The oil and gas operations insurance marketplace is alive and very, very well. According to Dave Stein of L. J. Stein & Company, Inc., there are plenty of players entering the business at the present time. His concern is “they have no knowledge of the market and are offering prices that won’t be supported by losses.” David Barclay, vice president of Chubb Energy, also notices this increased capacity in the marketplace. He says that, “competition wise, we are seeing more carriers getting interested in writing this type of business than in the past.”

The oil and gas industry needs standard coverages but unique coverages are also required, according to Marcus Jensvold, president of M. D. Jensvold and Company. One particular need with high loss severity potential is known as control of well. This loss situation is caused by a blow out that results in oil spewing out of control. The best example is from the Texas oilfields. The first major oil find in the United States was accompanied by the first major control of well loss. The well was drilled into the Spindletop field in Beaumont Texas. It erupted and spewed over a million barrels of oil over a nine-day period before it was finally brought until control. If control of well coverage had existed in 1901, it would have covered the expenses to stop the flow and clean up the mess it created.

Safety measures play a major role in the oil and gas industry. As a result of the Spindletop loss, a safety device known as the Christmas Tree was invented. Since gas and oil drillers couldn’t afford such losses, which were uninsurable at the time, the well-control industry started. While keeping the well under control was the highest priority, when a well did go out of control the next priority was bringing it back into control as quickly as possible. By the time the insurance industry started offering this coverage, loss prevention measures were already well established.

Control of well coverage today includes not only the cost of bringing the well back under control but also pollution cleanup, re-drilling, evacuation expenses and other add-ons, depending on the company providing the coverage. This coverage is known as Operators Extra Expense (OEE).

The industry itself consists of many independent operators. Lease operators hire one of three different types of oil and gas service contractors. Oil and gas drilling contractors work with an oil lease operator under contract. This group represents almost 80% of all potential insureds. The second, much smaller group is similar to this in that they also work under contract but instead drill for liquid natural gas. The last group provides well services but does no drilling. This group represents about 17% of all oil and gas businesses.

Mr. Barclay makes an important observation regarding these contractual relationships. “A major trend we’re seeing in the industry is the way contractual liability exposures are allocated. In the past, the lease operator had a little better ability to negotiate contracts for service contractors. Now that’s somewhat reversed and we’re seeing service contractors asking the operator to add them as an additional insured and doing a lot of things contractually on indemnifications that you wouldn’t have seen in the past.” He attributes this change to the higher cost of oil.

The increased cost of oil encourages new exploration as well as revisiting fields that may have been considered depleted in the past because of difficulties in drilling for additional reserves. Mr. Jensvold explains that measurement well drilling, or MWD, is now being used. He explains that, “if you drill a horizontal well you can run it through porous rock oil and gas strata and produce more than with a vertical well, so drillers are going into these oil wells to bring out extra fuel.” He also points out that the drilling equipment required to do this is more expensive, in addition to the possibility of blowing out another well because of its proximity to the drilling. Mr. Stein notes that he is seeing a lot of horizontal wells drilled into a section of the Appalachians called the Marcellus Shale. Mr. Barclay agrees that horizontal drilling is becoming fairly common. Because of that, he says that, “Chubb Energy is set up to provide the same kind of coverage that we traditionally provide for a well being drilled vertically.”

While we have concentrated on the unusual exposures presented by the oil and gas industry, the standard coverages must still be considered. Mr. Barclay points out that, “In terms of severity and frequency, the exposure we tend to be the most concerned with oilfield service contractors is the automobile. You have a lot of heavy vehicles, and with the recent spike in oil prices, a lot of oilfield contractors are extremely busy, and many are finding it harder to find quality employees and drivers.”

Why would an agent want to begin writing oil and gas operations? One reason might be the need to service existing clients. Mr. Stein points out that “new companies are being developed and small older companies have blossomed. There’s been huge growth in all aspects of the business.” However, he is concerned because “any retailer interested in this market needs to understand that this is a really different type of business. Big claims happen. The risk is severe and frequent. It’s a world unto itself, and if a broker were to enter this marketplace, it could end up writing some business for price shoppers. However, I would caution them to be really mindful, because carriers tend to not babysit brokers in this business.” He is particularly concerned about the disservice to the broker’s clients and also the broker's potential errors and omissions exposure.