Tuesday, March 5, 2013 Houston, TX. 2:45 4:00 p.m. ENVIRONMENTAL LIABILITY INSURANCE

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1 Tuesday, March 5, 2013 Houston, TX 2:45 4:00 p.m. ENVIRONMENTAL LIABILITY INSURANCE Presented by Jeffrey M. Hubbard Assistant Vice President, Senior Underwriter XL Insurance Various approaches may be used to insure environmental liability in the oil patch. This session will take a comprehensive view of the various policies that may come into play, including commercial general and umbrella liability, operators extra expense, and environmental site liability insurance. The pros and cons of relying on each type of insurance will be compared and contrasted, and important nuances to consider when arranging coverage in an environmental site liability policy will be examined. Copyright 2013 International Risk Management Institute, Inc. 1

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3 Jeffrey M. Hubbard Assistant Vice President, Senior Underwriter XL Insurance Mr. Hubbard is a graduate of the University of North Texas, where he obtained a B.B.A. with an emphasis in insurance and finance. He began his career in risk management with a Fortune 1000 building products manufacturer, where he had day-to-day risk management responsibilities. During this period, he had oversight of one of the largest building products litigation cases in the United States. He then served as a risk management consultant for an electric utility during its bankruptcy. Mr. Hubbard joined AIG Environmental in 1993 as an environmental risk analyst and rose to the level of regional manager. During his tenure there, Mr. Hubbard assisted primarily large, multinational corporate clients with the creation and implementation of environmental risk management strategies. He was recruited by Aon Risk Services in 2003 and became the Southwest regional manager of its environmental practice. He then joined JLT/Alliant in November 2003 and led its environmental risk practice until joining Zurich North America in June of In August of 2011, Mr. Hubbard and his associate, Richard Calvert, joined XL Environmental to create a local underwriting presence in Texas, Arkansas, and the surrounding states. In an effort to serve the community, he currently serves on the Crosspoint Youth Football League as a member of the board of directors and has previously served on the University of North Texas Finance Insurance Real Estate and Law Curriculum Advisory Board. He has also served as the insurance editor for Brownfield News. 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 Environmental Liability Insurance Jeffrey Hubbard AVP, Environmental XL Group 1 Let s GROOVE on back to the 1970s. 2 5

6 Life was grand, clothes were stylish, and CGL policies had no pollution exclusion. 3 Then styles changed, and CGL policies got pollution exclusions. 4 6

7 So What Happened To Cause These Changes? High-profile incidents Love Canal Times Beach Public outcry Governmental response Clean Air Act Clean Water Act Resource Conservation and Recovery Act (RCRA) Comprehensive Emergency Response, Compensation, and Liability Act (CERCLA) Transportation: Large (25+) power units, hauling for hire hazardous materials 5 Yep! People Panicked! 6 7

8 And Industry Responded So how did industry respond? A new form of insurance was born, called environmental impairment liability insurance. 7 What Did Coverage Look Like? Coverage was originally third-party, off-site, only for bodily injury, property damage, and cleanup For gradual and sudden pollution events Not available unless the site had a site assessment that was less than 12 months old There was no coverage available for transportation or disposal sites, and it only complied with financial assurance requirements under RCRA Annual policies only 8 8

9 Now We re Back to But Does the Situation Sound Familiar? Negative press (real, imagined, or fabricated) Movies (Gasland and Promised Land) Mainstream press articles (Esquire magazine) Television news High-profile claims situations Dimrock, PA Pavillion, WY North Texas Governmental response/regulation New drilling regulations including fluid disclosure 10 9

10 In today s environment, are you completely protected from environmental loss? CGL/Excess Control of Well 11 Control of Well: Operators Extra Expense The common element of a pollution loss in this policy form is universal in that: Pollution is caused from a well (that is scheduled to the policy) that suddenly and accidentally becomes out of control. Out of control is when there is a continuous unintended, uncontrolled flow from the well above the surface of the ground or water bottom or below the surface of the ground from one subsurface zone to another subsurface zone via the wellbore. When the well is out of control, the policy will first pay under priority of payments the costs to put the well back in control, then expenses to redrill or recomplete well, and finally, if any limit is left, coverage for the damages from pollution

11 13 Caution: Coverage Potholes Ahead Exhaustion of coverage Pollution costs are typically paid last under priority of payments Uncovered situations The pollutant has to come to the surface Claims where the pollution is beneath the surface are excluded 14 11

12 Commercial General Liability and Excess Umbrella Liability Coverage Should have coverage for third-party claims arising from a sudden and accidental pollution incident Broad in coverage grant Pollution can be a result of pollution coming from the well, from your equipment, from your gathering lines, even air pollution from your compressor stations. Some coverage is also broad; it will provide you with coverage for pollution allegations related to below-ground incidents and even below-ground cleanup of the pollutant. They will sometimes even cover pollution from a blowout after any applicable COW/OEE coverage is provided

13 Caution: Coverage Potholes Ahead Trigger restrictions Time element restrictions on discovery and reporting Uncovered situations Limited or no on-site coverage Sometimes limited to abovegrade releases only Third-party transit claims Non-owned disposal sites 17 Bottom Line: There Are Gaps in a CGL/OEE-Only Program Critical gaps Groundwater/Drinking water claims Non-sudden events Non-owned disposal site claims Third-party transportation claims Significant gaps On-site cleanup Historical liabilities 18 13

14 Sticking your head in the sand just exposes your backside. So what is a practical way to protect my company from environmental loss? 19 Environmental Insurance Can Complete the Protection Pie CGL/Excess EIL Control of Well 20 14

15 Can Is the Important Word. Structure and Terms Are Paramount. Critical structure components Excess and difference in conditions (Don t give up your CGL pollution) Unlimited defense in CGL Limited credit for removal of pollution from S&A Insured contract Need to give automatic insured contract status when insured is acting as non-operator Definition of insured Needs to include first named insured s non-operating partners Needs to automatically include special purpose entities set up for each well/lease 21 Can Is the Important Word. Structure and Terms Are Paramount. Critical structure components Pits and ponds exclusions Top source of site contamination at well site. Think twice before accepting this exclusion. Scale to interest/working interest only wording If policy scales to interest, understand that only a part of the loss will be paid

16 Can Is the Important Word. Structure and Terms Are Paramount. Suggested structure components Automatic waiver of subrogation Necessary change if you want to comply with IADC daywork contract Additional insured status Necessary change for automatic additional insured status when required by written contract (on an S&A basis) to comply with IADC daywork contract Control of well exclusion Be careful that this exclusion doesn t open a potential coverage pothole. 23 Thank you

17 Legal Disclaimer US In the US, the insurance companies of XL Group plc are: Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Insurance Company of New York, Inc., XL Select Insurance Company, and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details

18 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. 18