Colorado Flooding Implicates Insurance Coverage for Energy Companies

by Reed Smith
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The damage caused by the recent flooding in Colorado is catastrophic and has evermore changed the lives of many who live in and around the affected communities. As the waters recede, the impact of the destruction is being uncovered. Many roads, houses, and businesses have forever been washed away, and the recovery effort will take years to rebuild what has been lost.

Among the businesses hit the hardest were the oil and gas industry. There are about 20,000 oil and gas wells across Weld County, Colorado, and about 1,900 of them had to be closed off — "shut in" — as the floodwaters poured down from the mountains and spread out across the plains. When the floodwaters reached Colorado’s drilling center, they poured into wells, broke pipes and swept huge oil tanks off their foundations. The state has counted at least a dozen "notable" spills stemming from the catastrophic floods. According to officials, the heavy floodwaters caused more than 37,000 gallons of oil to spill into or near rivers, and the state’s oil and gas industry is racing to assess and fix the damage to wells, pipelines, and storage facilities that occurred during the storm.

While the resulting environmental impact caused by the recent Colorado flooding may pale in comparison to other catastrophic disasters, such as the Deepwater Horizon blowout or the Exxon Valdez oil spill, the physical damage and loss of operations sustained by many oil and gas companies that operate in the affected area will be significant. Fortunately, the affected companies likely have insurance coverage in place to assist with physical repairs to wells, pipelines, and storage facilities, as well as coverage to assist with any environmental cleanup, resultant third-party claims, and loss of business income and production.

Commercial insurance policies may provide coverage to affected policyholders in the oil and gas industry who sustained property damage and consequential loss of business income and production, to aid in recovery from the flooding and to mitigate business and production losses. Business income, or loss of production insurance (LOPI), may allow affected businesses to recover their lost earnings and pay for expenses that continue during the time they are affected by the flood. Such coverage extends to business and production losses caused by the flood itself, but also may extend to losses as a result of civil evacuation orders, well closures in anticipation of the flood, and losses to the customers and suppliers of the policyholder. These losses and associated extra expenses to restore operations may continue for months into the future.

Commercial insurance policies also may provide coverage to affected oil and gas policyholders for resultant third-party liability and environmental clean-up costs resulting from any oil spill, leak, or discharge caused by the flooding. Affected policyholders should be aware that unlike many conventional commercial insurance policies, coverage under these policies often is triggered at the time of the discharge – referred to as the incident or event – and not at the time a claim or suit is initiated. For this reason, policyholders need to act quickly to preserve coverage by timely notifying insurers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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