American Oil and Gas Reporter - December 2017 - 77

SpecialReport: Insurance Update
coverage (ISO form CA 20 71) should be considered since this
endorsement changes the amount paid under the physical
damage section of the auto policy to include the difference
between the actual cash value of the damaged vehicle and the
amount remaining on a loan or lease, but only when there is a
total loss. This coverage enables insureds to satisfy their
contractual requirements with either the loss payee/lienholder
or lessor. Because vehicles depreciate quickly and the difference
between actual cash value and the amount owed can be
substantial, this endorsement should be considered for newly
leased or purchased vehicles that are financed.
Considering that many well activities are conducted by
Q:
third-party service providers working on behalf of the
operator on a contractual basis, how can operators work collaboratively with service providers to make certain all well site operational risks are covered? How can operators tailor property and
equipment coverages to meet the variety of drilling, completion
and production activities on active leases?
PLUMER: Oil field contracts should include indemnification
provisions that set forth the allocation of risk between parties
and include insurance provisions to back up the indemnities assumed by each party to the contract. In establishing the insurance
requirements, the allocation of risk should be reviewed by the
parties' insurance brokers so that risk can be matched to the applicable insurance coverage. The insurance provisions should
address the types of coverage, along with a more detailed explanation when important, such as the requirement for sudden
and accidental pollution and underground resources liability
coverage in the CGL, if applicable to the risk.
These provisions also should state the policy limits up to
which each party seeks to be indemnified. Insurance protections
also should be required, again to back up the indemnities. This
is especially important in certain states with oil field antiindemnity statutes, such as Texas and Louisiana. These protections
should be tied to the risks and liabilities assumed by the party
providing the protections and should include additional insured
status, except as respects workers' compensation and employers'
liability, primary and noncontributory wording, and waivers of
subrogation on all policies.
The insurance provisions should require certificates of
insurance (COI) as evidence of coverage, and these should be
requested and reviewed annually as the various contractors' insurance programs renew. Reviewing COIs is very important, or
the operators may end up with inadequate protection from contractors, putting their own insurance programs and assets at
risk. It is important for operators to develop a system for
tracking master service agreements, drilling contracts and the
COIs that back up the insurance requirements.
Regarding large property at a well site for which the operator
may be contractually liable, insurance policies are available to
operators that address the significant exposures that can exist at
drilling and completion sites, depending on the indemnity provisions of the operator's contracts. CCC insurance can be
purchased as part of an operator's extra expense (OEE)/control
of well policy, up to relatively high limits, to cover the frac
spread in the event an operator is legally or contractually liable
under certain circumstances. Some CCC policies will cover the
rig for those provisions of a drilling contract that make the
operator responsible, such as unsound location, environmental
loss or damage, etc.

Regarding OEE insurance, high limits are available for each
occurrence and can be expanded with a multiwell pad endorsement
to provide a higher limit in the event more than one well is impacted in a well control event. This endorsement is especially
important if an operator is conducting simultaneous operations
at a multiwell pad site.
Operators are often contractually responsible for pollution
liability, including cleanup costs, bodily injury, property
damage, and defense costs unless pollution emanates from the
contractor's equipment above the surface. CGL and umbrella/excess liability policies provide sudden and accidental pollution
coverage that is tied to strict discovery and reporting provisions,
but all policy wordings are different and should be carefully
reviewed. Operators now have the ability to expand their
pollution coverage to include gradual pollution, first- and
third-party transportation, and nonowned disposal sites with a
specialty pollution policy often called pollution legal liability
(PLL). The best PLL policies will provide coverage that is
excess and difference-in-conditions to the operator's underlying
liability policies.
In regard to production activities, operators can purchase an
oil lease property policy under which they can cover the property
at their lease sites. This policy can be expanded, or separate
coverage can be purchased, for leased and rented equipment.
The policy also can cover crude oil in tanks. It is important to
review the scope of this coverage, especially if an operator's
equipment is exposed to potential flood or earthquake, as these
perils sometimes need to be endorsed specifically.
Finally, how are association-sponsored programs helping
Q:
smaller companies better manage their insurance programs?
What types of coverage are available through these programs?
How would you summarize the benefits of association-sponsored
insurance for smaller operators?
PLUMER: Association-sponsored insurance programs can
be a great benefit for small and mid-sized operators. By joining
a larger group, they can take advantage of economies of scale
that likely would not exist otherwise. Aggregating premium
affords association-sponsored insurance programs the scale to,
in theory, spread risk among a larger pool of premium, and by
doing so, obtain favorable rates and sometimes favorable
coverage language from insurance carriers.
Property, auto physical damage and auto liability, workers'
compensation, general liability, and umbrella/excess policies
typically are included in association-sponsored insurance
programs. More specialized coverages such as operators' extra
expense, oil lease property, pollution legal liability, and inland
marine coverages often are excluded.
Many factors determine if an operator should consider an
association-sponsored program. It is important that your broker
carefully review the program to understand how it is structured,
what other companies are currently within the program, and
how rates and coverages have changed historically. It also is
important that you understand and properly vet the financial viability of the insurance carrier(s) providing coverage. Furthermore,
and most importantly, your broker should carefully review to
ensure the program has appropriate coverage language in place
(especially regarding general liability, auto liability and
umbrella/excess liability) and that coverage language is sufficient
for any contractual/legal indemnity that either has been accepted
or is unable to be negotiated away.
r
DECEMBER 2017 77

American Oil and Gas Reporter - December 2017

Table of Contents for the Digital Edition of American Oil and Gas Reporter - December 2017