Onshore energy wordings are diverse and standard market wordings are adopted far more infrequently than in other sectors, largely due to the wide variety of business types which fall under the banner of "onshore energy". Bespoke wordings are common and, as such, can be tailored to the needs of any particular business.
Tailoring and adapting wordings to suit the needs of one specific assured is fraught with difficulties and dangers, particularly where the wording was drafted for use in one jurisdiction and is being amended for use in a different jurisdiction. Even within the Middle Eastern jurisdictions, the approach taken by the various Courts and Arbitral Tribunals to policy interpretation can vary greatly, for example between those which are heavily influenced by Sharia principles and those which are not. Caution must be exercised by those arranging policies to ensure that they have accounted for these jurisdictional differences in their policy wordings from inception.
Even when a policy has been carefully tailored, the assured’s business needs are susceptible to change. The onshore energy sector in the Middle East is a rapidly growing and changing industry and, during the currency of an annual policy and at each renewal, the business of the assured in question may change dramatically. Frequently, the basis of indemnity provided for in a business interruption policy was fit for purpose at inception of the first year of account but, due to change in accountancy practice and/or contractual arrangements, the original measure prescribed for calculating a business interruption loss can no longer be applied satisfactorily when a loss arises. This leads to uncertainty on the part of both the assured and the insurers.
Looking at a practical example of a petrochemical company, the company may choose to insure all of its processing plants under a single policy covering physical damage ("PD") and business interruption ("BI") losses sustained at all of the insured premises. Assuming that the various arms of the petrochemical company’s plants are dependent on each other (e.g. for feedstock and output), a single insurance policy would be expected to respond to BI losses sustained by all of the plants even if a PD loss is sustained at only one of the plants. However, if each of the plants becomes, for example due to a change in corporate structure, owned by a separate legal entity (perhaps with a shared parent company) and each of the plants procures its own insurance (indeed this is required in some Middle Eastern jurisdictions for fiscal and regulatory reasons), a specific policy wording would need to be drafted to ensure that the whole group’s losses are recoverable if there is PD loss at just one of the plants. Otherwise, in the event of a loss, the plants that do not suffer a PD loss could be denied coverage for a consequential BI claim (or subject to a very modest sub-limit for a Contingent Business Interruption claim). These issues are surmountable but it must first be appreciated that there is a need to amend the wording to reflect a change in the business.
In an industry in which there is rapid change, those purchasing, selling or arranging insurance should therefore be cautious of adopting a "one size fits all" approach.
This article has been prepared ahead of the Onshore Energy Conference in Dubai on 18 May