless of the size of your company and no matter how specific your needs, our expertise will always be within reach. For more information please call IRON411 or go to ironshore.com. Access Experience. Get Results. The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Bound insurance policies, not summaries thereof, govern. Not available in all states.

3 Theresa Fadul Energy Practice Director - Senior Vice President IMA of Colorado, Inc. Ms. 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 & Gas Industry Focus Presented By: Theresa Fadul, IMA, Inc. 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 Work Orders and Credit Agreements Well Site Consulting Agreements Leases Mineral, Surface, Equipment Rental Agreements Joint Operating Agreements Purchase and Sale Agreements 3 Basic Coverages: Bodily injury (BI) and property damage (PD) 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 5 Unique Liability Exposures: Contract indemnity provisions Risk at a multi-party worksite is typically transferred without regard to fault (negligence) Severity risk inherent in the industry Knock for Knock Indemnity Scheme 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 partys shoes as respects that other partys negligence 6 7

8 "Contractual Liability" - covered through an exception to an exclusion. Exception - Exclusion does not apply to an Insured Contract: 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 by assuming risks that would not be theirs in the absence of the contract. 7 Possible Solutions: Broadened coverage - Coverage to include the Named Insureds pass-through 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. 8 8

9 Parties asked to indemnify other party for BI or PD (covered under CGL). Also asked to take direct responsibility and release the other party for certain risks. Example: Operator under the 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. 9 Potential Problems: Does two party contractual undertaking falls under CGLs definition of an Insured Contract? If Operator is not negligent, CGL policy may not be triggered. Even if Operator is negligent, an exclusion could negate coverage, e.g., Control of Property exclusion. Solution: For large property exposures, the CGL and Umbrella cannot always be relied upon. Specialty insurance is often required, e.g., Care, Custody & Control coverage for the Operator. 10 9

10 11 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. Indemnity obligations usually not limited by the dollar amount of required insurance

11 Operational contract should address applicable state antiindemnity statutes. May require use of state-specific insurance protections, e.g. Louisiana (Additional Insured status for Marcel exception to LOIA). Policy forms are not created equal. There can be gaps and difficult coverage issues to navigate, especially as respects property and pollution. 13 Contractual liability coverage is only as broad as: The policy form, and Coverage provided to the Named Insureds. Contractual coverage only as broad as if it were a direct claim against Named Insured

12 Consider the CGL Care, Custody & Control Exclusion (Part of Control of Property Exclusion): If Operator in CCC of rig and indemnifies service contractor (not the driller) who damages rig, Operator may not be covered. It doesnt matter that rig is not in service contractors CCC; it matters whether it is in the Operators CCC. Operator has indemnified, but insurance might not back up indemnity. Same issue impacts AI status; exclusions apply to AI in the same way they apply to the Named Insureds. 15 Exceptions to the knock for knock indemnity Usually affect Operator: The well Costs and expenses to control a well blow out 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

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14 19 Other Support Equipment: Frac Equipment: Flow Back Tanks Pumps Blow Back Manifold Blenders Supervisor, Mechanics, I&E Technicians and Crew Vehicles Light Plant Flameless Heaters Frac Tank Manifold Chemical Add Units Treatment Monitoring Van High Pressure Treating Iron Sand Storage Units (Mountain Movers) Conveyor Belt 20 14

15 Scenario: Frac fleet is damaged by explosion due to negligence of frac companys sub while loading diesel. Operator assumed direct liability for damage to frac fleet (regardless of fault) pursuant to Specific Events carve-out. Concern: CGL policy may not cover physical damage or loss of use of frac fleet. 21 What is the concern? This was a two party contractual undertaking, so contractual liability coverage may 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

16 So, where would an Operator look for coverage? Should be coverage under CCC section of OEE/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, rented or property in the insureds 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

17 24 Some Pollution Forms 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 their own employee. In this case the Named Insured could have both a Work Comp claim and a CGL claim (indemnity)

18 26 How is coverage extended to Non-Ops when the Named Insured is Operator? Operators CGL and Umbrella should extend coverage to Non-Ops for their percentage working interest (only). When agreed (and to the extent required) under written contract (e.g., JOA ). Coverage should be provided either within the policy or by endorsement

19 How is Non-Operator covered when Named Insured? Claim expenses flow through JOA for Non-Ops share of losses. Non-Ops responsible for their share absent Operators gross negligence or willful misconduct. Primary liability coverage may or may not be provided under the JOA. Non-Ops need their own insurance either primary, if no coverage under the JOA, or excess of coverage provided by JOA. Non-Ops sometimes not named in a suit against the Operator. Potential problem for the Non-Ops to trigger coverage under their own policy. 28 Where is this exposure addressed under the CGL? It is not specifically addressed under many policies. There have been carrier denials because exposure was not contemplated even though non-op premium was charged. Denials turned into lawsuits against the carriers. Travelers makes an exception to the Contractual exclusion: Exclusion will not apply to the liability of your operating agent or any of your co-owners to pay damages if you have assumed such liability as operating expenses under a joint operating agreement for any well, oil lease, or gas lease you own but dont operate. Berkley has a similar approach

20 30 Contractual. AI status. Broad professional services exclusions

21 Exception to Contractual Liability exclusion does not extend to Professional Services. Definition of Insured Contract may specifically negate this idea. Insured should avoid indemnifying party for Professional Services liability. May be no coverage under Contractual Liability of CGL. 32 AI status cannot be extended under CGL for Professional Services. Insured should avoid naming another party as AI for their 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 these Professional Services limitations

22 Best that Operators CGL or Umbrella not contain a Professional Services exclusion. Potential problem when Operator indemnifies for its Groups negligence if Group includes someone who is providing professional services, e.g., Well Site Consultant. Contractual coverage under the CGL is only as broad as: The policy form, and Coverage provided to the Named Insured. 34 Example: Operator indemnifies Driller for Operators 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 the Professional Services exclusion? 35 22

23 36 Insurance serves several important purposes: Backs up the indemnities with financial strength. Guards against insolvency of the indemnitors. Sometimes insurance is valid when indemnity obligations might not be (e.g., certain situations involving TX and LA oil field anti-indemnity acts). Adequate insurance can ease tension between contracting parties, which often still work together

24 AI Status: AI status generally mirrors the indemnity obligation. Each party should be named AI on the other partys 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 AIs own policy against negative loss history. Gives AI direct rights against the other party's insurer. 38 Typically not available under certain policies: Workers Compensation/Employers Liability (Alternate Employer). OEE/COW - unless theres an ownership interest (e.g., non-operators, farmors) or financial interest (e.g., lenders). Purely first-party property (Loss Payee). Professional Liability (waiver). Ensure Additional Insured protection is not limited to: Acts or omissions of the insured or those acting on the insureds behalf because risk if often allocated without regard to negligence, coverage is also needed for acts or omissions of the AI and AIs Group Ongoing Operations (also need Completed Operations) Vicarious Liability, or Specifically excludes sole negligence 39 24

25 Ensure Additional Insured protection is not limited to: Acts or omissions of the insured or those acting on the insureds behalf because risk if often allocated. without regard to negligence, coverage is also needed for acts or omissions of the AI and AIs Group. Ongoing Operations (also need Completed Operations) Vicarious Liability. Specifically excludes sole negligence. 40 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. Some brokers concerned 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 LOIA, all material costs of extending AI protection must be paid by the indemnitee

26 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). 42 Policies contain "other insurance" clauses for the purpose of sharing losses. Insurers can rely on their policys 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

27 44 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 between CGL and Umbrella forms. Examples of differences in forms: Occurrence versus claims made forms 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 45 27

28 Examples of differences in forms: Sunset clauses Claim must be brought within 3 years Pollution cleanup costs coverage Some forms include this coverage, but require legal liability Other forms cover cleanup for 1 st party costs that are voluntarily incurred, and dont require legal liability Some policies exclude pollution caused by a well out of control. Can be removed if an OEE/COW policy is purchased. 46 Examples of differences in forms: Waste exclusions: Should amend definition of waste. Travelers does not consider waste to include the following at the insureds oil or gas sites: Substances produced from the insureds wells. Substances injected into the insureds wells. Glycol used in the insureds operations

29 Examples of differences in forms: Waste site exclusions: Should amend waste site exclusions. Especially if the insured owns or disposes into Salt Water Disposal wells, owns/operates salt water pipelines, or reuses produced water. Loading/unloading at a Salt Water Disposal facility should also be addressed. 48 Pollution coverage limitations under some forms: Punitive and exemplary damages are excluded (compensatory damages only). Exclusion for wells out of control. Blanket Additional Insured endorsements, unless modified, do not receive benefit of the pollution coverage. No exceptions to waste or waste site exclusions

30 50 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

31 Specialty Environmental policies: Can cover: 1 st and 3 rd party clean-up costs. 3 rd party bodily injury and property damage. Sudden/accidental 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. 52 Broader coverage triggers than in CGL and Umbrella/Excess Coverage grants for: Natural Resource Damage e.g., fish, wildlife, air, groundwater. Medical Monitoring Costs covered as bodily injury. Diminished value of 3rd party property covered as property damage. Waste disposal activities and non-owned 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. Direct Business Income Loss when caused by a pollution incident

32 Contractors Pollution Liability policy: Covers pollution incidents arising out of the insureds operations performed for a fee at a jobsite, e.g., drilling, servicing and/or equipment installation. 1st and 3rd party cleanup costs. 3rd party bodily injury and property damage. Defense costs. Emergency response costs. Transportation and disposal of waste or materials from the jobsite. CPL coverage can be incorporated into an insureds PLL policy if, in addition to providing services, it also owns wells, pipelines, and other fixed assets

33 55 What does the ISO wording do? Definition of Property Damage is broadened 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

34 Damage to Property exclusion under Coverage A of 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. 57 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. Dont laser in on one endorsement or exclusion. If UREQ endorsement does not amend the Pollution coverage, and theres a pollution component to an underground loss, Pollution terms and conditions will also come into play

35 Contractors Perspective For example, a stuck tool might not trigger coverage. The claim will be adjusted specifically to particular incident/situation. Review in the form how Property Damage/CCC exclusion is amended. There are exceptions to certain of the bulleted points in the exclusion. 59 Operators Perspective The form is designed to cover things like: Damage to the formation on a neighboring mineral lease if the insured is negligent and theres an occurrence (e.g., mistake while drilling or fracing). Loss of use of water in a well - water must be replaced. Damage to a well or resources that is not pollution related. If pollution related, pollution coverage terms come into play. For example, does the pollution portion of policy cover underground property damage? Underground cleanup costs? If pollution exclusion does not apply, then theres covered Pollution Physical Damage and possibly underground clean-up

36 Suits by Co-owners: In some policies the UREQ 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

37 62 What cyber exposures currently threaten oil and gas companies? Cyber terrorists can affect control systems, not just business applications and . Stuxnet was first of a new class of viruses that takes over systems that control pumps, motors, valves, and programmable logic controllers (PLCs). The virus uploaded itself into Siemens process control systems, sending erroneous safe indications back to process controllers, which then allowed cyber attackers to pirate detailed configuration information. Severity of the infection was most significant in Iranian nuclear enrichment facilities, but it affected roughly 18,000 other process control systems, including some in the US

38 Increased reliance on Digital Oil Fields leaves oil and gas companies more susceptible to cyber threats. Process control automation systems are frequently using real time data to optimize production. Control systems are from technology providers like Siemens, which leaves them vulnerable to the same threats facing plant control systems. Ultimately, Digital Oil Fields contain vast amounts of production information (pump speeds, choke positions, injection devices, etc.), which is highly sensitive and competitive, and thus attractive to cyber terrorists. 64 What guidance has the SEC provided on cyber-risk disclosure? On October 13, 2011, the SECs Division of Corporation Finance released CF Disclosure Guidance: Topic No. 2 Cyber-security. The Guidance defines cyber-security as the body of technologies, processes and practices designed to protect networks, systems, computers, programs and data from attack, damage or unauthorized access. The SEC notes that cyber-security risk disclosure must detail the cyber-security risks particular to a company's business operations, and, to the extent material, such disclosure may need to include a description of the relevant insurance. As a result, companies may need to re-evaluate their insurance programs to determine whether existing insurance coverage adequately covers the costs and liabilities a company is likely to incur if it is the victim of a cyber-attack. This SEC Guidance, by itself, should not materially impact a companys insurance purchasing decision. The ultimate question is whether a company believes it is prudent to transfer some of its cyber risk via an insurance product

39 What coverage is available within typical cyber policies? Insurance companies now offer various types of policies specifically designed to cover a wide variety of cyber risks. These policies frequently cover both: 3 rd party claims against the insureds. 1 st party losses incurred by the insureds rd Party coverage 3 rd party coverage usually applies to defense costs, settlements, judgments and other loss incurred in claims against the insureds by customers or other third parties. Claims include: breach of privacy due to theft. loss or misuse of data (including credit card, financial or healthrelated data). conduct which causes network systems to be unavailable to 3rd parties or susceptible to computer virus or other 3rd party attacks. libel, slander, defamation, plagiarism, copyright or trademark infringement or other injuries resulting from media activities

40 1 st Party coverage Examples of 1st party coverages in cyber policies include: business interruption coverage for loss of business income as a result of an attack on the companys network; cyber extortion coverage; public relations coverage associated with restoring public confidence following a cyber incident; cyber terrorism coverage; identity theft coverage for misuse or loss of confidential or private information; data restoration coverage; coverage for notifying affected parties, providing credit monitoring services, incurring forensic costs to determine how the breach occurred, and restoring damaged hardware or software st Party coverage (continued) Examples of 1st party coverages in cyber policies include: Property damage resulting from a cyber attack is typically excluded from cyber policies Ultimately, cyber risk policies should be tailored to fit the unique exposures and needs of a particular company. Like other types of negotiable insurance products, knowing what to ask for is extremely important to getting what you need

41 70 Umbrella/Excess typically sits excess of the following: Commercial General Liability per occurrence and aggregate limits (drops down if aggregate is depleted). Automobile Liability. Employers Liability. Can sit excess of other specific underlying coverage: Maritime underlying limits, e.g., Maritime Employers Liability, Non-owned and Chartered Vessel Liability, Wharfingers Liability, etc. Aviation liability. Higher Umbrella/Excess limits might be required if the Operator signs MSAs with onerous Specific Events carve-outs

42 Pay special attention to the form of upper layer policies. Follow form or just as broad under underlying. Pollution coverage in the Umbrella could differ from underlying CGL pollution and underlying Auto Pollution. For example, some CGL policies provide for the following coverages which are not in the Umbrella: First party, voluntary clean up, that does not require legal liability, of your oil and gas lease sites and work sites. Clean up of underground pollutants. 72 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

43 74 Not all policy forms are the same. Dont look at coverage in a vacuum. Insurance must support contractual undertakings. Understand what the contract issues are. Analyze limits independently your peers arent always right! 75 43

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