Not all Oil & Gas programs are created equal
What do Dodge Neon, Mazda Miata and Lexus 430 have in common? Simple–they are all the same form of transportation. Each will allow you to control your travel from Point A to Point B but each has its own unique features so the one you might choose will depend on what you want or need.
The Miata is probably a fun car but if you need to carry two sets of golf clubs or more than one person, it will not work. The Dodge Neon is practical but lacks many of the bells and whistles available on the Lexus that carries four or five people very comfortably.
But what if you need to carry more than four or five people? Dodge Caravan? Chevy Suburban?
The bottom line is there are many choices and what may be right for one is not necessarily right for another and the range is broad.
Now this is obvious with automobiles because you and I are different and one size does not fit all–just picture Stacy Keibler, Roseanne Barr, Shaq and Don Knotts.
The same is true in the oil and gas business. Each operation is unique unto itself. Contractors can work on land and/or water. They can be drillers or well servicing contractors; they can stimulate wells or do so-called Plug & Abandon work. Others can build, install, maintain or repair platforms and facilities and, although oil and gas operators all have wells, the depth, structure and location of each is different. The concerns and needs vary and the insurance program for each must recognize those differences.
Down to basics
All agents are familiar with the basic insurance requirements found in most Master Service Agreements (MSA): Commercial General Liability; Workers’ Compensation; Auto and Excess. In securing coverage to meet the MSA requirements and protect the insured, agents and brokers develop information regarding the actual operations and match those needs with underwriters willing to accept such risks. Since interests vary, some typical concerns to be addressed in matching an insured and underwriter include:
Land or offshore operations. Many company treaties exclude offshore and other underwriters are simply not prepared to accept such risks.
Watercraft. The standard CGL exclusion may need to be amended or deleted. If vessels are owned or chartered there are a new set of concerns to be addressed with the marine insurance market (Hull/P&I). This expands again if aircraft are involved.
USL&H and Maritime Employers Liability. There’s a limited market available if there is a true exposure.
Equipment. Generally, most forms exclude coverage while property is waterborne so you may need to request an amendment, if necessary.
Limit. In most instances a primary $1 million cover is provided with excess limits written under an umbrella or bumbershoot in layers necessary to meet requirements.
Territory. Although we are usually dealing with operations in the U.S. and Gulf of Mexico, oil and gas operations are worldwide and there is a separate marketplace for that exposure. China, Africa Russia and the Middle East all present different dynamics to be considered.
Energy shortage
Over the past 20 to 30 years agents and brokers charged with placing the insurance for these risks have found an ever-shrinking marketplace for most lines in energy insurance.
In well control, for example, in London during the 1970s and 1980s, there were 20 or more Lloyd’s syndicates and several ILU company markets acting as rating leaders for Control of Well insurance, whereas now there are only five or six Lloyd’s rating leaders, and only one or two U.K. company market rating leaders.
There were also more than 60 Lloyd’s energy syndicate participants plus 10 to 15 U.K. companies and another 10 to 15 Scandinavian and European insurer participants during the ’70s and ’80s. There are now fewer than 25 Lloyd’s syndicates and fewer than 10 insurance company markets in London actively pursuing well control insurance as a principal product.
The American market has expanded in numbers from AIG Oil Rig, principally alone 30 years ago, to perhaps 10 “domestic” energy markets. Other foreign carriers in Bermuda and some in Europe have been born and, although there is a greater willingness to participate among these various international insurers, Lloyd’s remains the preeminent force.
London, AIG, St. Paul and others’ forms present a Control of Well cover intending to reimburse the policyholder for those costs and expenses necessary to “regain control of a ‘well out of control.'” Each holds its own description of coverage and each has a definition for a “well out of control” as well as a specific set of circumstances when either it becomes a “well brought under control” and/or a time when underwriters liability under the policy ceases.
Well out of control definitions vary with the use or non-use of such words and phrases as: unexpected; sudden and accidental; and caused by extraneous pressure from outside the circulating system.
Similarly, although it seems simple to define a “well under control” as “a well that does not meet the definition of a ‘well out of control,'” some forms take up to four paragraphs for these definitions. Further, subject to underwriters’ discretion, a policy may include warranties regarding mud weight, pre-spud approval and/or rig surveys.
So, despite each underwriter using basically the same terminology, Control of Well or Cost of Control, their perception of an acceptable risk varies, not only by policy form but by underwriting guidelines usually based upon such factors as: location, including land, wet, offshore and area definitions; well depth; pressures/mud weight (possible warranty); drilling contractor (possible rig survey warranty).
Underwriters also weigh Care, Custody & Control concerns. The International Association of Drilling Contractors’ “Sound Location” clause has dramatically changed. The IADC used to have this to say about sound location: “… Operator shall, without regard to other provisions of this Contract, including Paragraph 14.1 hereof, reimburse Contractor to the extent not covered by Contractor’s insurance, for all such loss or damage …”
But as revised in April, 2003, it now says this:
“… Operator shall, without regard to other provisions of this Contract, including Subparagraph 14.1 hereof, reimburse Contractor for all such loss or damage including removal of debris …”
Now add to these underwriting considerations the ravages of Ivan in 2004 and hurricanes Katrina, Rita and Wilma in 2005. Think about the premiums and losses from hurricanes from 2003 to 2005. (See chart above)
What to do?
A business model for Lloyd’s overall and each individual syndicate includes a Realistic Disaster Scenario developing a review of windstorm exposure in the Gulf of Mexico and expected loss for various hurricane paths based on both historical data and projections.
Today’s coverage will not be renewed as expiring. Rather, underwriters are considering a variety of options and agents and brokers expect to see a number of changes this year that could include, obviously, increased rates, as well as windstorm aggregates and a greater focus on extended redrill expenses and Making Wells Safe coverages with possible sub limits.
If 2006 is a repeat of 2005, as forecasters predict, will underwriters go to a seasonal drilling program as they have in Alaska?
There is much to consider in developing an appropriate insurance program for oil and gas operators and contractors but please remember the devil is in the details. Knowledge is power. The power to understand the insured’s risk management philosophy, the power to present a true exposure picture to underwriters and the power to negotiate the most favorable terms and conditions for the insurance program.
Zator is a founder and senior vice president at Insurance Alliance, based in Houston, Texas. This is based on his recent presentation for the Strategic Research Institute. He can be reached at randy@ins-alliance.com or (713) 966-1776.