When something bad happens in the energy sector, it tends to happen big: There are no small losses.

Accidents in the energy industry make the news. A mistake or a faulty piece of equipment can kill people, damage incredibly expensive equipment and disrupt thousands of dependent businesses and the environment.

“Any mistake can have catastrophic consequences,” says Stephen Coward, president of Energy and Engineering for Navigators Insurance Co. “This is a high-severity business.”

When claims happen, “they are large and complex,” adds Steve Kessler, Energy claims executive for Liberty International Underwriters. “Adjusting can be challenging.”

Because of the billions of dollars at risk when covering massive energy facilities, it is common to build multilayered insurance towers that protect a single insurer from being the only one on the hook for a mega claim. Insureds also tend to have large retentions.

An incident can trigger numerous coverages for various parties (interdependency-type complexities are often at play), making loss prevention, risk mitigation and knowledgeable underwriters all important elements of the equation.

“The wording of contracts can be very complex,” says Stuart Anderson, CEO of Iron-Starr, a managing general underwriting agency representing Ironshore Insurance and the CV Starr Group of companies. “Familiarity with the clients and their exposures will help greatly when it comes time to find solutions and facilitate negotiations within the insurance tower when something happens.”

AGING INFRASTRUCTURE

Aging facilities and equipment—straining to meet intense production needs—is one big claims worry for underwriters today.

A new oil refinery hasn't been built in the U.S. since the 1970s, notes Robert Rokicki, senior vice president of Oil, Gas, Petrochemical and Chemical Property for Liberty International Underwriters.

“The infrastructure is aging,” adds Rick Gibbons, president of Zurich Global Energy. “Investments are being made, but until the equipment is replaced, there is an increase in risk.”

“With age, come breakdowns,” says John Carella, Energy practice leader at AIG.

When something happens to older facilities and equipment, it is “rarely the case that a client will repair as-was,” says Kessler. “It's an opportunity to update and upgrade.”

But in some cases, the policy may only pay for as-was. Kessler says a “meeting of the minds” is key—with insureds, consultants and contractors—as early as possible after a claim.

LOSS-CONTROL FOCUS

As with any risk class, taking the right risk-engineering and loss-prevention steps in advance is the best way to control claims costs.

“Loss control is a very, very important piece,” says Carella. “We advise our clients to take it very seriously—or we have to think about whether we want to be on their risk.”

“Clients know we will get involved with risk engineering prior to writing the account,” says Pete Connors, head of Offshore Energy for Allianz. “We get a grade on the risk, and then we communicate our concerns.”

Thankfully, Energy claims are rare. Coward says Navigators get about one claim every six months. Rob Bothwell of Beecher Carlson says he can't remember the last claim.

“Like everyone, we look to get the best clients and engineer the heck out of it; there is an enormous amount of pre-underwriting to get our clients the best options in the market,” says Bothwell.

Special Reports /

Energy Claims: Surviving a High-Severity Business

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