Negotiating Your Control of Well Insurance Policy: Strategies and Pitfalls – Part 1

As an oil and gas producer, managing your Control of Well (COW) insurance policy is a task that calls for careful navigation. With the complexities and unique risks involved in your operations, understanding the specifics of your COW policy and effectively negotiating its terms are critical to ensuring optimal coverage.

Let’s explore some practical strategies and common pitfalls when handling your COW insurance.

And note that at Novation, we stand ready to help you with any or all of these tasks!

Understanding the Policy

Your COW insurance policy is your safety net against a wide range of well control incidents. While most policies cover blowouts, well kicks, and associated containment expenses, the coverage specifics can greatly vary. The first step in effectively managing your policy is to understand its terms thoroughly.

Understand the definitions: COW policies come with industry-specific terminology that may not be immediately clear. Terms like “casing failure”, “cement bond failure” or “well integrity” can carry significant implications for your coverage. It’s crucial to understand what each term means (and doesn’t mean!) and how it impacts your policy.

Know the extent of coverage: Your COW insurance policy is designed to protect you against a host of well control incidents. However, not all policies are made equal. As an industry standard, blowouts, well kicks, and associated containment expenses are covered, but the extent to which other, perhaps less dramatic but still costly incidents are covered, can vary.

For example, not all policies provide robust coverage for “underground blowouts,” where the uncontrolled flow is within a formation or between formations, instead of flowing to the surface. These underground events can still lead to significant losses through damage to the reservoir and lost production. Yet some insurers may limit their coverage for these incidents or exclude them altogether.

Similarly, you should scrutinize policy language to determine the extent of coverage provided for “seepage and pollution” risks, particularly the definitions and time limits. Cleanup costs for an oil spill can quickly skyrocket, and you need to ensure that your policy provides adequate protection.

Grasp the policy conditions: Understanding the specific conditions and requirements of your COW policy is vital. It’s not enough to know the risks covered; you also need to understand under what circumstances they are covered and what steps you need to take to ensure a successful claim. An essential condition in many COW policies is the requirement to maintain proper “well control”. This means you must adhere to industry-standard procedures and use recognized safety equipment, like Blowout Preventers (BOPs). Failure to comply with such stipulations can result in a denied claim, even if the incident would typically be covered.

Similarly, policies require prompt notification of an incident (true of all insurance policies). A delay in reporting a blowout or a well control incident could violate policy conditions, jeopardizing your claim. Some policies may also contain a '“due diligence” clause requiring you to take all reasonable steps to prevent or minimize a loss.

Next, we will get into negotiation strategy on your COW policy.