THE ROLE OF INSURANCE IN THE OFFSHORE OIL

THE ROLE OF INSURANCE IN THE OFFSHORE OIL AND GAS INDUSTRY Dr Özlem Gürses King’s College London

Overview ü Oil companies : consortium ü Appointment of an operator ü The exploration stage ü Seismic surveys ü Employment of a drilling contractor ü Sub-contracting some of the operations ü Consultancy contracts for analysis of soil conditions ü Construction and installation of relevant infrastructure. ü Hand over the facilities to the Operator for production

Contractual relationships v Underlying contracts v between operator and contractors and v between contractors and sub-contractors v Liability provisions v Insurance provisions

Insurance u Construction of the field u Property u Liability u Employers Liability u Pollution u Oil and natural gas in transit or in storage u Package policies Gard Marine and Energy Ltd v Tunnicliffe [2012] Lloyd's Rep. I. R. 1 Devon Energy Corporation, a large independent oil exploration and production company, was insured under an Energy Package Insurance Policy. The package included OEE, business interruption and liability.

WELCAR 2001 Ø The operator arranges CAR insurance on behalf of all parties Ø Deductible is appropriate to pass to the contractor Ø Usual arrangement: loss to owned properties and personal injuries to own employees will be assumed by each party by means of mutual or reciprocal indemnities irrespective of fault, negligence or breach of duty whether statutory or otherwise of the indemnified party

Indemnities: Caledonia North Sea Ltd v London Bridge Engineering Ltd [2002] 1 Lloyd's Rep. 553 • (1) … the contractor shall indemnify, …. the company and its parent, subsidiary and affiliate corporations and participants, … from and against any claim, demand, cause of action, loss, expense or liability …by reason of: • … (c) … Injury to or death of persons employed by or damage to or loss or destruction of property of the contractor or its parent, subsidiary or affiliate corporations, or the contractor's agents, sub-contractors or suppliers, irrespective of any contributory negligence, whether active or passive, of the party to be indemnified, unless such injury, death, damage, loss or destruction was caused by the sole negligence or wilful misconduct of the party which would otherwise be indemnified; …

Caledonia North Sea v London Bridge Ø Operator settled the claims made both by its own as well as the contractors’ employees Ø Then it raised claims against the contractors by relying on the cross indemnities clause (for the settlement of death and personal injury claims in respect of these contractors’ employees). Ø Contractors: the indemnity is not to apply unless the contractor is liable at common law or for breach of statutory duty

Caledonia North Sea v London Bridge Ø The indemnity says nothing about the contractors having to be liable to the employee. Ø It imposes a general liability to indemnify the operator against any liability in respect of their own employees, with an exception only in a case in which the accident is attributable to the sole negligence or wilful misconduct of the operator.

WELCAR 2001 Ø May range in scope from a single pipeline installation right through to the construction of a complete offshore field. Ø Rig building, platform construction Ø A list of operations (eg procurement, towage etc) covered Ø All risks of physical loss of or damage … Ø Definition of assured Ø Definition of properties Ø And occurrence Ø Exclusions: eg cost of renewing faulty welds a defective part / distinguish from damage resulting from defective part

WELCAR 2001 • Section II incorporates third party legal and contractual liability • And reasonable legal costs and expenses incurred in defence of any covered claim

Control of well insurance • Operator is in charge and responsible for the cost of controlling a wild well • The Operators Extra Expense (OEE) • Energy Exploration and Development 8/86 ØOne of the most common cases when the control is lost is blow out. • when the underground pressures become greater than the downward pressure exerted by the column of drilling mud inserted while the hole is being drilled.

Energy Exploration and Development • EED 8/86 A) Control of well • the costs of equipment and manpower used to bring the well under control • Definitions of well being out of and under control • Exclusion: loss or damage to drilling or production equipment and for loss of use B) Redrilling/Extra-Expense – When a well is brought under control it may need to be re-drilled or restored to its preblowout condition

EED 8/86 C) Seepage and pollution • Trigger: accident or occurrence taking place during the policy period provided that it arises well becoming out of control u legal liability for damages in respect of third party property damage and injury u costs incurred by the assured to clean up : does not require legal liability. u The insured has autonomy to act quickly to try to prevent pollution reaching the shore.

Insurance of drilling barge and platforms u London Standard Drilling Barge Form (LSDBF) u London Standard Platform Form (LSPF) u London Market Offshore Mobile Unit Form (LMOMUF)

Operating insurance Ø Cover hull and machinery of the drilling barges including all their equipment, tools, machinery, while engaged in the drilling operation Ø All risks Ø Survey requirements Ø Classification warranty

Operating Insurance Ø CTL defined Ø Sue and labour Ø War and terrorism exclusion but these may be insured under a package policy Ø Liabilities: a drilling contractor may have a P&I entry.

Business interruption v Delay in start Up (DSU): A delay in the commencement of production, due to incidents occurring at the construction stage v It is also known as Advanced Loss of Profits (ALOP) v Loss of Production Income (LOPI) v Trigger: accidental physical loss of or damage well out of control

Incorporation of Institute time and cargo clauses • Mentor Insurance Co (UK) Ltd v Norges Brannkassee Skandia Insurance Co [1993] 2 Lloyd’s Rep IR 268 Ø hull and machinery insurance of the Ocean Champion that was one of the vessels used by the owner as a jack up rig in ocean drilling and oil exploration. Ø XL: $1 million deductible and up to $22 million in excess of $1 m were insured separately

Further matters u Definition of assured Ø National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd's Rep. 582 u Sue and labour Ø Eg, tugs were employed for some 12 months to provide safe positioning for a FPSO after the failure of the swivel system. Ø But note: expenses be shared between assured and underwriters proportionately to the extent of their respective interests Ø The limitation of expenses to 25 per cent of the declared value of the item u Subrogation in co-insurance u Generally waived Gard Marine & Energy Ltd v China National Chartering Co Ltd [2017] UKSC 35