One contract, many doubts: Interpretation of insurance contracts in offshore energy
According to the International Energy Agency, over a fourth of oil and gas supplies today come from the seas. Over the past couple of decades, extraction of natural gas from offshore deposits has risen by over 50%. There is also growing emphasis on offshore wind energy. Ventures of this type are technically complex, often innovative, and consequently costly. That is why fuel companies insure platforms, borings, and drilling equipment. What is important to pay attention to in such insurance policies? How to prepare for a potential dispute?
Upstream offshore energy insurance covers mining infrastructure and is mainly intended to limit the already high risk of conducting offshore extraction. This insurance must cover elements of extraction infrastructure found both on the ocean floor and on the surface. It must also reflect the impact of the extreme conditions in which this infrastructure is operated, as well as continual technological changes and the fact that a single deposit is typically exploited by multiple entities, with one of them serving as the operator, i.e. the leader within a joint venture.
Legal challenges
Choice of the law governing the insurance contract, the contractual clauses, and the language of the contract may also present a challenge, particularly when the offshore mining platform is a joint venture of several international fuel companies.
May an insurance contract concluded by a Polish fuel company with an international insurance company, concerning a foreign investment also involving other companies, be concluded under Polish law but drafted in English? In our practice we encountered an insurance contract that was concluded under Polish law but contained clauses typical of English law, including clauses excluding the insurer’s liability. The contract provided for insurance protection of a platform for extracting gas from a deposit in the Norwegian Sea. Shares in the platform were held by four entities operating a submarine gas pipeline.
Insurance contracts in the offshore energy sector are usually drafted on the basis of contract forms used by international insurance companies for an entire group of companies. For this reason, we often encounter contracts containing clauses typical for the law of the insurer’s jurisdiction, not the insured’s. If a dispute arises, even at the stage of paying losses under the policy, doubts and difficulties of interpretation also arise. Even a clause that seems simple for one legal system may prove hard to interpret under another country’s laws. Whether an insured event has occurred, and if so, whether the insurer’s liability is excluded or limited, may turn on the proper interpretation of the policy.
How to interpret clauses in an insurance contract?
In offshore energy, many entities are involved in insurance risk. It is also highly likely that there will be multiple insurance policies with overlapping coverage. In that situation, choice of the controlling law and language of the insurance contract assumes particular importance. A point of departure is to determine where the insurance protection begins and ends.
Under the general rules, the parties to an insurance contract concluded under Polish law may freely shape its provisions, including particular clauses, insurable events, and the amount of insurance coverage and premiums (Civil Code Art. 805 §1). Moreover, in interpreting a contract, primary consideration should be given to the mutual intent of the parties. If the mutual intent of the parties is discernible or is demonstrated during the course of a judicial or arbitration proceeding, then reliance should be placed on the mutual intent of the parties rather than the literal wording of a specific clause (Civil Code Art. 65 §2). If there was no understanding as to the mutual intent of the parties or it cannot be proved, then the contract should be interpreted in light of the circumstances in which it was concluded as well as established commercial custom (Civil Code Art. 65 §1).
In offshore energy insurance, when considering payment of losses, the manner in which the insured event occurred is examined. To this end a “root-cause analysis” is conducted, which often shows that the loss was due to multiple equal causes. The entities involved in insurance disputes often have trouble identifying the “immediate cause” of the loss, particularly when the root-cause analysis finds a number of possible causes for a single loss. Sometimes there are multiple causes which together led to occurrence of the loss.
Meanwhile, whether claims are paid may depend on a determination of whether a loss involving damage to an element of the mining infrastructure arose as a result of a design defect, or constituted a hidden defect. Moreover, while terms used in insurance clauses, such as design defect or hidden defect, may be used colloquially and understood similarly in various jurisdictions, their legal interpretation may differ greatly, presenting a further difficulty.
Insurance risk in offshore energy consists of all-risks coverage. In that situation, if equipment is operated in accordance with its design specifications and nonetheless suffers a breakdown or damage, the loss will most likely be covered by the insurer (subject to any arguments concerning due diligence). But if it turns out that the equipment was defectively designed, and if not for the design defects the equipment would not have failed, as a rule this will exclude the insurer’s liability if the policy contains a clause on design defects (see Navigators Insurance Co. v Atlasnavios-Navegação LDA, UK Supreme Court judgment of 22 May 2018, UKSC 2016/0192).
Summary
It is in the interest of both parties to an insurance contract to word the contract so that it precisely reflects the parties’ agreement and intent on the scope of insurance protection, and also reflects the legal regulations governing the contract. The contract should clearly define what constitutes an insured event, in order to protect the insured but also to exclude the insurer’s liability for events not covered by the risk. Thus the legal interests of all parties to the insurance contract are protected, not only at the stage of payment of claims but also during litigation arising out of the contract.
Monika Hartung, attorney-at-law, Dr Marta Kozłowska, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners
