environmental risk & insurance for gallagher … · environmental risk & insurance for ......

Environmental Risk & Insurance for the Oil Production Industry

Gallagher EnvironmentalPractice

JANUARY 2018

2

Introduction

Standard liability and property insurance policies have excluded coverage for claims associated with pollution events since 1985, leaving significant coverage gaps in insurance programs throughout the U.S. Although there has been a market for pollution liability insurance since 1979, until recently, coverage was very narrow, limits were low, and premiums were relatively high.

The market for pollution liability insurance has dramatically changed over the past few years. Environmental liability coverage has greatly broadened, limits have increased and premiums are significantly lower. This review is provided to the oil production industry to examine how environmental liability insurance can be used to manage financial risks associated with environmental liabilities.

Gallagher, a leader in risk management advisory and insurance brokerage services, provides this analysis. Gallagher Environmental is a unit of expertise within Gallagher that specializes in providing environmental risk management and insurance services. Gallagher Environmental’s role as an industry leader in this area is to (1) identify the potential environmental risks facing our clients, (2) analyze the environmental risks in terms of potential frequency and severity and (3) review the various risk control and financing mechanisms available to address these risks.

Gallagher Environmental Practice Environmental Risk & Insurance for the Oil Production Industry 3

Potential Environmental Liability ExposuresThe oil production industry is exposed to many environmental liabilities due to their operations. Specifically, they face the following risks that are the focus of this analysis:

• Current and past operations pose risks to contaminating soil, ground and surface water, air emissions and potential injuries to third parties.

• Property that has been cleaned up, or a “clean” environmental assessment has been done, turns up as contaminated.

• During a cleanup directed by the company, the contractor’s activities exacerbate the contamination at the site.

• The design plan for a cleanup project fails as a result of the engineer’s negligence

• There are cost overruns associated with a cleanup project due to a non-performance of the remediation system.

• After a cleanup project is started, additional contamination is found, increasing the costs to complete the cleanup.

Some of the specific operational environmental risk exposures faced by the oil refining industry include the following:

• Outside superstructures with extensive piping, valves, pumps, connections, and other equipment without adequate containment.

• Storm water runoff contaminated with drips, spills, leaks of materials, products, and wastes flowing off site.

• Insufficient treatment of process wastewaters containing organics discharged to municipal treatment plants or surface waters.

• Extensive liquid chemical inventories, both in quantity and in number, without secondary containment.

• Inadequate containment of chemical loading and unloading areas.

• Poorly contained marine and aquatic terminals, especially on rapidly flowing rivers.

• Inadequate maintenance of hoses, hose couplings, and other product handling equipment at marine and aquatic terminals.

• Failure of high temperature and pressure process equipment releasing organic compounds into the environment.

• Use of earthen and often unlined lagoons to treat wastewater, allowing the soluble petroleum fractions to migrate into the soil.

• On site disposal and land farming of oily sludge causing groundwater contamination.

• Buried leaded tank bottoms, often in the tank farm areas, contaminating groundwater aquifers.

• Improperly maintained PCB containing electrical equipment.

• Inadequate underground tank management programs.

• Underground tanks that were removed/abandoned for unknown reasons.

• Underground pipelines carrying either raw materials on site or products off site which might corrode and leak.

• Aboveground tanks, which are not inspected or tested for leaks through their bottoms, placed over soil.

• Poor quantification and qualification of benzene and other hazardous volatile organic compounds released into the air.

• Nuisance atmosphere conditions caused by fugitive volatile organic compounds from raw materials, products, and wastes.

• Chronic off site nuisance problems caused by sulfide air emissions.

• Local noise problems from the process operations.

• Plants located in areas where similar neighboring facilities could cause problems for which both companies might be investigated.

• Preconceived negative opinions by the general public.


• Chronic drips and leaks resulting in stained soil and an appearance of poor housekeeping.

• Inadequate or out of date emergency and spill control plans.

• History of past on site spills and releases to the environment.

• Scant historical data regarding operations and environmental releases from older facilities.

• Incompletely combusted volatile organic compounds from fire fighting training areas soaking into the ground and groundwater.

• Inadequate auditing of hazardous and nonhazardous waste handling and disposal contractors.

• Infrequent and undocumented preventative maintenance.

• Large inventories of bulk hazardous gases stored near high vehicular traffic areas.

• Obsolete and remote equipment storage (bone) yards where oil and other residual liquids percolate into the soil.

The most common environmental and regulatory exposures encountered at oil production facilities include:

• Oil pipelines with valves/pumps/connections without containment.

• Tanks for storage of petroleum that are often uncontained/unlined.

• Loading/unloading of tanks cause chronic leaks and spills.

• On site disposal and land farming of oily sludge.

• Poor maintenance of hoses and other product handling equipment.

• Underground pipelines which might corrode and leak.

• Underground tanks that were removed/abandoned for unknown reasons.

• Tanks not inspected/tested for leaks through the bottoms.

• Use of earthen and often unlined lagoons.

• Equipment storage (bone) yards where liquids drip onto soil.

• Stormwater runoff contaminated with drips, spills, and leaks.

• Unpermitted venting of volatile organic gasses from processes.

• Nuisance atmosphere conditions by fugitive volatile organics.

• No data on operations/environmental releases from older facilities.

• Infrequent and undocumented preventative maintenance.

• Inadequate or out of date emergency and spill control plans.

• Poor housekeeping practices resulting in stained soil.

• Preconceived negative opinions by the general public.

Note: This list is provided as an overview of the exposures that are often encountered within the oil production industry, and is not intended to be a comprehensive inventory of all environmental exposures.


Environmental Liability Insurance Overview and Industry ExamplesThe environmental liability insurance market today is approaching $2 billion in annual premium, and leading insurers, including Ironshore, Great American, Navigators, AWAC, Beazley, Zurich, Aspen, Allianz, XL-Catlin, and Chubb (to name a few) are providing significant coverage at cost-effective rates. These carriers account for more than 90 percent of the total environmental insurance market.

Each environmental liability insurer offers its own coverage forms (not standardized, ISO forms ). To complicate matters, one insurer may have more than 15 different environmental liability coverage forms. However, the policies can generally be categorized into three major categories:

• Fixed Site – pays for cleanup, third-party bodily injury and third-party property damages associated with pollution conditions at, or emanating from a site. These policies can be modified to insure business income exposures, non-owned locations (warehouses, disposal sites, etc.), and transportation exposures. Other enhancements can be negotiated to meet the specific needs of the insured.

• Contractor’s Pollution Liability (CPL) and Professional Liability – coverage can be written either under one policy or under separate policies. CPL coverage can be provided on a claims made basis and pays for third-party claims of bodily injury, property damage and cleanup costs that result from a pollution condition caused by a contractor’s work. Professional liability coverage pays for claims, including pollution coverage, arising out of the negligent acts, errors or omissions of the insured.

• Secured Creditor’s/Lender’s Pollution Liability – designed to protect lenders (banks) and equity investors (Real Estate Investment Trusts, private equity, specialty lenders, etc.) from the environmental risks associated with secured properties. Although the Lender Liability Protection Act of 1996, and similar state laws, provide banks protection from Superfund liability for their pure lending activities, creditors and lenders still face significant exposures (third-party claims) and credit risks associated with environmentally- impacted properties.

As discussed previously, the oil production industry has many potential environmental liabilities that, uninsured, could adversely affect a company’s financial performance, internal budgeting and net earnings. The policies and coverage summarized below can be designed to address these risks and provide companies with a cost-effective way of transferring their costs through insurance.

INSURANCE POLICY TYPE

Fixed-Site Pollution Liability1

INSURABLE RISKS

A claims made policy that generally covers the following:

1. Unknown contamination at, or emanating from, and insured site is found requiring cleanup.

2. Third-party bodily injury and property damage claims caused by a pollution condition at, or emanating from an insured site.

3. Natural resource damages.

4. Non-owned disposal sites.

5. Transportation of waste and/or products leads to a pollution event.

6. Defense of claims.

7. Illicit Abandonment of Materials,

8. Underground and Aboveground Storage Tanks.

LIMITS

Determined on a site-specific basis.

Up to $150,000,000 per loss and aggregate limits are available from a single insurer;

Over $300,000,000 in limits are available through stacking insurers

1 Insurer names for these types of polices include, but are not limited to, Pollution Legal Liability (PLL), Pollution and Remediation Legal Liability (PARLL), Environmental Site Liability (ESL) and Environmental Impairment Liability (EIL).


Many companies have successfully used various environmental liability insurance policies to insure risks arising out of their operations. Specific examples include:

• A refinery and bulk oil distribution center designed a finite-risk insurance program that will pay for the cleanup costs related to cleanup after its closure, demolition and post-closure care costs. The policy will also pay for third-party claims for bodily injuries, property damage, cleanup and natural resource damages caused by pollution conditions at, or emanating from the site. Defense costs are also covered. The 20-year policy has a $35 million aggregate limit.

• An oil company designed a finite-risk insurance program related to the disposition of its former refinery. This program will pay for the cleanup costs related to cleanup after its closure, demolition and post-closure care costs. The policy will also pay for third-party claims for bodily injuries, property damage, cleanup and natural resource damages caused by pollution conditions at, or emanating from the site. Defense costs are also covered. The 15-year policy has a $25 million aggregate limit.

• A petroleum manufacturers association worked with an environmental risk and insurance advisor and designed and implemented a pollution liability insurance program for its members. The policy used by this program allows insureds to demonstrate financial responsibility under the Resource Conservation and Recovery Act (RCRA) for their operation of underground storage tanks (USTs). The policy also provides coverage for third-party liability claims brought against insureds for bodily injuries, property damage and cleanup costs related to USTs, above ground storage tanks (ASTs) and other sources at, or emanating from, their sites.

• A large petro-chemical company structured an environmental wrap-up insurance program that covers claims associated with the professional liabilities and contractor pollution liabilities from the cleanups it is responsible. The policy dedicates $10,000,000 per claim and $20,000,000 aggregate limits over five years.

• A company was concerned about cost-overruns and third-party liabilities related to its known environmental cleanups. A 20-year program was put in place that dedicated limits to each site for cost overruns and third-party liabilities. The policy’s aggregate limit was $40 million and included costs of “reopeners” by governmental authorities.

• A Superfund site’s potentially responsible party (PRP) group used a blending of finite-risk and fixed-site pollution liability insurance to finance and insure a long-term cleanup at one of the most complex and costly Superfund sites. The policy paid for the removal actions, long term remediation and monitoring costs, as well as third-party claims related to the cleanup, or for pollution conditions at, or emanating from the site. The 30-year non-cancelable policy provided the financing mechanism needed by the PRPs to bring financial certainty to the site.

Gallagher EnvironmentalPractice

Global Headquarters 2850 Golf RoadRolling Meadows, IL 60008

The information contained herein is intended to serve only as a conceptual overview of the insurance programs recommended to the oil production industry by Gallagher. This paper is for discussion purposes only. Please address any specific questions to either your Gallagher representative, or Gallagher Environmental team member.

17GGB32765A

Gallagher Environmental Team Members www.ajg.com/environmental

Chicago Managing Director Anthony Lehnen, CHMM 312.803.7447 [email protected]

Cameron Douglass 312.803.6069 [email protected]

Amber Chavin 312.803.6338 [email protected]

Tara Frasure 312.803.7391 [email protected]

Luke Trejo 312.803.7452 [email protected]

Tatiana Zaatiti 312.803.7404 [email protected]

San Francisco Jonathan Leavens 925.310.1014 [email protected]

New YorkGene Devine 516.622.2483 [email protected]

Carl Varteresian 212.994.7097 [email protected]

environmental risk & insurance for gallagher … · environmental risk & insurance for ......

Documents