Part 3-Insurance: For the assured to be prepared for the emergency and be adequately covered, correct policy wording on Control-of-well coverage under OEE or EED 8/86 forms needs to be worked out in advance
Sam J. Salvato, Jr., President, Matthews-Daniel Co., and
Larry H. Flak, former Wright, Boots & Coots employee, Houston, Texas
This article discusses the important subject of insurance-what is available, what can be covered and why operators and contractors need to know this.
Specific discussions include: 1) role of the adjuster and the mechanics of "how you get paid," 2) two basic policy forms, OEE and EED 8/86, now avail able, and 3) evolution of well control coverage and important definitions. The article concludes with some comments and cautions on what might happen to this coverage in the future.
It is the middle of the night and the phone rings. It is the drilling foreman at your new location and he advises you that the well is blowing out. Numerous thoughts race through your mind, and your first reaction, depending on your company duties, is to visit the wellsite or get to the office to obtain full details.
Then, you begin to realize the seriousness of the well remaining out of control, and it becomes clear that, in addition to controlling the well, you may be facing potential liability claims in respect to pollution and third party damages. Your thoughts then turn to remedying the problem and implementing a response as soon as practical, to mitigate the loss. Through discussions with other personnel, the decision is made to bring in outside control-of-well experts, following which, control procedures are designed.
Also, by this time, and of course assuming you are insured, you have recognized the need to advise your insurance agent or broker so they, in turn, can report the incident to your insurance carriers. Unfortunately, it may only be at this point that you begin to realize how unfamiliar you are with coverages purchased and the mechanics of pursuing claims on the relevant policies. Here are some discussions on steps that can be taken to design the right insurance in advance, and know how to implement it.
Of the many problems plaguing the oil/gas industry, probably none rate as dramatic as a well out of control. Blowouts throw fear into the public, and because no one is really immune to their devastating effects, drilling is a politically and environmentally sensitive issue.
It is becoming further apparent that, as intensified petroleum exploration operations progress toward complex and adverse environments such as deeper waters offshore and more inhospitable, remote and ecologically sensitive terrain onshore, the potential for accidents and mishaps increases.
Given the legal responsibilities and liabilities that operators and drilling contractors are exposed to, both may be forced to endure financial burdens associated with a blowout. Without sufficient resources to deal with these responsibilities, insolvency of certain involved parties could be nearly inevitable. Historically, most operators and contractors have turned to insurance as the means for demonstrating financial responsibility. Responsibility of the assured. Unfortunately, it is not unusual for operators/drilling contractors to only become aware of deficiencies or limitations in their well control coverage while actually experiencing a blowout. It often happens that much of what an assured initially understands about scope and degree, or lack thereof, of policy coverage is through discussions with a loss adjuster appointed by insurers once a potential claim is notified. The role of the adjuster, however, should not include introduction of the assured to their policy workings.
Once operators and contractors recognize their exposure to risks associated with drilling operations, they should, through liaison with their insurance agent/broker, formulate an insurance program. Close attention should be paid to types of coverage available and, of course, applicable limits and retentions in the event a loss is sustained. It goes without saying that policy limits and retentions should reflect the ability of individual companies to absorb a loss while, at the same time, protect their assets. Preplanning will help alleviate situations in which the assured, having notified a well control claim, is faced with the prospect of being unable to recover the full amount of expenditure for remedial operations thought covered.
The insurance loss adjuster. As the adjuster plays an important role in an assured pursuing a claim, a brief explanation of the adjuster's role is in order. Under normal circumstances, insurers will confirm the appointment of a loss adjuster immediately following loss notification. The adjuster would then contact the assured and, if required, visit the casualty site and establish a rapport with the contractor/operator.
This early involvement, in addition to allowing a preliminary loss assessment, provides the opportunity to address, with relevant personnel, the need to maintain records and documentation for downstream claim settlement purposes. Also, the adjuster may aid in developing a cost accumulation system in a manner that will serve all parties' interests. This would tend to expedite processing and payment of legitimate claims.
For the most part, the adjuster will concentrate on issues concerning insurance aspects of the event-that is to say, make a determination as to loss cause and magnitude so as to ascertain various insurance coverages which may be affected and to what degree. Further, when possible and depending on circumstances, the adjuster may be in a position to contribute to planning/implementation of the remedial program.
Finally, early involvement and continuous monitoring of the event by the adjuster is crucial as it affords the opportunity to quickly ascertain and comprehend the mechanics of the situation. This ensures that reporting of the event to the underwriters is factual and provides that any subrogation possibilities, which benefit both policy holder and underwriter, can be quickly identified. The adjuster's input with regard to insurance concerns is often beneficial to the ultimate course of remedial action being considered by the policy holder.
Responding to concerns. Again, as indicated earlier, many assureds look to their policies for financial security and for funds as necessary to indemnify loss expenditure. This being the case, and depending on monetary resources available to an assured, some first questions confronting the adjuster are:
However, before such questions can be answered, the extent of insurance coverage must first be addressed. To accomplish this, one would determine contractual relations existing at the time of the event and applicability of specific policy wordings. Once this is achieved and coverage confirmed by insurers, reviewing and approval of invoices detailing expenditures arising from the loss would eventually lead to moneys being made available to the assured. Such settlements could come in the way of partial payments during the period the assured's claim is being reviewed/approved or through a single payment when the final claim is agreed.
Today, well control coverage is avail able in two basic policy forms: 1) Operator's Extra Expense (OEE), and 2) Energy Exploration and Development (EED 8/86). Over the years, other forms of insurance for energy operations have been introduced; however, most of those are no longer readily available.
There are several renditions of the OEE wording; conversely, EED 8/86 coverage is primarily available under a standard form. As for sections of basic insurance coverages available under OEE and EED forms, these are similar, and are either incorporated within the body of the wordings or made available by endorsement. Primary coverages which can be attained under the forms of insurance in question are:
It must be emphasized that not all coverage types are automatically included in OEE and EED forms. There are other coverages such as Making well safe, Underground blowout, and certain liabilities, which, depending on philosophy of the assured and nature of the operations, could be considered fundamental. Therefore, it is imperative that the assured is fully aware of coverages which can be purchased so that they can be confident their exposure to potential financial burdens is within acceptable limits. For the purpose of this article, further discussions will concentrate on only Control-of-well coverage aspects. Not to diminish the importance of the other coverages, it is normally a covered occurrence under policies' Control-of-well sections which activates the remaining coverages.
To best appreciate the primary difference between OEE and EED forms with respect to Control-of-well cover age, an introduction to the history of this wording is useful. It appears that specialized energy insurance cover ages originated in the late 1940s, with onshore risks being addressed by the London insurance market. Prior to World War II, there was no significant offshore drilling activity, and insurance coverages were limited to physical damage for land drilling rigs which were insured as contractors' equipment much in the same manner one would insure heavy construction machinery/equipment . However, after World War II, with capital investment in the energy field on the increase, and oil/gas operations extending from onshore to near-off shore areas, a requirement existed for innovative ideas for protecting energy exploration investments. The challenge to provide this protection through insurance was taken up by the London insurance market, which developed the specialized policies- particularly the Control-of-well coverages. The U.S. domestic market, to a degree, then followed suit.
Early definitions. As best as we can determine, in the late 1940s and early 1950s, Control-of-well coverage was available under a relatively simple Lloyd's of London Standard Form which provided, inter alia: "To cover expenses entailed by the assured in regaining control of oil or gas well(s) being drilled . . . which get out of control as a direct result of the drilling of wells insured hereunder until completion of (or) abandonment . . ., caused by . . . Blowout."
Interesting enough, some of the early insurance coverages did not include definitions for "blowout" and/or "well out of control." This obviously was a potential problem and did, indeed, lend itself to certain assureds taking legal action against insurers . Other policies incorporated definitions for blowouts, with emphasis on loss of equilibrium in the wellbore due to downhole pressures which exceeded that exerted by the column of drilling fluid. One such early definition of a blowout was: ". . . a condition in which a well builds up a sufficient gas pressure at the bottom of the hole and causes a rather sudden, forceful eruption or explosion which cleans out the well and causes it to go out of control." Regardless of existence, or lack, of a definition, courts routinely adopted the position that the rule for interpreting insurance contracts was the controlling factor in determining coverage, and that the definition or interpretation of a blowout which was most favorable to the assured would prevail.
Example court-case definitions. There were several court cases which directed the interpretation of the Control-of-well coverage and which were often referred to during evolution of OEE wordings. One such case was Creole Explorations Inc. vs. Under writers at Lloyd's (La. 1964).3 This case involved a well which was alleged to have had a blowout on July 20, 1958. This being one of the instances where the insurance policy did not contain a definition for blowout or well out-of-control, the Louisiana Supreme Court in 1964 adopted definitions which were most favorable to the assured. In this case, the definition utilized for a blowout was: ". . . A blowout occurs whenever pressure from the formation overcomes hydrostatic pressure exerted by the mud column and forces formation fluids to the surface."
The definition considered for "control" was that: ". . . the well was under control when the column of mud was balanced so that whatever operations were necessary could be performed in the wellbore hole, and that it was out of control when the mud column became so imbalanced from gas and saltwater penetrations that operations had to be stopped while the mud was conditioned or weighted up and control regained." A second case which demonstrated that courts were interpreting the policy wordings in a manner most favor able to the assured was Sutton Drilling Co., Inc., vs. Universal Insurance Co. (Fifth Cir. 1964).4 In this case, the policy defined a blowout as: ". . . a sudden uncontrollable expulsion of drilling fluid, gas, air, oil or water, from within the well erupting above the earth's surface and . . . resulting in the well getting completely out of control and . . . rendering the use of any blowout preventer equipment, customarily used, inoperative or ineffective." Given the circumstances, a jury trial concluded that there was not an occurrence within policy definitions and, therefore, no claim. However, the Court of Appeals determined that a blowout had occurred and that the well was out of control to the extent that extraordinary well operations had to be implemented and routine drilling could not continue.
Getting more precise. As a result of such rulings, it was becoming obvious to insurers that they would have to take steps to eliminate ambiguities in their policies. To a degree, this was somewhat accomplished by the introduction of more precise definitions. Examples of refined definitions, variations of which could be found in the subsequent Operator's Extra Expense cover, are as follows: Blowout: ". . . a sudden accidental, uncontrolled and continuous expulsion from the well and above the surface of the ground of drilling fluid in an oil or gas well followed by continuous and uncontrolled flow from the well and above the surface of the ground of oil, gas or water due to encountering subterranean pressures and resulting in the well getting completely out of control."
Well out of control: "A well(s) shall be deemed out of control only so long as (when) there is a continuous flow of drilling fluid, oil, gas or water above (or below) the surface of the ground or water bottom (which is uncontrollable by the blowout preventer and/or storm chokes and/or wellheads and/or safety valves installed in or on the well)." OEE wordings. A third legal case which influenced the development of modern day OEE policy was Atlantic Richfield Co. vs. Underwriters at Lloyd's London (D.C. Tex. 1975).5 The issue in this case was not if a blowout had occurred, but when was control of the well regained? At the time of the policy period (1969/70), wordings did not include a definition for "well under control." It was Underwriters' position that, once there was no longer a blowout in accordance with policy definition and pressures could be confined within the wellbore and works implemented to eliminate the source of the pressure, then the well was under control.
However, the court rejected this contention and concluded that ". . . from a practical point of view . . ." a well was not under control until workers could ". . . make the well as planned." In many policies thereafter, definitions of a well under control were incorporated with variations along the line of: "A well(s) shall be deemed under control 1) when the well(s) can be re-entered for salvage, fishing, whipstocking, or cleaning operations, or to resume drilling, or 2) when the well(s) can be plugged or abandoned, whichever first occurs...."
Certain policies also allowed for regulatory authorities to confirm insurance coverage by stipulating when a well was and was not out of control. By the late 1970s/early 1980s, it was becoming common practice under an OEE policy to conclude that a blowout and/or well out of control had occurred and relevant insurance coverage triggered when there was a breach of the drilling circulatory system. Once this was demonstrated, the Control-of-well coverage continued until such time that normal and routine drilling practices could be restored.
There is little doubt that coverages provided under the OEE form were interpreted to be much broader than insurers originally intended. Nevertheless, it is quite apparent that OEE wording was, and continues to be, viewed as a comprehensive cover to indemnify an assured for appropriate expenditure incurred during a period a well may be technically out of control.
Changes through EED 8/86. Given the fact that underwriters continued to be held liable for claims which they never intended to cover, it was concluded in the mid-1980s that the time had come for a revision in well control insurance wordings. Also, by that time, there had become numerous variations of the OEE wording as a result of brokers wanting to market their own version of the Control-of-well coverage. Partly due to these reasons, and in an attempt to standardize that coverage, an undertaking by representatives of the London insurance community led to introduction of the EED 8/86 wording. Unlike the previous Control-of well wording, EED did not incorporate a blowout definition, but, instead, addressed the cover in terms of definitions for wells 1) out of control, and 2) brought under control.
The definitions for well out of control are as below:
"Well out of control: For purposes of this insurance, a well(s) shall be deemed to be out of control only when there is an unintended flow from the well(s) of drilling fluid, oil, gas or water above the surface of the ground or water bottom, 1. Which flow cannot promptly be:
2. Which flow is declared to be out of control by the appropriate regulatory authority. "Nevertheless and for purposes of this insurance, a well shall not be deemed out of control solely because of the existence or occurrence of a flow of oil, gas or water into the wellbore which can, within a reasonable period of time, be circulated out or bled off through surface controls."
"Well brought under control: A well(s) deemed out of control in accordance with (the above) . . . shall, for purposes of this insurance, be deemed to be brought under control at the time that:
"Whichever shall first occur, unless the well(s) continues at that time to be declared out of control by the appropriate regulatory authority, in which case, for purposes of this insurance, the well(s) shall be deemed to be brought under control when such authority ceases to designate the well(s) as being out of control."
As was the case with the OEE wording and as referred to earlier herein, additional coverages such as Underground blowout and Making well safe were also made available under the EED 8/86 form.
Coverage differences. When comparing EED 8/86 wording to that under the OEE form, it is difficult to conclude that they provide the same degree of coverage. With emphasis in the EED wording for determining whether or not a well is out of control being put on status of flow from the well, it is easy to conclude that EED wording is not a comprehensive well control coverage.
Routine interpretation of this wording and application to numerous claims have, for the most part, established that EED wording provides limited coverage to the well control remedial program to the extent that flow from the uncontrolled well is stopped or can be safely stopped. That is to say, it is arguable that Control-of-well coverage under EED wording cannot be triggered with coverage only being in effect so long as there exists a flow from the well. There are, of course, exceptions to this; the obvious being when the appropriate regulatory authority deems otherwise. Regardless, it should be accepted that scope of Control-of-well coverage provided under EED is much more restrictive than that in OEE wordings.
At the end of 1991, and during early 1992, the Joint Rig and Associated Business Committee of Lloyd's agreed that it should actively encourage and promote a return to utilization of standard insurance wordings in the market. EED 8/86 was the first to undergo such a review, with the intent being to formally introduce the revised wording into the marketplace beginning early 1994.
It would not be appropriate at this time to comment on specific revisions and modifications to the EED form except to say that the basic coverage concept, being that the wording is something less than a comprehensive insurance policy, has not been abandoned. In fact, an attempt has been made to emphasize just this point and to -further clarify scope and degree of coverage.
Also, it is becoming even more obvious that underwriters will be looking to more accurately assess their exposure to risk and establish some predictability in the interpretation and application of the wording to potential well control related claims. Notwithstanding, it appears inevitable that, given the nature of the insurance market, certain variations of the OEE wording will continue to be available, although perhaps on a much more limited basis.
In conclusion, from the above, it is apparent how assureds who are not totally familiar with the workings of the Control-of-well coverage would react to the situation should they find themselves faced with obvious well control expenditure not being recoverable, given their policy is something less than what had been envisioned! We cannot overemphasize the importance of an assured being fully aware of the types of Control-of-well coverages available and workings of the relevant wordings. This can best be achieved through close, in-depth communication with prospective insurance agents/brokers. This is the only sure way of being confident that the appropriate cover- as necessary to meet your financial objectives-is being purchased, and at acceptable rates.
Finally, although the Control-of-well insurance coverages have been made available to the industry in some form for more than 45 years, we cannot take for granted their existence in the future. Accordingly, it is imperative that all interested parties work together to insure the perpetuation of this cover at realistic premiums.
Contingency Plans. A systematic approach to blowout control preparedness is key to
emergency response. Covered will be a groundwork of procedure, organization and
methodology for blowout control management through contingency plans at corporate or
worldwide and local or regional levels. The technology of blowout control will be
introduced. With a contingency plan and knowledge of insurance coverage, a company is
ready to take on the job of blowout control.
3 Creole Explorations, Inc. vs. Underwriters at Lloyd's London, 245 La.
927,161 So. 2d.
4 Sutton Drilling Co., Inc. vs. Universal Insurance Co, 335 F 2d 820 (5th Circ. 1964).
6 Atlantic Richfield Co. vs. Underwriters at Lloyd's London, 398 F. Supp. 708 (S.D. Tex. 1975).
Sam J. Salvato, president, Matthews-Daniel Co., Houston, is a 1975 graduate of Texas A&M University with a BS in marine engineering. He has been with Matthews-Daniel for some 16 years and was seconded to their London office for 7 1/2 years between January 1979 and July 1986. Prior to joining Matthews-Daniel, hewas employed by Todd Shipyards, Galveston, Texas Division, as a project engineer, and was involved in a number of programs including drillship/supply vessel construction, ship conversions and repair. Matthews Daniel Co. is a firm of energy and marine insurance adjusters and surveyors which was established in 1962.
L. Flak (See photo and biography, Parts 1 and 2)