What brokers need to watch for in Oil & Gas coverage

There are common problems that may arise in the provision of coverage for Oil & Gas operators. Among those for which the broker should be on the lookout are:

The International Association of Drilling Contractors Drilling Contract makes the operator responsible for damage to the rig caused by subsurface conditions, such as a crater that engulfs the rig. The Care, Custody and Control portion of the Control of Well policy may cover such a loss, but even so, is the limit enough to cover a $5 million or more rig?

Even if the contract is a pre-2003 form and the operator is responsible for loss in excess of the insurance, the contractor’s insurance can still subrogate the loss back to the operator, because the contractor has not indemnified him for the loss, only promised to use insurance first.

Non-Operating Working Interest Owners are often included, either intentionally or unknowingly, in the operator’s umbrella policy, which dilutes the amount available for the operator.

The Joint Operating Agreement makes the operator responsible for the entire loss if he is grossly negligent. The CGL will respond regardless of the type of negligence, but the Control of Well may not pay the Non-Operating Working Interest Owners’ part. Read the Control of Well policy very carefully.

If the operator is not grossly negligent for the loss, but the loss exceeds the limit of the insurance purchased, who pays for the loss? New Mexico and Wyoming Law do not allow indemnity for the contractor’s own negligence. The “knock for knock” is unenforceable, almost. Contracts under Texas and Louisiana law permit it, if written correctly. The operator is responsible for environmental damage to the rig, e.g., a blowout covers the rig with H2S cut mud causing a cleanup of $500,000. Both the CGL and the Control of Well exclude such a loss.

The operator’s CGL has an “additional insured if required by contract endorsement.” Does it actually add the indemnitee if he is negligent?

Even with mutual indemnifications in the drilling contract and the MSAs, what happens if the drilling contractor’s employee is injured severely and brings a large claim against the operator and his subs? The subs pass the lawsuits to the operator, who hands it to the drilling contractor, but what if the indemnification is only for $1 million?

Robert L. Carson, Jr.