Aon’s 11th Energy Insurance Training Seminar

Onshore & Offshore Liabilities

David Sayer

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Why Purchase Liability Insurance?

• Statutory Obligation e.g. motor, employer’s liability

• Contractual obligation

• Protection of the Balance Sheet

Regardless, the company should act as if uninsured and adopt risk control

and risk management procedures

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Is the risk overstated ?

• Since 1997 in Europe only :• > 32 Major Accidents in commercial and transport activities within the Oil industry*• > 24 Major Accidents in Oil Refineries*

• Types of accidents :• > Leaks from valves / faulty joints / pumps failures• > Overspills• > Corrosion defects / tightness defect• > Bulk storage collapse• > Pipeline burst• > Fire and Explosion

All resulting in pollution from crude oil or refined products, but also from foaming agents

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Operators Normal Responsibilities

• Own employees - Employers Liability, WCA

• Production Unit, Physical Damage, Removal of Wreck (Platforms, FPSO)

• Control of Well

• Pollution from the Wells and owned Property

• Liability to Third Parties

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Contractors Normal Responsibilities

• Own employees - Employers Liability, WCA

• Drilling Vessel Physical Damage, Removal of Wreck, Protection &

Indemnity

• Pollution from the vessel (not the well)

• Liability to Third Parties

• Liabilities arising of Gross Negligence or Willful Misconduct

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Operator / Contractor relationship

• Liabilities between Operators and Contractors are normally

defined in the contract. For example:

– Indemnities for people

– Indemnities for property

– Indemnities for Control of Well

– Indemnities for Removal of Wreck

– Indemnities for Pollution

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Upstream Oil Company

Upstream

• Exploration / Production

• Pipelines to Refinery

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Deep Water Horizon—Gulf of Mexico

The numbers:• Release of oil between April 20 and

July 13, 2010• Between 25,000 and 30,000 bbls

released daily• 19,000 personnel deployed  • Over 1,000 vessels on site  • 1.9 million feet of boom deployed  • Over 19,000 claims filed• Over $8 Billion spent over 1st 4

months• BP establishing a $20 Billion

Trust to pay claims• Cost estimated at $40 billion• Dividend suspended• Share price collapse • CEO replaced

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Risk Assessment

Exploration/ Production

• Operating area

• Revenues / throughput

• Number of Employees / wage bill

• Number of Contractors and who

• Number of Wells

• Depth of Wells

• Contingency Plan/Disaster Plan

• Contractual Agreements

• Claims Record

• Methodology and experience ( differentiation )

• P&I entry ( special opps extention )

• OIL entry ?

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Downstream Oil Company

Downstream

• Refining

• Terminal / Storage Operations

• Pipelines / Transportation & Distribution

• Products

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Fuel Terminal—Bayamon, Puerto Rico

An explosion of 11 fuel tanks at a fuel storage complex which shook the ground of Bayamon, a municipality near San Juan, with the force of a 2.8 magnitude earthquake caused the

evacuation of about 1,500 residents, school closings and class actions suits.

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Tank Farm Fire - India

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2005 : Buncefield - UKExplosion and fire at a tank farm outside

London

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2005 : Kallo - Belgium

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2009 : Plaine de la Crau - France

Underground pipeline burst in Natura 2000 protected site

4000m3 – 5ha- +$25M claim

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Star Terminal—Suburban Washington DC

A petroleum leak from the Pickett Road Tank Farm on a nearby site contaminated the 1,500-home community : Cost in excess of US$ 250m

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Risk Assessment

Refining and petrochemicals

• Proximity of the public

• Proximity of neighbours premises ( surrounding third party )

• Potential for escape of hazard e.g. Vapour Cloud Release / Pollution Hazard

• Presence of third parties at the site e.g. Contractors / Vessels ( Terminals )

• Measurement of Activity, Turnover or Throughout

• Nature of operations e.g. Refining, Petrochems, Terminals

• Products Exposures

• Moral Hazard – Risk Management and quality of risk in general.

• Surveys

• Capex ( capital expenditure on betterment / maintenance )

• Details on any construction activity to be insured or otherwise

• Claim History

•

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Risk Assessment

Transportation

• Type Road / Rail / Vessel / Pipeline

• Size of Vessels / Pipelines / number of wagons / road tankers

• Frequency

• Distance

• Type of Product being transported

• Contractual Arrangements

• Surveys including details on pigging / scada protection.

• Claims Record

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Risk Assessment

Products

• Type

• Turnover / volumes

• Export markets

• Contractual Sales Agreement

• Claims Record

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Types Of Liability Policy

• Public Liability / Commercial General Liability

• Products Liability

• S & A Pollution Liability

• Environmental liability ( European directive 2004/35/ec)

• Employers Liability

• Professional Indemnity

• Directors & Officers Liability

• Motor Liability

• Aviation Liability

• Marine Liability

• P & I

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What will a Liability policy not normally cover

Exclusions

• War / Nuclear

• Damage to own Property or Property in CCC unless by extension.

• Punitive / Exemplary Damages unless by extension ( limited markets )

• Gradual Pollution

• Products Guarantee / Recall

• Damage to Product itself

• Contractual liability other than for liability that would attach at tort ( ie in

absence of the contract ).

• Statutory Motor

• Workmens compensation schemes ( strict liability )

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A Liability Insurance programme

Marine&

Aviation

ComprehensiveGeneralLiabilityUpstream

PublicLiability

Down-stream

EmployersLiability

/Workers

CompensationAct

AutoTerminalOperators

UMBRELLAExcess

Difference in Conditions

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Adequacy of Limits of indemnity

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What can the insurance market offer :US$ 2,500 m ?

• Lloyd’s ( US$ 500m ++)– Marine syndicates– Non-Marine syndicates– Combined

• Companies ( US$ 750m ++ ) – UK– Continental Europe– USA– Rest of the World

• Bermuda ( US$ 750m ) – OCIL / OIL (Oil Casualty Insurance Ltd & EIM ( Energy Insurance Mutual)– XL, ACE, STAR EXCESS

• Others ( US$ 1bn) – Berkshire Hathaway.

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Can you Ignore the Risks

Questions ?