The Oil Insurance Limited Policies: Broad Hurricane Loss Coverage

By Lester O. Brown
Howrey LLP

Property Damage and Business Interruption insurance for many energy companies generally involves a package of policies with the Oil Insurance Limited ("OIL") policy as its core. Although the OIL policy itself only provides property damage coverage, the surrounding policies or "wrap around" policies (most often providing coverage below the OIL property damage limits) issued by commercial insurers often do provide business interruption coverage and use the OIL policy as their base. These commercial "wrap arounds" are most often placed with domestic carriers like AIG, XL and others, as well as Lloyd's, London, European and Middle Eastern insurance companies.

These "wrap around" policies tend to be favorable for the policyholder. The policies either follow the terms and conditions of the OIL wording and provide additional business interruption/time element coverage, or they provide better coverage.

The basic OIL policy form has very broad coverage wording. This wording is particularly beneficial to policyholders where more than one cause, i.e., one covered and one not covered, may have resulted in the loss. For example, the OIL policy makes clear that a covered occurrence involves losses "which are attributable directly or indirectly to one accident, event or cause . . . ." Thus, where more than one cause is involved, e.g., water and wind, under this broad wording the loss should be covered and resort to a "proximate cause" analysis is unnecessary.

Additionally, the OIL form explicitly covers "sue and labor" expenses. The policy states:

To indemnify the Assured for any sum or sums which the Assured may be obligated to pay or incur as expenses on account of:

a. Sue and Labor Expense, to the extent reasonably incurred arising from an occurrence covered hereunder.

See OIL March 2005 form Insuring Agreement 2.a. The March 2005 OIL property insurance policy specifically provides coverage for actions taken by a subscriber in order to reduce or prevent damage from Hurricane Rita. Condition "B" of the policy states:

In case of loss or damage or imminent loss or damage hereunder, it shall be lawful and necessary for the Assured, his, its or their factors, servants and assigns to sue, labor and travel for, in and about the defense, safeguard and recovery of the insured property, or any part thereof without prejudice to this insurance, nor shall the act of the Assured or the Underwriter in recovering, saving and/or preserving the insured property in case of disaster be considered a waiver or an acceptance of abandonment.

Since OIL and any commercial carrier or underwriter that follows this wording benefits from the policyholder's actions to lower the insurers liability, the insurers are responsible for these costs. Moreover, the prevailing law puts such expenditures outside of the limits of the policy. See American Home Assurance Co. v. J.F. Shea Co., 445 F. Supp. 365 (D.D.C. 1978).

If a claim dispute arises under the OIL policy, the parties must engage in binding arbitration in London, England under the terms of the Arbitration Act of 1996 pursuant to Condition "V" in the policy. The law to be applied in any such litigation is New York law, which is favorable to the policyholder on the issue of sue and labor expenses. See, e.g., International Commodities Export Co. v. American Home Assurance Co., 701 F. Supp. 448, 452 (D.N.Y. 1988) (under sue and labor clause, insureds are encouraged to take measures to preserve the subject matter of the policy while the insurer must reimburse the insured for the expenses it incurs because the insured has acted to benefit the insurer by averting or mitigating an otherwise recoverable loss); Protection Mut. Ins. Co. v. Silgan Plastics Corp., 2000 U.S. Dist. LEXIS 11700, at *31-33 (D.N.Y. Aug. 16, 2000) (New York law requires a harmed party to mitigate its damages and under a sue and labor clause an insured must act reasonably to protect its insured property).

Finally, the OIL policy also contains a specific provision regarding how the definition of occurrence applies to losses from a hurricane. According to the definition, Condition "C," each hurricane is considered "one accident, event or cause . . . ." As a result, one limit applies but also only one deductible applies.

Overall, the OIL package of policies likely will be important to most energy company's policies. Policyholders would be advised to review their policies as soon as possible, assess losses and tender notice where necessary.

This article may be reprinted with permission from the author, Les Brown, Howrey LLP. All rights reserved. Further duplication without permission is prohibited.