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How oil and gas companies can strengthen their insurance strategies for wildfires and other natural disasters

How oil and gas companies can strengthen their insurance strategies for wildfires and other natural disasters

Synopsis
3 Minute Read

Natural disasters can have consequences for Canada’s oil and gas sector beyond physical damage to infrastructure. Insurance coverage that protects energy companies from wildfire and other natural disasters that doesn’t directly impact the site, but halts operations is vital – and having appropriate limits and deductibles can make all the difference.

Partner, National Leader - Insurance Advisory

Opportunities and risks for reactive versus proactive approaches to insurance coverage in the event of a wildfire or other natural disaster

As natural disasters, particularly wildfires, increase in frequency and intensity, energy companies across Canada are facing mounting risks that threaten both their physical infrastructure and their operational continuity.

While energy companies will likely have coverage if a natural disaster damages their infrastructure, many don’t have enough coverage or don’t know what their policy covers if the catastrophe comes close enough to halt operations without directly touching their sites.

During the Fort McMurray wildfires of 2016, it’s estimated that around one billion barrels of oil per day were taken offline from the global markets, representing around 18 percent of oilsands production at the time. In this case, none of the sites were damaged by the wildfires but access into and out of the facility, and widespread evacuations in the area, prevented workers and power from reaching many of the operations in the region.

In order to best protect oil and gas operations, appropriate insurance coverage and a proactive approach to natural disaster response can be the difference between financial safety and disaster.

Types of coverage

When looking at natural disaster coverage, there are typically three areas to consider:

Civil authority

This kind of insurance coverage kicks in when a government body restricts access to property, even if it’s not damaged, due to nearby natural disasters. For oil and gas companies, this could mean production at a facility stops because emergency responders or regulatory bodies prohibit entry to the site.  

Ingress/Egress

Ingress/Egress coverage applies when physical access to or from a site is cut off. For example, if the road to the site is cut off or destroyed by wildfire, landslide, flooding, etc. and crews cannot reach the facility, insurance could help cover lost income or added expenses during the disruption.

Business interruption

Business interruption coverage is a bit more all-encompassing and covers lost income when operations are disrupted due to property damage. This may involve the need to halt drilling due to wildfire activity or flooding on site. Coverage usually continues until the property is restored and operations are back to normal and is typically subject to a timeline or dollar amount limit.

What is the best approach to natural disaster claims?

When it comes to natural disasters, oil and gas companies may engage in a reactive or proactive insurance process.

Reactive – The claims process

Claims are made after an event has occurred. Forensic specialists will be brought in to assess the company’s coverage to calculate the claim, with the fees for that service being covered by the insurer.

Recovery from insurance can be an extremely complicated and lengthy process, one that may be ongoing if shutdowns and start-ups occur in tandem.

Proactive – The planning process

A proactive approach sees companies plan ahead for a possible wildfire or other natural disaster. More and more, these scenarios are not an if but a when.

Ahead of the annual insurance renewal, a proactive approach gives oil and gas companies a chance to review their policies to ensure they have the appropriate coverage and limits. Insurance advisors come in to help determine the coverage and limits for all assets to ensure leadership is not surprised when the need to make a claim.

Limits and deductibles, why do they matter?

Every policy will have two things: a limit and a deductible.

Policy limits look at how much coverage a company will get in the event of a natural disaster. A limit can be in the form of a dollar amount or a number of days. For example, an oil and gas company may have either $5 million of coverage or their insurer may set the payout limit at 30 days.

Similarly, deductibles are based on a dollar amount or a period of time. A company may be on the line for the first $1 million of losses or they might need to cover the first week of a shutdown before a policy kicks in.

Both of these factors are important to assess on a regular basis. Often, wildfire and natural disaster losses are significantly more impactful than expected so it’s key to know what coverage exists and if changes need to be made.

Ultimately, awareness is key. Knowing the different types of coverage that exist for oil and gas companies in the event of a natural disaster, and ensuring the right amount of coverage is in place, gives businesses the chance to mitigate potential future losses.

Proper coverage, and appropriate wording of that coverage, is vital. Working closely with an MNP advisor, oil and gas companies can rest easy knowing they have expert assistance throughout the entire process.

To learn how you could benefit from planning ahead, reach out to MNP’s Insurance Advisory team or contact Craig Burkart at [email protected] or Sheetal Esmail at [email protected].

Craig Burkart , CPA, CA, IFA, CFF, CIP

Partner, National Leader - Insurance Advisory

403-536-5533

1-877-500-0792

[email protected]

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