Tuesday, March 1, 2016 Houston, TX. 1:45 3:00 p.m. ROLL UP YOUR SLEEVES: DETAILED INSURANCE PROBLEMS IN OIL FIELD CONTRACTS

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1 Tuesday, March 1, 2016 Houston, TX 1:45 3:00 p.m. ROLL UP YOUR SLEEVES: DETAILED INSURANCE PROBLEMS IN OIL FIELD CONTRACTS Presented by Theresa Fadul Energy Practice Director, Senior Vice President IMA of Colorado, Inc. Harold J. Flanagan, J.D. Partner Flanagan Partners, LLP Most professionals understand the basics of insurance, including its interplay with indemnity. But often, the details of complicated situations or specialty coverages require advanced knowledge. This session will drill down into the more complicated (and potentially dangerous) areas of insurance coverage for oil field contracts. Copyright 2016 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. 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. Harold J. Flanagan, J.D. Partner Flanagan Partners LLP Mr. Flanagan is a founding partner of Flanagan Partners LLP in New Orleans, Louisiana, and a former shareholder in the Maritime, Oilfield, and Insurance Section of the New Orleans office of Liskow & Lewis. Mr. Flanagan s practice includes both contracts and litigation in the areas of insurance coverage and recovery, construction, admiralty, oil and gas production, casualty, and commercial matters. He has extensive experience in contract drafting for oil and gas producers and is frequently called upon to investigate casualties and advise clients on matters involving well blowouts, explosions, drilling rig and vessel accidents, and various other oilfield tort claims. In addition, he has extensive experience in drafting construction contracts and litigating construction disputes for contractors and property owners. Mr. Flanagan graduated from Loyola University with a B.S. in business management in 1984 and from the Loyola School of Law in 1995, cum laude. For the past 11 years, he has taught insurance law at Tulane Law School. His outstanding service to the school was recognized when he was awarded the Monte M. Lemann Distinguished Teaching Award in 2003 and Mr. Flanagan lectures and writes frequently in the areas of oil and gas law, construction contracts and litigation, and insurance coverage. 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 ROLL UP YOUR SLEEVES: DETAILED INSURANCE PROBLEMS IN OILFIELD CONTRACTS Presented By: Theresa Fadul and Harold Flanagan 100 traps Commercial General Liability Contractual Liability Insurance/Indemnity Coordination Hydraulic Fracturing JOA Issues Professional Services Underground Resources and Equipment Liability Pollution Liability Special Environmental Properties Basic Insurance Umbrella/Excess Liability 2 5

6 There are 100 traps out there: Failure to provide coverage as required by contract makes you the insurer of that obligation Not having coverage for your own liability. Overreliance on what s standard. Write checks you can t cash Make promises you can t keep Why does it happen? Lack of awareness of one s own program Haste, lack of curiosity Lack of internal controls No broker/risk management review. 4 6

7 Common errors/oversights Assuming pollution liability outside of insurance coverage. Assuming contractual liability outside of typical three-party scheme. 5 Solutions Awareness of your insurance program. Broker/risk manager Coverage summary/checklist Training Awareness of contractual provisions. What do they really mean? Alternatives Advice. Lawyer Broker Risk manager What s the plan? Knowingly accept uninsured risks? 6 7

8 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. 7 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 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. 8 8

9 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 typically not covered by the CGL unless property has been physically injured. 9 9

10 Unique Liability Exposures: Risk inherent in the industry. Risk at a multi-party worksite is transferred without regard to fault. Each party takes its own people and property. One party contractually steps into the other party s shoes as respects that other party s negligence. Third party losses typically fault-based

11 Three Party Party to a contract indemnifies counterparty for BI or PD to a third party. Two Party Party takes direct responsibility to counterparty for the counterparty s own people/property. Example of Two-Party undertaking: 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. Solution: Specialty insurance is often required, e.g., CCC coverage for the Operator as part of Operator s Extra Expense policy. 12 Potential problems as respects property damage: Two-party contractual undertaking not an Insured Contract. If Operator is not negligent, CGL policy will not be triggered. Even if Operator is negligent, an exclusion could potentially negate coverage, e.g., CCC exclusion in CGL. For large property exposures, the CGL and umbrella cannot always be relied upon. Partial solution: Coverage to include the Named Insured s pass-through liability by removing the word tort, thus eliminating tort liability requirement from the Insured Contract definition

12 Party responsible for a particular exposure through contractual indemnity is also party responsible for insuring that exposure. Insurance requirements of contracts must "dovetail" with the indemnity obligations. Usually not limited by the dollar amount of required insurance. Policy forms are not created equal. Gaps and difficult coverage issues

13 Exceptions to the knock for knock indemnity Usually affect Operator: The well. Costs and expenses to control a well blow out and surface fire. In-hole tools, fishing. All equipment in CCC of Operator. Underground resource damage. Pollution from the well. Special events and catastrophic loss: All losses arising from fire, explosion, a well out of control and cratering

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15 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 19 Scenario: Frac fleet damaged by frac company s sub while loading diesel. Operator assumed liability for damage to frac fleet due to fire and explosion, without regard to fault. Concern: CGL may not cover frac fleet loss

16 What is the concern? This was a two party contractual undertaking, so contractual liability coverage might 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. 21 So, where would an Operator look for coverage? Should be coverage under CCC section of OEE/COW policy Amendments to the standard endorsement 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 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

17 Pollution Forms Under certain forms, including stand-alone pollution legal liability policies, contractual liability coverage can be limited in scope, requiring endorsement to 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 employees. Under such a contractual undertaking, named insured could have both a workers compensation claim and a CGL claim (indemnity)

18 How is coverage extended to WIOs when the Named Insured is the Operator? Operator s CGL and Umbrella should extend coverage to Operator s non-operating partners for their percentage working interest. 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 the Named Insured covered under its own policy when a Non-Operator? Claim expenses flow through the JOA for non-operator s proportionate share of loss. Non-operators responsible for their WI 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 not typically named in a suit against the Operator. Potential problem for Non-Operator to trigger coverage under their own CGL policy if this issue is not addressed in the form. 26 Where is this exposure addressed under a CGL policy? Not specifically addressed under some policies. Some carrier denials because exposure was not contemplated, even though premium was charged for non-op wells. Denials turned into lawsuits. Best approach: Some carriers make exception to contractual exclusion. Exclusion will not apply to the liability of Named Insured operating agent or any of their co-owners to pay damages if they have assumed such liability as operating expenses under a joint operating agreement or similar agreement

20 Contractual AI status Broad professional services exclusions 29 20

21 Exception to contractual liability exclusion might 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. 30 AI status often can t be extended under the CGL for professional services. Insured should avoid naming another party as additional insured for 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 faultbased

22 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., engineers. Contractual coverage under the CGL may be only as broad as the policy form. 32 Example: Operator indemnifies Driller for Operator s broad Group Other contractor worker injured during drilling operation. Is the consultant a professional engineer? Might the carrier try to deny a claim for indemnity under a broad professional services exclusion? 33 22

23 What does the ISO wording do? Definition of property damage includes loss of underground resources. Underground Resources and Equipment Hazard is defined to include property damage to: 35 23

24 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. 36 Damage to Property exclusion under Coverage A of the CGL is amended to not apply to: 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

25 Whether coverage will be triggered is complex. Must have: An occurrence. Covered property damage. When trying to understand coverage, must review the policy in its entirety: Look at endorsements and exclusions in combination, not in a vacuum. Don t focus on one endorsement or exclusion. If UREL endorsement does not amend the pollution coverage, and there s a pollution component to an underground loss, pollution terms come into play. 38 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. Claim adjusted specifically to that particular incident/situation. All policy terms, conditions, and exclusions must be considered

26 Operator s Perspective Form designed to cover things like: Damage to formation on neighboring mineral lease if 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 well or resources that is not pollution-related. If pollution-related, must also review pollution coverage terms. Example: if aquifer is damaged, does 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 clean-up. 40 Operator s Concern Two party contractual undertaking without regard to fault. Example; Operator takes direct contractual responsibility for drill stem, directional tools, and motors under the IADC drilling contract without regard to fault. If in-hole equipment is lost or damaged due to the fault of the driller, possibly no coverage for Operator

27 Suits by Co-owners In some policies UREL endorsement is only place where claims or suits by co-owners are excluded. Under other policies there is a broad co-owner exclusion endorsement

28 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-based, but subject to discovery and reporting requirements, e.g., 30-day knowledge and 90-day reporting of pollution incidents from date of discovery

29 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., one year. 45 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 Salt water in the insured s gathering lines and pipelines Glycol used in the insured s operations 46 29

30 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, and a Contractor s Pollution Liability policy Operators should address in the insurance requirements in contracts with waste haulers (auto broadened pollution endorsement and a CPL policy). 47 Waste Site Exclusions: Amend waste site exclusions especially if: Insured (operator or conductor) disposes into third-party salt water disposal wells, Owns/operates salt water disposal wells or pipelines, or Reuses produced water. Loading/unloading at a salt water disposal facility should also be addressed

31 Pollution coverage limitations under some forms Coverage for legal liability only and not contractual liability. Sunset clauses a claim must be brought within three years. Punitive and exemplary damages excluded (compensatory damages only). Non-criminal fines and penalties. Exclusion for wells out of control (can often be removed if OEE/COW policy purchased). Blanket Additional Insured endorsements, unless modified, do not receive benefit of the pollution coverage. No exceptions to waste or waste site exclusions. 49 Coverage difficulties under CGL and umbrella/excess policies from 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

32 Specialty Environmental policies Can cover: First and third-party clean-up 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. Operators Extra Expense/Control of Well. Eliminates difficulty in making Other Insurance clauses work seamlessly

33 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 non-owned disposal sites. Transportation risks (first-party and third-party carriers). Emergency Response, Evacuation, and Crisis Management expenses. Non-criminal fines and penalties associated with BI and PD, and punitive damages when allowed by law. There is no exclusion for NORM or silica dust particles. 53 Contractor s Pollution Liability policy Covers pollution incidents arising out of the insured s operations performed for a fee at a jobsite, e.g., drilling, servicing and/or equipment installation. 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 jobsite 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, they also own wells, pipelines, and other fixed assets

34 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, Non-owned 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

35 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 clean up, that does not require legal liability, of your oil and gas lease sites and work sites. Clean up of underground pollutants. How might pollution exclusions impact the Employers Liability coverage in the Umbrella? 57 Hydraulic fracing exclusions Marcellus exclusions Coverage limited to specific operations Narrower contractual liability coverage Subsidence exclusions UREQ exclusions Cost of well control exclusions (wells of others) 58 35

36 Oil Industry limitations 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 59 36

37 Insurance serves several important purposes: Backs up the indemnities with financial strength. Guards against insolvency of the indemnitors. Sometimes insurance is valid (Additional Insured status) 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 companies

38 Additional Insured (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. Additional insureds generally have the same rights as Named Insureds. May increase AI s ability to recover "bad faith" damages in coverage dispute. 62 Typically not available under certain policies: Workers Compensation/Employers Liability (Alternate Employer). Operator s Extra Expense (Control of Well) - unless there s an ownership interest (e.g., non-operators, farmors) or financial interest (e.g., lenders). First-party property (Loss Payee). Professional Liability (Waiver)

39 Ensure Additional Insured protection is not limited to: Acts or omissions of the insured or those acting on the insured s behalf because risk is often allocated without regard to negligence, coverage is also needed for acts or omissions of the AI and AI s economic family. Ongoing Operations (also need completed operations). Vicarious Liability. Specifically excludes sole negligence. 64 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. Concern among some 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 LOIA, all material costs of extending AI protection must be paid by the indemnitee

40 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). 66 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 non-contributory, 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

41 68 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! Broker review is a no brainer

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43 To enter the drawing for a cash prize, affix your personal bar code label here or complete this evaluation online. T2. ROLL UP YOUR SLEEVES: DETAILED INSURANCE PROBLEMS IN OIL FIELD CONTRACTS Rating scale for all questions: 4 = Excellent 3 = Very Good 2 = Average 1 = Somewhat Disappointing 0 = Very Disappointing Overall rating for this workshop? Theresa Fadul Preparation and quality of information Energy and enthusiasm of delivery Educational focus (not a sales pitch) Harold J. Flanagan Preparation and quality of information Energy and enthusiasm of delivery Educational focus (not a sales pitch) Comments: