BBH: What do you think is the most common misunderstanding among marketers and terminal operators when it comes to insuring energy inventory and infrastructure?
JR: It reminds me of the old Mike Tyson quote, which I’ll paraphrase: “Everybody has plans until they get hit.”
We find that some companies are not fully prepared for a potential catastrophic event. Contracts are not carefully reviewed, insurance is not coordinated with the risk allocation in the contracts, pollution coverage and how it responds is not fully understood, adjusters and lawyers have not been pre-agreed in the insurance policy, and so forth. This leads to confusion and significant frustration with how the insurance actually works. It is important that both the marketer and terminal owner have a good understanding of potential exposure and how the insurance will cover all the different risks that could arise in a catastrophic event.
Generally speaking, terminal operators have a better understanding for what insurance is required for the product, infrastructure and liability. What we see is some marketers have old agreements that make them responsible for insuring their product in the terminal. Going back to our comment about reviewing all the insurance and indemnity provisions of the contracts is very important.
BBH: How can a terminal operator or trading company insure itself against potentially unquantifiable environmental damage, as well as an unlimited number of corporate, personal or government lawsuits?
JR: This is a good question, and we know from experience that environmental events have become more complicated and expensive. Environmental events tend to take on a life of their own as the public, legal community and government get involved very quickly.
Pay special attention to the sudden and accidental pollution coverage within the general liability and excess liability policies. S&A language can be very limited; the devil is in the details. Make sure your broker fully explains the S&A coverage and if there are options for other forms. Consider questions such as: Does the policy cover onsite cleanup? Does it cover natural resources damages?
Strong consideration should be given to purchasing a monoline environmental insurance policy. Your brokers should discuss the pros and cons of S&A pollution coverage vs. a PLL policy using examples.
As noted earlier, if you have a PLL policy, you need to understand how the fixed-site pollution legal liability policy interplays with any sudden and accidental pollution coverage offered in the general and excess liability program.
Marketers that own product stored at third-party terminals should consider products pollution coverage. This policy will respond to third-party “products claims” as it relates to “your product” for a definitive coverage grant via an insuring agreement for a marketer’s product in storage and/or transit. There are varying policy wordings within carrier forms for products liability and pollution coverage or exclusions. The key concern here is if a claim is received as a “products” claim and understanding the products liability and pollution wording in the PLL policy.
Last but not least, the total limits are important, and this is an exercise that needs to be discussed and reviewed with your broker.
BBH: Is the Deer Park disaster likely to affect insurance rates for terminal operators or product shippers that store product at terminals?
JR: After ITC, there has been a knee-jerk reaction in the pollution market. Some quotes were pulled, and in other cases, the pricing went up. It has settled down a bit, but coverage for terminal operators is now being closely reviewed, and prices for the primary layers have firmed. Some of the PLL insurance markets are starting to look closer at their exposure and coverage offering for non-owned sites. For example, if a marketer wanted to add a third-party terminal to its PLL policy as a non-owned site, there might be more underwriting scrutiny before the non-owned site is added.
For product in storage, we have not seen any change in rates due to the ITC event; however, we are seeing general firming in the market for property and products in storage.
BBH: John, thank you for sitting down with us to share your insights.