OFFSHORE ENERGY INSURANCE

COVERAGE: PHYSICAL DAMAGE AND

BUSINESS INTERRUPTION/CONTINGENT
BUSINESS INTERRUPTION

Claude L. Stuart, III

Phelps Dunbar LLP
700 Louisiana Street, Suite 2600
Houston, Texas 77002
T: 713.626.1386
F: 713.626.1388
E: stuartc@phelps.com

17th Annual Admiralty and Maritime Law Conference

October 24, 2008

Table of Contents
I.

Physical Damage Coverage (PD) .................................................................................... 1

A.

HISTORICAL OVERVIEW ........................................................................................... 1

B.

LONDON STANDARD PLATFORM FORM (LSPF) .................................................... 2

1.

Basic Coverage Part ........................................................................................ 2

2.

Physical Loss or Damage ................................................................................ 4

3.

Causation......................................................................................................... 6

4.

Due Diligence ................................................................................................. 6

5.

All Risks ...................................................................................................... 8

6.

Period of Cover: Generally 12 Months ........................................................... 9

7.

Occurrence-Based Policy .............................................................................. 10

8.

Property Insured ............................................................................................ 11

9.

Limits of Liability ......................................................................................... 13

10.

Sue and Labour Expenses ............................................................................ 21

11.

Exclusions .................................................................................................... 23

12.

The Role of the Package Policy ................................................................... 31

13.

The Significance of Form J .......................................................................... 32

14.

The Assured ................................................................................................. 32

15.

Territorial Limits .......................................................................................... 33

16.

General Average and Salvage Charges ........................................................ 34

17.

Other Clauses Included in the Standard LSPF ............................................. 34

18.

Typical Coverages Included in Manuscript Policies ................................... 37

19. Other Clauses Customarily Included as Enhancements in Manuscript

Policies .................................................................................................................. 41

II.

C.

POST-SCRIPT: THE STRAINS OF THE HURRICANES ON LSPF .................................. 43

D.

SUMMARY .............................................................................................................. 45

Business Interruption (BI) and Contingent Business Interruption (CBI) Coverage .. 45

A.

HISTORICAL DEVELOPMENT OF BUSINESS INTERRUPTION COVERAGE (BI) ....... 45

B.
HISTORICAL DEVELOPMENT OF CONTINGENT BUSINESS INTERRUPTION COVERAGE
(CBI) .............................................................................................................................. 46
C.
APPLICATION OF BUSINESS INTERRUPTION AND CONTINGENT BUSINESS
INTERRUPTION COVERAGE TO THE OFFSHORE CONTEXT: LOPI AND CONTINGENT LOPI
POLICIES ............................................................................................................................ 46

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III.

D.

THE EVOLUTION AND ROLE OF LOPI/CONTINGENT LOPI IN TODAYS MARKET .. 46

E.

REVIEWING THE LOPIW POLICY ........................................................................... 47

1.

LOPIW Wording........................................................................................... 47

2.

The Insuring Clauses..................................................................................... 49

3.

The Recovery Period..................................................................................... 54

4.

The Limit of Liability ................................................................................... 59

5.

The Measure of Recovery ............................................................................. 61

6.

The Definitions ............................................................................................. 63

7.

The Exclusions .............................................................................................. 64

8.

The Conditions .............................................................................................. 67

9.

Resumption of Operations ............................................................................ 68

10.

Ordinance Cover .......................................................................................... 68

F.

POST SCRIPT: THE STRAINS OF THE HURRICANES ON LOPIW .............................. 68

G.

SUMMARY .............................................................................................................. 69

Appendix
A.

London Standard Platform Form (LSPF) (original 1972 form from Sharp I)

B.

London Standard Platform Form (LSPF) (recent broker supplied form)

B.

Loss of Production Income Wording (LOPIW)

C.

Bibliography

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OFFSHORE ENERGY INSURANCE COVERAGE: PHYSICAL DAMAGE

AND BUSINESS INTERRUPTION/CONTINGENT BUSINESS
INTERRUPTION
I.

Physical Damage Coverage (PD)

A.

HISTORICAL OVERVIEW

The offshore energy business has by and large developed hand-in-hand with the evolution
and availability of appropriate insurance wording in the London Market. While well control
insurance had been written by certain London syndicates since the late 1940s, as pertains to our
topic, it was only by the late 1960s that the London Market also began to cover the risks of
direct physical loss or damage to platforms, rigs and equipment.1
The leading commentator on London offshore insurance observes there are three basic
operational physical damage wordings in the Market today:
[1]

The London Standard Platform Form

At an early stage in the emergence of a specialised marine

insurance market for offshore production units there was
recognition that a dedicated wording would be necessary. The
wording developed by the market purposely designed for such
facilities was introduced as the London Standard Platform Form
(LSPF) in 1972. This wording, with various amendments tailored
to the specific risk, still provides the universal template for the
insurance of these units. It remains the standard market format,
combining coverage for perils associated with oil and gas drilling
and production activities with those pertaining to a marine
environment. Much of this work had been undertaken previously
with the development of the London Standard Drilling Barge
Form. The Platform wording shares with the Drilling Barge Form
many of the concepts in terms of insuring agreements and
exclusions that were fashioned by the market in order to produce a
unique wording specifically designed to cover marine and drilling
risk combined.
[2]

Institute Time Clauses, Hulls Port Risk

The emergence of floating production units, and in particular, the

FPSO and FSO, neither of which has drilling capability, gave an
impetus to consider other market forms or wordings. Essentially
these ship-shaped objects could be considered as modified forms
of tankers (many were originally built as tankers and subsequently
1

David W. Sharp, Offshore Oil and Gas Insurance at p. 2 (1st Ed. 1994) (hereinafter referred to as Sharp I);
Kaiser, Mark J., World Offshore Energy Loss Statistics, Energy Policy 35, 3495-3525 (2007).

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converted), and therefore market wordings developed for marine

hull risk could be considered viable alternatives. In fact many
FPSOs and FSOs are now insured on a modified version of the
Institute Time Clauses Hulls Port Risks including Limited
Navigation(20.7.87), this being a subject that will be profiled in the
following chapter.
[3]

The Pipeline Form

It could also be said that the LSPF may not provide suitable
coverage for pipelines and other sub-sea properties, where
existence on the sea-bed, and in some cases in a buried position,
creates a different risk profile. Whilst many pipelines and sub-sea
properties are nevertheless insured under the London Standard
Platform Form, perhaps with one or two specific exclusions, a
wording has emerged specifically for pipelines, known simply as a
Pipeline Form. This will also be profiled in the following chapter.
David W. Sharp, Offshore Oil and Gas Insurance (2 Ed., to be published November 2008) at p. 1
of 28 pages of working draft of Chapter 11) (hereinafter Sharp II).2
For purposes of the present discussion, we will focus on the physical loss and damage
coverage afforded in the LSPF.
B.

LONDON STANDARD PLATFORM FORM (LSPF)

As noted, the London Standard Platform Form, known universally as LSPF, is

recognized in the industry as the fundamental physical damage coverage for fixed installations.
Introduced in 1972 it has standardized the coverage for fixed units and combined the perils
associated with oil and gas drilling activities with those pertinent to the marine environment.
In the offshore context, hurricanes often result in direct physical damage to the platform
and related equipment. Repair time generally depends on the extent of the damage, the location
of the facility and the availability of equipment, support services and contractors to perform the
needed work. The effect of and coverage for production shut-ins due to damage to not only the
insureds property but also to others offshore and onshore facilities, such as refineries,
terminals, pipelines, and processing stations, is discussed in II. Business Interruption infra.
The basic elements of the LSPF are as follows:
1.

Basic Coverage Part

Based on conversations in mid-October 2008, Mr. Sharp has advised that his second edition, currently in nearly
complete draft form, will be published next month in London. He has graciously permitted quotation (used
extensively for the benefit of the reader since it is not yet available) in this paper from his nearly completed
draft. It will certainly be a text well worth having in ones library.

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