Ten years ago, using fracturing and horizontal drilling to extract oil and natural gas was hardly on the energy industry’s radar. Now these methods are well established, and they’re helping drive an increase in oil and gas production and changing the United States’ position from an energy importer to a growing energy exporter.
Matt Waters, chief underwriting officer of Liberty Mutual Insurance’s Commercial Insurance Energy Practice, says, “With new methods of well drilling and completion becoming more common in the energy space, it’s important to be aware of the risk management issues that can accompany them.” Top risks facing the industry include:
1. Increase in commercial automobile claims
As a result of the increase in domestic activity, the energy sector is seeing more commercial automobile claims. Two key drivers of this trend are:
- Increased use of commercial vehicles: Fracking and horizontal drilling require more frequent vehicle trips to production and exploration sites. Vehicles must deliver water, sand, gravel, and chemicals to sites; remove materials once they are used; and also transport any special equipment needed for these extraction methods.
- Lack of skilled drivers: There is a rising demand in the energy sector for drivers, particularly for those licensed to transport oil and chemicals. As a result, hiring and retaining drivers with the proper training and qualifications can be a challenge.
A comprehensive fleet safety program that includes a written policy, a formal driver selection process, ongoing driver training, and scheduled vehicle maintenance can help protect your business, your employees, and the public at large.
2. Lack of clarity around contractual liability
Energy projects are complex and often include several stakeholders. Making strategic decisions about the liability you assume or transfer can help protect your company’s capital, reputation, and employees. Consider these scenarios:
- A mid-stream oil and gas company leases oil rail cars to transport product from the extraction point to storage or a refinery. During transport, there is a rail accident.
- A drilling company contracts with an oil and gas lease holder to extract product from a well. The town’s drinking water is later found to contain high levels of methane gas.
In these scenarios, determining which party is ultimately liable for damages may depend on how contractual liability is defined in their contracts. Certain jurisdictions limit a company’s ability to transfer liability. “Knowing your business’s options, as well as limitations, is critical. At the end of the day, you want to be clear on what the risk is and whether you, or someone else, owns it,” Waters said.
3. Inadequate pollution coverage
Many general liability policies exclude coverage for pollution exposures. Some policies add limited coverage for accidental and immediate spills, but not for long-term releases. For example, if methane migrates from deep underground and infiltrates the water supply over a 10-year period, that event is not covered by a standard policy. The best way to control exposure and minimize gaps is to have two types of coverage:
- A standard general liability policy with an endorsement to protect against sudden and accidental spills of pollutants
- A stand-alone pollution policy for more gradual exposures
“A key risk of fracking and other operations is contamination that is gradual in nature with no clear beginning and end date. A stand-alone pollution policy can help protect against these types of situations,” stated Waters.
Whether your business is natural gas or oil, upstream or mid-stream, new technologies and regulations can present opportunities as well as risks. Having the right coverage and a sound risk management plan can help you effectively identify, mitigate, and manage them.