CIn

Wednesday, March 2, 2016Houston, TX

3:30–4:30 p.m.

EXOTIC COVERAGES AND THE JOA

Presented by

Jeffrey M. HubbardDirector, Environmental

Towerstone, Inc.

Insurance needs in the energy industry have evolved from the simple general liability, au-tomobile, workers compensation, and excess policies. Now oil and gas producers arefaced with potentially securing cyberliability, pollution, enhanced crime, and employmentpractices coverages to protect themselves and their partners. This session will exploresome of the nontraditional insurance coverages that an operator may want to includewithin its joint operating agreements (JOAs) as well as explore the operating partner’s ob-ligations to its partners in offering and sharing nontraditional coverages even though theJOA does not require the coverage specifically.

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Jeffrey M. HubbardDirector, Environmental

Towerstone, Inc.

Mr. Hubbard is director, environmental, with Towerstone, Inc. in Dallas, Texas.

Mr. Hubbard is a graduate of the University of North Texas, where he obtained a B.B.A. with anemphasis in insurance and finance. He began his career in risk management with a Fortune 1,000building products manufacturer, where he had day-to-day risk management responsibilities. Dur-ing this period, he had oversight of one of the largest building products litigation cases in theUnited States. He then served as a risk management consultant for an electric utility during itsbankruptcy. Mr. Hubbard joined AIG Environmental in 1993 as an environmental risk analyst androse to the level of regional manager. During his tenure there, Mr. Hubbard assisted primarilylarge, multinational corporate clients with the creation and implementation of environmentalrisk management strategies. He was recruited by Aon Risk Services in 2003 and became theSouthwest regional manager of its environmental practice. He then joined JLT/Alliant in Novem-ber 2003 and led its environmental risk practice until joining Zurich North America in June of2010. In August of 2011, Mr. Hubbard and his associate Richard Calvert joined XL Environmentalto create a local underwriting presence in Texas, Arkansas, and the surrounding states.

In an effort to serve the community, Mr. Hubbard currently serves on the Crosspoint Youth Foot-ball League as a member of the Board of Directors and has previously served on the University ofNorth Texas’s Finance Insurance Real Estate and Law Curriculum Advisory Board. He has alsoserved as the insurance editor for Brownfield News.

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Notes

This file is set up for duplexed printing. Therefore, there are pages that are intentionally leftblank. If you print this file, we suggest that you set your printer to duplex.

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Exotic Coverages And The JOA

Presented by:Jeffrey Hubbard

Director, Environmental Practice

Towerstone, Inc.

#IRMI2016

Exotic Coverages and The JOA• What’s in and What’s Out in the Typical Joint Operating Agreement?• What is a Fiduciary Duty and When/If it Applies to an Operator in a

Joint Operating Agreement? • What Impact Does Buying Coverages not listed in the Joint Operating

Agreement have for the operator?• Strategies For Mitigating Risk of a Breach of Fiduciary Duty claim

while Protecting Your Business and Your Business Partners.

#IRMI20162

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Exotic Coverages and The JOA• What Coverages Are Generally Required in JOA

• ALWAYS• Worker’s Compensation & Employers Liability• SOMETIMES• Automobile• Commercial General Liability• Excess/Umbrella• Operators Extra Expense/Well Control

#IRMI20163

Exotic Coverages and The JOA• What Coverages Are Missing but Purchased by the Operator

• Cyber Liability• Pollution• Downhole Tool• Drone• Well Control

#IRMI20164

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Exotic Coverages and The JOA• Cyber Liability

• This type of crime is on the rise• Operators maintain significant “stores” of data on nonworking interest

partners such as name, address, and tax identification or Social Security Number for tax reporting purposes.

• If government systems and major corporate systems can be breached, why can’t energy companies suffer the same fate?

• Companies can be a “softer” target.

#IRMI20165

Exotic Coverages and The JOA• Pollution

• Gradual pollution claims increased with the application of hydraulic fracturing technology and public’s perception of the risk.

• Defense costs for gradual pollution claims can commonly be seven figures and court interpretations of sudden & accidental pollution coverage has narrowed it’s scope recently through CCC exclusion.

• Lack of below grade or underground S&A coverage creates discomfort

#IRMI20166

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Exotic Coverages and The JOA• Downhole Tool Insurance

• Tools are becoming increasingly more expensive• Protect the AFE to stay with the planned contingency• Operator wants to avoid going back to non-operator for more money• Loss of downhole tool creates other losses to include:

• Fishing/Jarring Cost• Loss of Hole• Plug back and Sidetrack Expense

#IRMI20167

Exotic Coverages and The JOA• Drone

• Use is more prominent today than ever before• Opens up invasion of privacy and aviation risk issues

#IRMI20168

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Exotic Coverages and The JOA• Operators Extra Expense/Well Control

#IRMI20169

Exotic Coverages and The JOA• What’s a Fiduciary Obligation Generally?

• A strict and exceedingly high standard of conduct• The highest recognized obligation under the law• Requires:

• Good Faith• Loyalty• Transparency• Prohibits acts that would conflict with or benefit one party over another

#IRMI201610

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Exotic Coverages and The JOA• When Does Fiduciary Obligation Apply in the Energy Business?

• A Clear Question with four different fuzzy answer • Jurisdiction never recognizes fiduciary duty under the JOA (Oklahoma, Arkansas &

Louisiana)• Jurisdiction recognizes fiduciary duty under certain circumstances but also give parties

the right to disclaim them in the JOA (Texas)• Jurisdiction recognizes fiduciary duties on a case by case basis (Colorado)• Jurisdiction recognize JOA as a joint ventures & always recognize a fiduciary relationship.

(Kansas & Michigan)

#IRMI201611

Exotic Coverages and The JOA• When Does Fiduciary Obligation Apply in the Energy Business?

• Law is not clear and Varies State to State• Allen v. Devon and ARCO v. Long Trusts may support recognition of a formal fiduciary

duty in Texas• May exist in the form of a partnership, joint venture or agency relationship.• Fiduciary duties may be implied• Kansas, for instance, holds that the operator of a JOA must treat the non-operator in a

manner that is consistent with fiduciary principles. • Current general trend is to imply fiduciary duties if possible

#IRMI201612

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Exotic Coverages and The JOA• What Impact Does Buying Coverages not listed in the Joint Operating

Agreement have for the operator?• To Buy or Not to Buy? That is the Question.• Can Operator Buy Coverage only for their own interest?

#IRMI201613

Exotic Coverages and The JOA• What Impact Does Buying Coverages not listed in the Joint Operating

Agreement have for the operator?• To Buy or Not to Buy? That is the Question.

• Securing coverage based on perceived exposure or litigation trends may be prudent creating “damned if you do, damned if you don’t” scenario

• If loss severity would create a burden or damage a relationship with a nonworking interest partner, coverage could be valuable

• If not accounted for properly, premium accounting could create a MAJOR headache

#IRMI201614

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Exotic Coverages and The JOA• What Impact Does Buying Coverages not listed in the Joint Operating

Agreement have for the operator?• Can Operator Buy Coverage only for their own interest?

• Buying coverage implies knowledge/concern for this risk• Protecting yourself as operator could be construed as contrary to acting in good faith and

loyalty which could give rise to questions about a breach of fiduciary duty• Buying for operator’s own interest and allowing opt in/opt out by nonworking interest

holder is plausible. However, this can create recordkeeping nightmares.

#IRMI201615

Exotic Coverages and The JOA

• Can Operator Buy Coverage only for their own interest?• Buying coverage implies knowledge/concern for this risk• Protecting yourself as operator could be construed as contrary to acting in good faith and

loyalty which could give rise to questions about a breach of fiduciary duty• Buying for operator’s own interest and allowing opt in/opt out by nonworking interest

holder is plausible. However, this can create recordkeeping nightmares.

#IRMI201616

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Exotic Coverages and The JOA• Strategies For Mitigating Risk of a Breach of Fiduciary Duty claim

while Protecting Your Business and Your Business Partners• Try to identify how the jurisdiction that you are in interprets Fiduciary Duty;• Insert language within the Joint Operating Agreement that allows parties to

disavow any Fiduciary Duty on the part of the Operator;• If purchasing insurance, look for coverage that does not have “scale to

interest” provisions if possible;• If purchasing “scaled” coverage, notify nonworking interest holders of

purchase and allow opt in/opt out. This may cause “heartburn” for carrier.

#IRMI201617

Exotic Coverages and The JOA• Strategies For Mitigating Risk of a Breach of Fiduciary Duty claim

while Protecting Your Business and Your Business Partners• Within Joint Operating Agreement wording allow for purchase of non-

traditional coverage for the benefit of the joint account at the operator’s discretion.

#IRMI201618

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Exotic Coverages and The JOAQuestions and Answer Segment

• Sample Questions• “That tie is fabulous. Where did you get it?”• “Exactly how much lead based paint did you eat as a child?”• “If a tree falls in the forest, does it make a sound?”

• Topic Relevant Questions• Those are up to you guys…….

#IRMI201619

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W9. EXOTIC COVERAGES AND THE JOA

Rating scale for all questions:

4 = Excellent 3 = Very Good 2 = Average 1 = Somewhat Disappointing 0 = Very Disappointing

Overall rating for this workshop? 4 3 2 1 0 Jeffrey M. Hubbard Preparation and quality of information 4 3 2 1 0

Energy and enthusiasm of delivery 4 3 2 1 0

Educational focus (not a sales pitch) 4 3 2 1 0

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