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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 Operator’s 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 policy’s 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 policy’s Section A (Control of Well) coverage. The EED Seepage & Pollution cover also eliminates the availability of cover for
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This trend is particularly apparent in heavy oil and gas producing states such as Texas. Some assureds have argued that the OEE wordings’ broad language permits coverage because the waste materials disposed at the site did. Some assureds have sought coverage for contamination of property in close proximity to their oil and gas exploration or production facilities. Most recently. the policy Declarations typically indicate that all aspects of the coverage are triggered by an accident or occurrence. First. Redrilling/Extra Expense. however. In particular. Significantly.damageswhich arise “indirectly” pollution or contamination. At the same time. Often. Also. and insurers typically have accepted coverage for such claims. coverage or unfavorable jurisprudence concerning the availability of that coverage. another revision was undertaken which further consolidates and refines the available coverage. Among the exclusions from coverage are an exclusion for liability with respect to pollution evaluation. that the OEE wording requires a more direct and immediate connection to the assured’s well operations than is present in this scenario. 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. seeking relief with respect to these increasingly signiticant exposures. Oklahoma and Louisiana. so that any party deemed even partially responsible may theoretically be liable for the entire cost of cleanup. These claims arise out of several scenarios. 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. in that the policy limits are typically on a “per accident” or “per occurrence” basis. occurrence or event during the policy period. the assured must demonstrate compliance with several requirements described as “absolute conditions precedent” to coverage. 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. monitoring and cleanup expenses arising solely from statutory or contractual obligations. Seepage & Pollution and Named Perils Redrilling and Restoration Cost). discover and reporting of the accident. several and retroactive. “arise out of’ covered operations and/or “emanate from” covered wells. 2 . Liability is frequently joint. The EED wordings have effectively eliminated this line of argument by linking the Seepage & Pollution coverage to an accident. faced either with insufticient amounts of general liability. Much of the attention in this regard has focused upon general and excess liability coverage. It is clear. at least indirectly. 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. oil and gas assureds have become increasingly concerned with the problem of potential liability in respect of pollution. In order to establish coverage under the Seepage & Pollution section. 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. 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 assured’s operations. to an event recoverable under the Control of Well cover and to damage caused directly by contamination from an insured well. The assured must also establish compliance with certain requirements as to the timing of the commencement. 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. 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. with no apparent relation to a blowout. Like all segments of American industry. notwithstanding the absence of specific language to that effect in the Seepage & Pollution cover. The 1993 EED wording retains the basic multipart structure of the earlier wordings (Well Out of Control. Some assureds have also relied upon the OEE wording’s responsiveness to liability caused only “indirectly” by contamination. however. Some assureds. While the OEE wording clearly was not intended to respond to such claims. 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. In light of these developments many assuredshave turned to their insurers. from the contamination. have attempted to obtain coverage under the OEE or EED wordings even while acknowledging the absence of a well out of control. Typically. responding only in respect of damage caused “directly” by seepage.

no matter how indirectly. Nevertheless. assureds may argue that the older policies may be at risk. However. 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. 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. as the search for coverage in respect of long-tail pollution liabilities goes on. Here. some assureds have focused attention on the OEE wordings even in the admitted absence of a well out of control. viewed collectively. it is likely that the OEE wordings will remain subject to attack until such time as a body of jurisprudence is developed. 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. reference to the other sections of the policy. Where liability coverage. there are no reported decisions addressing the availability of coverage in this context. we are aware of no active litigation addressing these issues. However. In later-year policies where the EED wordings are present. the OEE wordings are still in use under some circumstances. courts should require that insurance policies be viewed as a whole and that no single portion may be read independently of the entire document. 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. END NOTES: Richard Dicharry is a Partner at Phelps Dunbar and has extensive experience acting for London insurers. First. Therefore. although some assureds have expressed disagreement with the insurer’s position where coverage has been denied on the basis of the OEE wordings. courts will permit the introduction of evidence to clarify the meaning of the language. Significantly. 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. Nevertheless. relatively few assureds have contested coverage on this basis. While some assureds have raised the arguments about the breadth of the OEE wordings in disputing denials of coverage based on those wordings. I 3 . to date it appears that no assured has felt sufficiently confident of its arguments to litigate the issue. again. Perhaps because of the numerous stumbling blocks to establishing coverage for long-tail pollution under even OEE wordings. To date. the language in an insurance policy will be given its plain meaning unless an ambiguity exists. In this instance. in particular on long tail liabilities. 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. Further. is covered. assureds frequently do not even seek coverage for their liabilities in this regard. we note that certain general principles of contractual interpretation would be relevant should any of these claims ever reach litigation. as a general rule. 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.Finally. In this regard. or coverage issues exist in that regard.