Damage to Existing Property WELCAR 2001 · Damage to Existing Property WELCAR 2001 Asia Offshore Energy Conference 26 September 2014 Barry Stimpson Partner •

Damage to Existing Property

WELCAR 2001

Asia Offshore Energy Conference

26 September 2014

Barry Stimpson

Partner

• Introduction to DTEP issue

• Contractual background

• WELCAR 2001 coverage under Sections I and II

• “Existing Property” exclusion and Buyback

What are the issues?

WELCAR S.II

• Contractual Regime

Logic K4K

Tie-In + Crossover Existing

Project

Sub/Contractor

Other Assured

Operational

Property Insurers

PROJECT

Company

Principal Assured

Introduction to DTEP issue

• Existing Property exposure for Owner/Operator

• Tie-ins to owned or partially-owned property at location

• Historically dealt with in Liability section of CAR policies

LOGIC

• Company and Contractor definitions

• Permanent Works

LOGIC Indemnities

• Indemnity regime on a knock-for-knock basis except for third

party liabilities arising from fault of Contractor or Company

Tie-In and Pipeline Agreement(s)

• Indemnity given to existing field operator by ‘project’ operator

• Extent of indemnity usually assumes all responsibility for

damage to existing property arising from tie-in or cross over

activities irrespective of negligence

• Scope of indemnity can often extend to loss of revenue and

loss of use, as well as pollution and clean-up liability

WELCAR 2001

• Section I and II distinct and not always placed together

• S.1 - primary/S. 2 - excess

• Scope of Insurance for Sections I and II

“…covers …activities undertaken in the course of the…

Project… provided such are within insured values.”

WELCAR Section 1

• Section I

- Insured Property includes works in performance of all

contracts relating to the Project, provided included in

contract values, including “all temporary works” and

“…insured equipment and/or property that is not for

incorporation into the contract works shall be covered

whilst it is being utilised in the Project…”

- Not covered:

- Existing property which does not form part of Project

Works and has not been declared to contract values

WELCAR Section II

• Coverage to indemnify the Assured for Ultimate Net Loss

which Assured is obligated to pay by reason of:

i. Liability imposed upon the Assured by law and/or

ii. Express Contractual Liability

for bodily injury of Property Damage caused by an

occurrence and arises out of activities described in Scope

of Insurance

WELCAR Section II

• Cross Liabilities of each Assured to the other is covered with

limited exceptions

“ In no case shall this Section II of the Policy provide coverage for any physical loss of or physical damage to or defects discovered in the property insured under Section I.”

• Exclusion 21 – Section II does not apply to actual or alleged

liability for damage to or loss of or loss of use of property

owned, used or in control, custody or control of Assured

DTEP Buyback (in Section II)

• Existing Property/Contractual Exclusion Buyback

“Nothwithstanding Existing Property/Contractual Exclusion

contained in this Policy, it shall not apply to any claim for:

physical loss of and/or physical damage to existing property

identified on the attached schedule of insured property.”

• DTEP buyback intended to provide cover for liability for

damage caused to existing property and negates effect of

Exclusion 21

Liability issues

1. Arguably there remains no trigger of cover under Section II

due to (i) the absence of the Assured’s liability to another

party, and (ii) the absence of an obligation to pay

2. Also, Section II is an excess cover so should the Assured’s

operational policy not respond first?

- Digby v General Accident [1940] CA LLLR at 205

3. But, insurers have taken premium to provide indemnity for

liability for loss/damage to Assured’s existing property!

WELCAR S.II

Logic K4K Existing

Project

Sub/Contractor

Other Assured

Operational

Property Insurers

PROJECT

Company

Principal Assured

• 100% owned by same Company

DTEP buy-back

required

• 100% Third party Existing Property

Company

Principal Assured

WELCAR S.II

Logic K4K

Sub/Contractor

Other Assured

Operational

Property Insurers

PROJECT

No DTEP buy-

back required

Existing

Project

• Partly owned by same Company

Company

Principal Assured

WELCAR S.II

Logic K4K

Sub/Contractor

Other Assured

Operational

Property Insurers

PROJECT

DTEP buy-back

required

Existing

Project

WELCAR S.III?

Reinsurance

• Absence of legal liability could impact insurers ability to

recover Section II Buy back payments from their reinsurers

• Exxon Valdez liabilities - King Syndicate v Brandywine

…Possible Solutions ?

Disclaimer

The views expressed by the author are his own and do not necessarily reflect that of ReedSmith LLP.

The information in this presentation does not constitute legal advice and no reliance should be made on the contents of the presentation.

Specific legal advice should be sought in every instance.