Source: http://www.insurancejournal.com, June 3, 2015
By: Stephanie K. Jones
While stand-alone pollution insurance coverage for energy risks is available in the marketplace, more often than not those who need it the most may be unaware it is available or decide not to purchase it.
That creates a coverage gap for many oil and gas production-related operations for risks like seepage and pollution migration that aren’t covered in energy general liability and control of well policies, according to John Heft, senior vice president and director of the Real Estate Practice at New Jersey-based New Day Underwriters.
Energy GL and control of well policies typically cover pollution caused by sudden and accidental events like tank ruptures, pipeline breaks and explosions. But operators and non-operators of wells, pipeline companies, waste material collection and storage systems providers, support contractors and many more may be at risk for the kind of pollution exposures that would not be considered sudden and accidental, said Heft.
The oil and gas area is seeing insurance claims related to gradual pollution, such as seepage and migration from leaking equipment, pipelines and tanks. Also from waste containment areas that may have had a breach, he said.
With the expanded use of extraction methods such as hydraulic fracturing, or fracking, which produces large amounts of wastewater mixed with chemicals and sludge, there is greater public awareness of hazards that may result from the disposal of those waste materials.
And with greater public awareness comes an increase in allegations of pollution, especially related to the wells into which fracking wastewater is injected under high pressure, Heft said.
“The claim is the wells weren’t constructed properly and sealed, there was leakage and that has gotten into the groundwater table,” he said.
As a result, “the environmental insurance marketplace a few years ago saw the potential opportunity to fill that coverage gap … and provide coverage for the gradual pollution incidents, as kind of a dovetail to the current energy casualty products that are available,” Heft said.
When oil was at its peak and revenues were substantially higher, energy industry businesses may have been able absorb the costs related to a site pollution incident.
With the decrease in oil prices, some operators and others in the business may not be looking to add business expenses, but now is the right time “to take a hard look at environmental insurance for your operation, whether you’re an owner, operator, non-operator of wells, if you have a portfolio of wells, either production wells or disposal wells, or you’re in the construction side, now you really need to think about it. Because if you had a gradual pollution issue, can you really afford to take that type of hit?” Heft said.
As claims go, it’s in severity, not frequency, where the risk lies.
“It’s a severity-based product, meaning that when a claim does happen — it’s not going to happen often — but when a claim does happen it’s typically going to be large,” he said.
Energy related companies may feel like they have some environmental coverage in the GL policy, and that’s where the counsel needs to be improved from agent to client, he said.
Still, Heft thinks the brokers out there in the industry are having those conversations with their customers.
“It’s still overall a very small penetration in the energy space that purchases the gradual pollution coverage, but I think it’s growing now that there’s an awareness of it,” he said.
Thomas Blanquez, an oil and gas specialist at San Antonio-based insurance wholesaler Quirk & Co., is not so sure.
He said his brokers are talking to clients about pollution coverage. But, Blanquez said, the classes of business “that have the most exposure for site pollution probably buy the least.”