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Protecting Contractors From Environmental Exposures in the Energy Sector

Numerous contamination pathways are driving the need for insurance coverage in the energy sector. Even simple spills and mishaps can lead to years of litigation and costly cleanups.
By Kenneth Cornell
April 2, 2018
Topics
Safety
Markets

Numerous contamination pathways are driving the need for insurance coverage in the energy sector. Even simple spills and mishaps can lead to years of litigation and costly cleanups. In addition, the limited pollution coverage provided in some general liability policies may not be enough to mitigate these exposures.

Some of the exposures facing contractors in this space include surface and sub-surface soil/groundwater contamination resulting from well completion services, the improper installation and maintenance of surface infrastructure, and the improper handling and disposal of production materials and waste—all of which can lead to claims.

In one instance, a contractor providing on-shore well construction, completion and support services was alerted to a blowout related to its cement work. The notice included restitution for cleanup and associated legal defense expenses. In another, a contractor failed to negotiate a steep downhill turn while transporting produced water back to the company’s disposal facility. The vehicle rolled over, spilling the contents of the tanker trailer. The contractor was deemed legally responsible for the resulting spill and cleanup.

These are just two examples of the many problems that can occur during the performance of everyday contracting activities. Other potential pollution liability issues commonly involve:

  • erosion and stormwater runoff during well pad construction and drilling;
  • improper handling and disposal of flow back fluids, installation and maintenance of lines and other production assets, and storage and containment of fracking;
  • contaminating the excavation of access roads and well pads;
  • fluid leaks from storage of trucks and equipment;
  • poor housekeeping and preventive maintenance of operations and pollution control equipment;
  • poor management of underground and aboveground tanks;
  • improper testing, treatment and disposal of potentially contaminated soil; and
  • spilling fuel, chemicals, crude products, produced water, etc. during transport.

Plus, these challenges don’t always stay in the field. Numerous pollution exposures often occur in relation to the contractor’s premises. These can surround the:

  • contamination resulting from minor oil, fuel and lubricant spills caused by poor housekeeping or improper storage and maintenance practices;
    leaks from vehicles or equipment stored on premises; and
  • naturally occurring radioactive materials contamination from equipment in laydown yards.

While some of these releases and claims may not constitute a significant risk to humans, property and natural resources, others often involve massive remediation costs and intensive cleanup efforts performed over several years. As a result, contractors and other support organizations working within the oil, gas, storage, distribution and disposal industries have increasingly sought to protect their balance sheets and reputations from the myriad of environmental exposures encountered in the energy industry.

In addition, energy companies and site owners are requiring standalone pollution liability insurance in their contracts/master service agreements (MSAs). Although “pollution” may be included in the contractor’s general liability policies, it usually includes time element and named peril pollution language that can be limiting and, in many cases, not in compliance with the MSAs.

Contractor’s Pollution Liability And Pollution Legal Liability

Contractor’s pollution liability (CPL) has become an increasingly viable insurance option for covering bodily injury, property damage, defense and cleanup as a result of pollution conditions caused by contracting operations performed by or on behalf of the contractor. Purchased on a “blanket” or “project” basis, CPL can include coverage for the transportation of waste and materials, the insured’s legal liability at non-owned disposal facilities, and some level of coverage for the insured’s owned/leased locations and “base” jobsite activities. These exposures are commonly related to jobsite contracting operations, transportation problems, non-owned disposal sites, sudden or accidental pollution exposures, emergency response and supplemental defense funds.

In addition, pollution legal liability (PLL) endorsements can be utilized to cover pollution exposures associated with the insured’s maintenance yards, equipment storage areas and storage tanks. The main coverage of the PLL endorsement includes onsite and offsite cleanup/remediation expenses, third-party bodily injury and property damages, and defense expenses.

Subsequently, the coverage has never been broader for pollutants and pollution conditions due to the increased carrier competition. In an expanding marketplace, approximately 45 insurance carriers currently offer some form of CPL insurance either as a monoline program or endorsed to another product.

Expanded terms now cover bacteria, microbial matter, legionella, silt/sedimentation, silica, petroleum hydrocarbons, low-level radioactive waste, illicit abandonment, medical/infectious/pathological wastes and electromagnetic fields. Additional expansions have even been developed to cover emergency remediation, crisis management, litigation and subpoena expenses, as well as exposures surrounding the use of sustainable building and energy-efficient materials.

Annual practice policies continue to be the preferred CPL product. However, more markets are offering two- and three-year policy duration options. Project CPL policies are typically used to satisfy contractual requirements for dedicated pollution limits. These project policies can extend to the 10- to 15-year range (project term plus completed operations/extended reporting period).

Contractors are best served by investigating the latest options for insuring against environmental risk management problems. This is especially true in a market where coverage forms for pollutants and pollution conditions are continuing to widen, with expanded terms ranging from bacteria and mold to waste and hazardous materials.

by Kenneth Cornell

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