Lessons Learned After a Large Pipeline Failure in Canada: Viewpoint

Twelve years ago an oil field gathering system in Northern British Columbia suffered a major pipeline failure leading to significant losses. The oil field owner was ISH Energy Ltd. that had contracted with an oil field service company, Weber Contract Services Ltd., responsible for overall operation of the oil field inclusive of pipeline monitoring, maintenance and corrosion protection. The failure led to a joint action between the owner, ISH Energy Ltd. and its pollution liability insurer under a negotiated subrogation agreement against the contract operator.

The complexities surrounding the case presented numerous loss adjusting and legal issues. A joint subrogation action was pursued by ISH Energy and its pollution liability insurer to address issues associated with the potential for recovery. The court decision that was issued in March 2019 by the Court of Queen’s Bench of Alberta awarded ISH $24,372.000 (CAD), which represented 100% recovery of loss of damages for ISH Energy.

The prolonged duration of the case demonstrates the intricacies between the insured and its specialty insurer in a protracted recovery process. In such complex cases, the practical consequences suggest that while collaboration is policy-mandated, engagement early in the process through a cooperative approach by the parties working on behalf of the insured can impact the cost and outcome of incident recovery.

The unique features of the incident offer some lessons to be learned that could assist those in claims management involving Sudden and Accidental Pollution Liability coverage.

In 2007, five leaks were discovered in several segments of the oil field’s pipeline gathering system. These buried pipelines move oil under pressure from oil wells, which is transported to a central processing facility where it is treated before entering into a larger sales pipeline for delivery to upstream facilities. The pipeline leaks triggered:

• Extensive environmental damage to soil from escaping emulsion;
• Excessive costs associated with pipeline repairs and to satisfy regulatory requirements for continuation of operations; and
• Revenue losses from the oil field as wells had to be shut down while repairs and site cleanup were completed, which extended for more than 12 months.

One of the early issues related to the cause of loss posed the question of whether there were 1 or 5 separate occurrences. Of note is that Weber Contract Services alleged that ISH Energy presented allegations of simultaneous leaks only when submitting Proof of Loss in its insurance claim to satisfy a policy requirement of a Sudden and Accidental Pollution event.

How was it possible to have five leaks discovered in close proximity and at the same time over a large oil field? On-site investigation, interviews with ISH and Weber employees, in consultation with pipeline experts, revealed that the failures were caused by contract operator employees conducting operations in the oil field, which instigated a pressure incursion event in the gathering system. Evidence determined that a valve was closed at the central processing facility. The pump jacks at each of the wells were pumping against a closed system, which increased pressure in the gathering lines, thereby causing segments of the pipeline already weakened by pre-existing corrosion to fail simultaneously. Thus, the pipeline failure was deemed to be a one occurrence event in relation to the pollution liability coverage, which was affirmed by the court. The judge concluded that the failure was caused by “an over pressure occurrence on the pipeline” leading to the five leaks at various points throughout the system.

The incident offers notable insight into the principle of spoliation. While ISH had taken precautionary steps to preserve certain failed segments of the pipeline, a third party consultant erroneously disposed of the evidence. The court determined that it was an “inadvertent mistake.”

Given the unique features and corollary consequences of the environmental incident, various lessons can be learned for oil and gas insurance underwriters and claims management teams.

1. ContractReview: Prompt review of contracts for oil field contract operators to understand the scope and any potential subrogation opportunities.
2. Business Interruption Cover: While the revenue loss to ISH was significant, the contractual terms did not provide for recovery of consequential losses against the contractor; hence business interruption losses were not pursued or awarded at trial.
3. Involvement of Sector Experts: Early involvement of professional sector adjusters to interview parties, obtain photographic evidence, etc.
4. Location Oversight: On-site monitoring of the repair operations and clean-up process to validate incurred costs and the required allocation for reimbursement of damages.
5. Evidence Collection: Proper measures for gathering and maintaining any and all evidence related to the incident while the matter is still an active investigation.
6. After-the-Event Documentation: Cost tracking protocols and procedures for the orderly capture of supporting documents, such as invoices, reports, estimates, etc., to validate insurance recovery and support for any potential subrogation action.

One of the interesting findings in this case was the issue of causation as it related to the corrosion of the pipeline and that Weber was, in part, responsible. Contract operators working at oil fields are accountable for various tasks. Industry experts should be looking closely at the contracts to confirm the scope of work. If the contract includes maintaining the corrosion control and monitoring program and there had been breakdowns in adhering to the required responsibilities, those contract operators can be held legally liable for subsequent corrosion.

A take-away, overriding lesson learned is that evidence materials and communications between loss adjusters and underwriters on behalf of the insured are producible in litigation and should be considered in assessing the risk of commencing subrogation proceedings.