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PHELPS DUNBAR~~~

WELL CONTROL COVERAGES AND LONG-TAIL POLLUTION LIABILITY


Richard N. Dicharryl Pamela G. Michiels As the oil and gas industry has evolved, so have the coverages created to insure its unique risks. In particular, the coverages offered in conjunction with well control have undergone significant refinement since their inception in the 1940s. However, this evolution has not been without controversy as disagreements have arisen between assureds and their insurers as to the nature and scope of the coverage afforded. As a result of this discord , the available wordings, most notably the various Operators Extra Expense (OEE) and Energy Exploration and Development (EED) forms, have been modified and revised over time in an effort to respond to such concerns. This article examines one issue which has been the source of significant disagreement: whether or not the OEE or EED seepageand pollution coverage responds to long-tail environmental pollution claims, that is, claims involving contamination which has taken place over time such that the date of loss is uncertain. A review of the wordings will illustrate the source of this controversy. Over time the London Market has developed increasingly sophisticated well control coverage. Some sort of Control of Well cover is common to all the OEE and EED wordings over the years, but additional coverages have been developed to respond to other aspects of such claims, including Redrilling Expense, Seepage and Pollution and Care, Custody & Control, as well as others. The impetus for the development of the coverage, however, and its central purpose since its origin in the 1940s has been to pay the costs associated with blowouts. The forms developed under the OEE rubric vary greatly. Typically, however, the coverage was provided pursuant to several independent sections addressing different aspects of a blowout claim, frequently Control of Well, Redrilling/Recompletion and Seepage and Pollution. A fairly typical Seepage and Pollution cover would respond in respect of liability for damages due to bodily injury or property damage caused directly or indirectly by contamination arising out of scheduled operations; and in respect of cleanup costs in connection with contamination emanating from covered operations. In certain policies the OEE Seepage & Pollution cover itself contains no express requirement that the pollution which forms the basis of the claim must result from an accident, event or occurrence during the policy period, although some OEE wordings do contain such a requirement. Other OEE Seepage& Pollution wordings may be triggered by a claim being made during the policy period. Also, some policies contain no express requirement that the pollution result from a claim otherwise covered under the policys other sections, most significantly the Control of Well cover. As numerous OEE wordings came into use during the 1970s and 1980s it apparently became difficult for the underwriters to be certain exactly what risks were being undertaken. Additionally, some wordings were interpreted by the courts as covering risks never intended to be covered by the underwriters. Accordingly, a wholesale revision of the wording was undertaken in an effort to provide clarity with respect to the coverage issues which had arisen and to develop a single form generally acceptable across much of the market. This effort resulted in the introduction of the EED wording in 1986. The EED wording resolved many of the concerns about the earlier wordings. It too provided coverage for various aspects of a well control claim pursuant to several independent sections (Control of Well, Redrilling/Extra Expense and Seepage & Pollution), and could be modified by a number of compatible endorsements. As to the Seepage & Pollution Cover, the 1986 EED wording contains several important modifications. Most notably, coverage is available only in respect of seepage, pollution or contamination resulting from both (1) an accident or occurrence taking place during the policy period and of which underwriters are property notified, and (2) an occurrence which gives rise to a claim recoverable under the policys Section A (Control of Well) coverage. The EED Seepage & Pollution cover also eliminates the availability of cover for
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damageswhich arise indirectly pollution or contamination.

from the contamination, responding only in respect of damage caused directly by seepage,

Most recently, another revision was undertaken which further consolidates and refines the available coverage. The 1993 EED wording retains the basic multipart structure of the earlier wordings (Well Out of Control, Redrilling/Extra Expense, Seepage & Pollution and Named Perils Redrilling and Restoration Cost). In order to establish coverage under the Seepage & Pollution section, the assured must demonstrate compliance with several requirements described as absolute conditions precedent to coverage. In particular, it must be shown that the Seepage & Pollution was caused by an Accident and resulted directly from a Well Out of Control as defined by the policy. The assured must also establish compliance with certain requirements as to the timing of the commencement, discover and reporting of the accident. Among the exclusions from coverage are an exclusion for liability with respect to pollution evaluation, monitoring and cleanup expenses arising solely from statutory or contractual obligations. Like all segments of American industry, oil and gas assureds have become increasingly concerned with the problem of potential liability in respect of pollution. Government efforts under Superfund and similar state statutes to rectify complex pollution problems which have arisen over many years and from many sources frequently focus upon identifying all entities involved at a site over time and spreading the liability among them. Liability is frequently joint, several and retroactive, so that any party deemed even partially responsible may theoretically be liable for the entire cost of cleanup. At the same time, increasing public awareness of environmental concerns has resulted in a substantial increase in claims by private property owners that oil and gas operations on or near their property have resulted in pollution. This trend is particularly apparent in heavy oil and gas producing states such as Texas, Oklahoma and Louisiana. In light of these developments many assuredshave turned to their insurers, seeking relief with respect to these increasingly signiticant exposures. Much of the attention in this regard has focused upon general and excess liability coverage. Some assureds, however, faced either with insufticient amounts of general liability, coverage or unfavorable jurisprudence concerning the availability of that coverage, have attempted to obtain coverage under the OEE or EED wordings even while acknowledging the absence of a well out of control. These claims arise out of several scenarios. First, it should be noted that pollution directly associated with a well out of control would generally be covered under all of the wordings assuming all other conditions of coverage are satisfied, and insurers typically have accepted coverage for such claims. Some assureds have sought coverage for contamination of property in close proximity to their oil and gas exploration or production facilities. Typically, neighboring property owners assert such claims alleging that contamination was caused by improper waste storage or disposal or seepage from tanks or equipment over a period of time, with no apparent relation to a blowout. While the OEE wording clearly was not intended to respond to such claims, the arising out of /emanating from language has caused some assureds to argue that the coverage responds even if there is no identifiable well out of control or other covered event. Some assureds have also relied upon the OEE wordings responsiveness to liability caused only indirectly by contamination. The EED wordings have effectively eliminated this line of argument by linking the Seepage & Pollution coverage to an accident, occurrence or event during the policy period, to an event recoverable under the Control of Well cover and to damage caused directly by contamination from an insured well. Often, spent drilling fluids and other by-products of the oil and gas exploration and production process are disposed at landfills and other disposal sites remote form the assureds operations. Some assureds have attempted to secure coverage for their liability as generators of wastes disposed at such sites currently under investigation and remediation by goverment agencies. Some assureds have argued that the OEE wordings broad language permits coverage because the waste materials disposed at the site did, at least indirectly, arise out of covered operations and/or emanate from covered wells. It is clear, however, that the OEE wording requires a more direct and immediate connection to the assureds well operations than is present in this scenario. Significantly, the history of the OEE coverage clearly indicates that the coverage was developed to respond specifically in respect of losses arising from wells out of control. Also, the policy Declarations typically indicate that all aspects of the coverage are triggered by an accident or occurrence, notwithstanding the absence of specific language to that effect in the Seepage & Pollution cover, in that the policy limits are typically on a per accident or per occurrence basis.
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Finally, review of an OEE policy in its entirety demonstrates the intended scope of the coverage as responsive to various aspects of a well-out-of-control event. Here, again, the subsequent modifications to this class of coverage in the form of the EED wordings effectively eliminate any reliance on these arguments by assureds whose policies are subject to the later wordings. Perhaps because of the numerous stumbling blocks to establishing coverage for long-tail pollution under even OEE wordings, relatively few assureds have contested coverage on this basis. Significantly, we are aware of no active litigation addressing these issues, although some assureds have expressed disagreement with the insurers position where coverage has been denied on the basis of the OEE wordings. To date, there are no reported decisions addressing the availability of coverage in this context. Nevertheless, we note that certain general principles of contractual interpretation would be relevant should any of these claims ever reach litigation. First, as a general rule, the language in an insurance policy will be given its plain meaning unless an ambiguity exists. Assureds may argue that the arising out of/emanating from language in the OEE wordings indicates that any contamination which had any relation to an insured well at any time, no matter how indirectly, is covered. However, courts will permit the introduction of evidence to clarify the meaning of the language. In this instance, information concerning the history of the wording and a close review of other aspects of the coverage would demonstrate that the pollution coverage is in fact dependent upon a well-out-of-control event. Further, courts should require that insurance policies be viewed as a whole and that no single portion may be read independently of the entire document. In this regard, reference to the other sections of the policy, viewed collectively, demonstrate that the coverage does indeed pertain to various aspects of a well control claim and not broadly to any claim pertaining to an insured well. The revisions to well control coverage culminating in the EED wordings have effectively eliminated the argument that the Seepage& Pollution cover responds to long-tail pollution scenarios which do not involve a well out of control. In later-year policies where the EED wordings are present, assureds frequently do not even seek coverage for their liabilities in this regard. However, the OEE wordings are still in use under some circumstances, and typically an assured targeted in a pollution claim with an uncertain date of loss will place its policies in all potentially relevant years on notice. Where liability coverage, or coverage issues exist in that regard, some assureds have focused attention on the OEE wordings even in the admitted absence of a well out of control. Therefore, assureds may argue that the older policies may be at risk. While some assureds have raised the arguments about the breadth of the OEE wordings in disputing denials of coverage based on those wordings, to date it appears that no assured has felt sufficiently confident of its arguments to litigate the issue. Nevertheless, as the search for coverage in respect of long-tail pollution liabilities goes on, it is likely that the OEE wordings will remain subject to attack until such time as a body of jurisprudence is developed. END NOTES: Richard Dicharry is a Partner at Phelps Dunbar and has extensive experience acting for London insurers, in particular on long tail liabilities.
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