Oil and Gas Insurance
13/05/2020Oil and gas insurance is a series of policies designed to protect companies involved in the production and distribution of oil and natural gas. The oil and gas industry poses both significant safety and environmental concerns that different insurance policies address. Even small oil and gas companies can expect to pay thousands in premiums annually.
Oil and gas companies include not just the companies that extract and refine petroleum products, but also includes any company that performs professional services for the industry including inspections, geological surveys, transportation, and well design. Oil and gas companies can buy this insurance through specialty insurance providers.
What Oil and Gas Insurance Is?
Oil and gas insurance is a series of policies including general liability, business property, and workers’ compensation insurance. What makes insurance policies for the oil and gas industry unique is their need to satisfy the many state and federal regulations imposed on the industry to keep people, animals, and the environment safe.
Storage Tank Pollution Liability
The two types of storage tanks, underground storage tanks (UST) and aboveground storage tanks (AST), have different risks that must meet EPA guidelines and require proper coverage. Oil and gas insurance policies include coverage that protect oil and gas companies from third-party claims of bodily injury or property damage. It also includes oil and gas insurance coverage specific to covering the expense of cleanup that meets state and federal regulations.
Leased Equipment with Operator Insurance
Trucking and special heavy equipment is often used in the oil and gas industry through a “leased equipment with operator” agreement. This is where the operator is also leased to the company for the duration of the contract terms. Leased equipment should be insured through the business property section of oil and gas insurance, though an oil and gas company should consider a policy that covers subcontractors when operators are involved. Trucking insurance is normally maintained by the trucking company.
What Oil and Gas Insurance Covers?
Oil and gas insurance covers various risks evident in the entire supply chain of finding, extracting, refining, transporting, and storing natural gas and petroleum products. The industry itself is segmented based on where in the process a business operates. Every stage has its own set of inherent risks requiring very specific underwriting protocol and evaluation.
The three main segments of oil and gas production that need oil and gas insurance are:
- Upstream
Business operations involved in the exploration, extraction, and production of oil and natural gas. Operations efforts may exist underground or underwater using wells to locate and pull the raw materials to the surface.
- Midstream
The category of oil and gas operations where raw materials are stored, transported, and marketed in wholesale sectors. Midstream operations include transportation pipelines, terminals, and treatment centers.
- Downstream
Responsible for refining crude oil, purifying raw natural gas, and distributing final petroleum products to retail distributors, businesses using petroleum products, and consumers.
Claims for oil and gas companies vary depending on which segment operations exist. However, all operations are subject to general liability claims, workers’ compensation injuries, potential environmental contamination, and equipment breakdown.
What Oil and Gas Insurance Does Not Cover?
Oil and gas insurance is designed to cover the broadest levels of accidents and negligence but it does not cover known problems arising from ignored or illegal acts. The oil and gas industry is highly-regulated when it comes to site preparation, safety standards, and environmental protection. Violating rules, regulations, or safety standards could result in a denied claim.
An oil and gas company can help itself with a well-written set of operations and safety standards distributed to all employees. Holding regular safety training sessions and inviting site inspectors to point out potential issues and then taking action to correct them goes a long way to making sure an incident is a covered claim.
Oil and Gas Insurance Claims
There are many controlled and uncontrolled conditions when maintaining oil and gas operations. Landscape, weather, and wild animals are just a few of the hazards that oil and gas companies face that they have little control over. Oil rigs operating in deep seas, dealing with polar bears in arctic conditions, and relying on accurate chemical reports about underground gas pockets as part of day-to-day operations demonstrate just a flavor of the risks faced.
Common oil and gas insurance concerns include:
- Oil and Gas Equipment Breakdown
Companies rely on equipment to get the job done in a safe and efficient manner. Equipment failure and loss can lead to serious production down-time costing everyone money.
- Environmental Concerns
Extraction and fracking can render landscapes barren. Oil spills and chemical leaching can contaminate large areas well beyond the incident site killing wildlife and making nearby residents ill.
- Safety Risks
Workers work in conditions where a fire or explosion can happen without notice. Equipment is big and dangerous with increased of disabling or deadly injuries.
Claims Made vs. Per Occurrence Policies
A Claims Made policy has two timelines: the time the policy is in force and the time that coverage exists before the policy started. This allows for retroactive coverage on incidents leading to a claim that the company was unaware of previously and may not have had coverage for. An example would be a crack in a tank that was missed in an inspection leading to an underground leak.
An insurance policy written on a Per Occurrence basis only covers the claims during the policy period. There is no retroactive date, thus no coverage for incidents that occur before the policy is contractually started. Because the oil and gas industry has so many regulations and potential claims’ incidents, most oil and gas insurance policies are written on a Claims Made basis. While this is a more expensive policy standard, it provides the broader protection to those being held liable for clean up and damages.
Who Oil and Gas Insurance is Right For?
Oil and gas insurance covers anyone involved in the exploration, extraction, refining, and distribution of oil and gas products. This includes even consultants, engineers, and transportation experts. Even indirect involvement such as being a real estate investor where mineral surveys discover oil and gas reserves exist could mean you need to get some type of oil and gas insurance.
Those who work in or service the oil and gas industry and need specialized policies include:
- Well drill consulting
- Well design
- Geology and mineral surveys
- Drug testing and security
- Pipeline and equipment inspection
- Software and technology development
- Oil tanker and trucking transportation
- Gas station distribution
- Waste cleanup contractors
- Real estate owners with oil and gas land rights
- Wildcat driller with one well
If you are unsure about your exposure to the oil and gas industry, consult with an insurance broker versed with the policies and coverage needed to protect your business interests.
Oil and Gas Insurance Costs
Oil and gas insurance costs have extremely wide variances due to the unique scenarios of every oil and gas company. Where a company falls in the production and distribution pipeline, its size, and overall industry experience directly affect costs. Underwriters in this industry have in-depth knowledge of how operations function and will work hand in hand with businesses to properly price the risk.
Factors Affecting Oil and Gas Insurance Costs
Common factors affecting oil and gas insurance costs include:
- Production Level
Being upstream, midstream or downstream poses different risks such as exploration and drilling upstream and storage downstream.
- Operations Size
Owning a small operation as a wildcat drill operator is much different from a publicly traded oil refinery with multiple locations and various operations across the production pipeline.
- Payroll
Workers’ compensation is always based on payroll costs and these rates, even for clerical staff who may be on-site, are increased in the oil and gas industry.
- Storage Type
Above ground and below ground storage have different potential risks and the types of storage units greatly affect the rates particularly concerning environmental safety claims.
- Management Experience
A track record of industry success, compliance, and safety helps reduce the overall costs of oil and gas insurance.
- Resident State of Operations
State regulations impact safety standards, environmental protections, and insurance requirements. Check with local Environmental Protection Agency (EPA) offices to meet compliance requirements.