September 2018, Vol. 245, No. 9


Insuring Against Liabilities Can Be Tricky

By John J. Heft, Senior Vice President, Director - Real Estate Practice, RT New Day

Energy is big business in the United States. By supplying the life’s blood to nearly every industrial and residential sector in the county, the oil and gas industry racked up more than $100 billion in revenues two years ago says Statista.

However, despite the great overall success of the American energy industry, problems do exist and happen on a near daily level. While rail accidents occur with more regularity, pipeline spills can actually have more devastating effects.

According to the Pipeline and Hazardous Materials Safety Administration (PHMSA), significant pipeline incidents grew 26.8% from 2006 to 2015. In 2015, there were 326 such incidents – almost one per day. EcoWatch defines significant incidents as those “that result in serious injury or fatality, costs more than $50,000, releases more than five barrels of volatile fluids such as gasoline or 50 barrels of other liquids, or results in a fire or explosion.”

As a result, contractors serving the oil and gas industries have become increasingly susceptible to errors and omissions claims. These exposures are commonly related to the contamination of surface and sub-surface soil/groundwater; improper installation and maintenance of pipelines and related infrastructure; and poor handling and disposal of production materials and waste.

Unfortunately, many of these problems happen during the performance of everyday contracting activities. Among the potential pollution liability issues are the:

  • Improper handling and disposal of flow back
  • Installation and maintenance of lines and other production assets
  • Fluid leaks from the storage of trucks and equipment
  • Poor housekeeping and preventive maintenance of operations and pollution control equipment

In addition to the risks posed to humans, property and natural resources, many of these issues commonly involve massive remediation costs and intensive cleanup efforts performed over years. As a result, contractors and related organizations working within the oil, gas, storage, distribution, and disposal industries have increasingly sought to protect their balance sheets and reputations from the wide variety of environmental exposures encountered in the energy industry.

Energy companies and site owners are requiring stand-alone pollution liability insurance in all contracts and master service agreements (MSAs). Although “pollution” may be included in contractor’s general liability policies, it usually includes time element and named peril pollution language which can be limiting and often times not in compliance with the MSAs.

As a result, contractor’s pollution liability (CPL) has become a viable option for insuring against pollution issues occurring during the contracting operations performed by or on behalf of the named insured. Available on either an occurrence or claims-made form, coverage can be purchased on a practice or project basis.

Insurance specifications demanding CPL coverage are continuing to expand with the proliferation of pollution insurance requirements. As with many middle- to large-sized insurance buyers, asset protection will remain the prevalent driver.

This trend is likely due to the broad coverage terms that currently provide for bacteria, mold, microbial matter, legionella, silt/sedimentation, silica, petroleum hydrocarbons, illicit abandonment and electromagnetic fields.

In the marketplace, about 40 insurance carriers offer CPL coverage – either as a monoline program or as an endorsement to another product. However, many are migrating from monoline pollution liability products to combined professional/pollution liability forms. This is due primarily to professional liability insurance inclusions and the increased professional liability risk of contractors in today’s construction marketplace.

Other key risk management tools include pollution legal liability (PLL) endorsements, which are continually being used to facilitate transactions involving contaminated properties as well as to buoy balance sheets for large real estate assets.

This claims-made coverage offers protection against on- and off-site clean-up/remediation expenses; third-party bodily injury, property damage; and defense expenses. Coverage enhancements such as contingent business interruption and first-party diminution of value, as well as several others are readily available for inert real estate portfolios; while indemnity triggers can be used to address known pollution conditions identified in contaminated property transfers.

Consequently, with the increase in claim activities, rates for certain business classes have risen 5% to 10% for 10-year terms, with a flat 5% increase for 5-year policy terms. For example, rates and deductibles are increasing rapidly in the oil and gas space with buying motivators falling into four categories: regulatory, contractual, lender requirements and risk management.

Furthermore, PLL has become the vehicle of choice for companies that must satisfy federal and state regulatory requirements for underground storage tanks and hazardous waste units. This is because of the increased frequency and severity of claims, which rose dramatically in 2017. 

As for the future, contamination liability is expected to drive the need for pollution insurance coverage by the thousands of contractors serving the energy sector. This is especially true in a marketplace where even simple spills and mishaps can lead to years of litigation and costly cleanups. In addition, the limited pollution coverage provided in some general liability policies may not be enough to mitigate these exposures. P&GJ

Author: John J. Heft, MS, CRIS, is a senior vice president and the director of the real estate practice at RT New Nay, where he specializes in construction-related professional liability and environmental liability insurance.


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