A Conversation with John Rathmell, President of Lockton Marine & Energy

We sat down with John Rathmell, president of Lockton Marine & Energy, to get a glimpse into recent changes and trends in the energy insurance space.

Brown Brothers Harriman: Thanks for sitting down with us, John. Tell us about Lockton and its history and role in the marine/petroleum terminal insurance industry.

John Rathmell: Lockton is a private company owned by the Lockton family and key stakeholders. We are the largest privately owned insurance broker with owned and partner offices in 120 countries. Like Brown Brothers Harriman, we see a major advantage in being a private company where our focus is on taking care of our associates and our clients.

In 2001, Lockton decided to build a world-class energy practice. The company hired a group of us from a large publicly traded broker, and Lockton Global Energy was born. It started with a team of about 10 people in Houston, and today we have more than 100 energy specialists in Houston and another 25 in London. We also have energy specialists in the Middle East, Far East, Australia and Brazil.

While our practice covers all aspects of the energy and marine business, we specialize in the midstream industry, which includes pipelines, processing and storage terminals for petroleum and other commodities. In Houston, we currently service more than two dozen midstream companies, ranging from very large public pipeline companies to small privately owned trading/terminal companies.

BBH: Broadly speaking, have you seen environmental liability insurance for the energy industry change much over the past 10 years?

JR: Yes, the market for environmental liability, or what we call pollution legal liability (PLL), insurance has changed in the past 10 years. Ten years ago, there were only three insurance companies that offered the coverage, with AIG being the market leader. Today, AIG is out of the business, but 10 to 15 insurance companies now offer PLL.

There are six carriers playing in the heavy midstream space, three of which dominate the market share in the midstream space.

Two insurance companies have dedicated fixed-site pollution liability forms that can be implemented for midstream and upstream risks. These dedicated forms are excellent options, as they address nuisances in oil and gas placements that differ from other risks.

With more carriers, the costs have come down, and we have seen more flexibility in the coverage.

BBH: There’s obviously been quite a stir in Deer Park, Texas, recently, after the Intercontinental Terminals Company (ITC) fire. What parts of their insurance coverage should energy marketers and terminal operators be double-checking in light of these events?

JR: Before you look at the insurance, you need to start with the contract between the terminal owner and marketer. The contract will largely dictate the allocation of liability between the marketer and terminal and the direction of an insurance claim. These contracts can vary, and we have seen them go from terminal-friendly to marketer-friendly and everything in between.

In the ITC event, we found that some of the marketers are on older legacy terminal operator contracts carried over year to year. The older contracts are more favorable to the terminal operator.

At Lockton, it is critical for us to review all our clients’ contracts before we structure the insurance program. We want to make sure the insurance covers all the assumed liabilities under a contract, or we want to advise on how to negotiate out any areas that could be problematic.

Making sure all contracts have been reviewed and insurance is appropriately structured to cover the assumed liabilities will go a long way to avoiding any headaches. With that said, the ITC event has raised several coverage issues that marketers and terminal operators should consider.

The first is loss of product. For example, ITC was liable for up to a dollar amount per gallon of product, and above that contractual agreed amount the marketing company/terminal customer had to assume the loss. One of our customers had several million dollars in lost product and had to file a claim with its insurance company for the amount above what ITC was responsible for.

Energy marketers and terminal operators need to make sure the insured site schedule is always up to date and covers any location in which they store product.

Demurrage is another issue. There have been concerns from both terminal operators and traders due to closed access to the ITC terminal. This can extend to neighboring terminals and the ship channel for third-party demurrage claims from other vessel owners due to the shutdown or slowdown of vessel traffic. It can also result in traders incurring demurrage claims for the inability to load and unload product at an affected terminal and causing delays as a result of having to reroute to other terminals. Demurrage may be excluded in liability policies but can be covered in other policies.

It is also important to look at the type of pollution wording in your general liability/excess liability policies. There are many different wordings and trip wires that can exclude or limit coverage. For example, in some sudden and accidental (S&A) pollution policy wordings, the grant of coverage is really tightened down where the event must not only have started at a specific time and date, but ended within a timeframe as well. An incident like ITC could present a problem if the policy wording is restrictive. Again, the devil is in the details.

Special attention needs to be placed on how the fixed-site pollution legal liability policy interplays with any S&A pollution coverage offered in the general and excess liability program. Ideally, it should be clear which policy is triggered first vs. not dealing with the language and having a method of sharing whereby two carriers are figuring out primary coverage and response.

Finally, the legal counsel and loss adjusters should be pre-agreed between insureds and insurers at the time the policy is placed and clearly documented in the policy. This eliminates disputes and delays following a catastrophic incident.

BBH: In a case like Deer Park, what is a traditional sequence of events from an insurance perspective? Is it first the terminal operator’s insurance, and then the product owner’s insurance if the terminal operator cannot cover the full claim?

JR: Again, the contract will dictate the allocation of liability, and the contracts can vary depending on what was negotiated at the time. In general, you would expect that the terminal operator’s insurance would be primary to the marketer’s insurance for both the property and liability.

It is important that the marketer makes sure its insurance carriers understand where the terminal operator’s insurance starts and stops under the contract and that the marketer’s insurance syncs up with the allocation of risk under the contract. You want to avoid misunderstandings with your insurance carriers.

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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.

 

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