For many companies in the Oil Patch—producers or service companies—insurance is one of the top expenses, especially when the reckoning includes health policies—and premiums for that coverage are rising quickly. But the protection from loss and liability provided by insurance is important, and for many service companies it’s required by most Master Service Agreements (MSAs).
So as the oil business nosedived in spring 2020 and only wobbled back to life in the last few months, insurance costs have become more challenging to meet. Many producers have adjusted coverages, especially as they shed employees. Providers, especially on the local level, have scrambled equally to find the best possible coverage at something approaching affordable prices.
John Wilkins, president of McAnally Wilkins Insurance in Midland, saw many clients rework their insurance coverages to reduce premiums. They parked some vehicles to get a “stacked auto rate”; some reduced payroll basis, which lowers general liability and workers compensation rates.
“We saw a number of people say, ‘I told you I was going to have $10 million in payroll, but as a result of the downturn, can you revise that to $5 million or $2 million.’” McAnally Wilkins then went to the insurance carriers to rework those policies and negotiate some premium returns. “That allowed them [the insureds] to use that cash to get through some tough times.”
Return of premiums from carriers also means a return of commissions from companies like McAnally Wilkins. “I would say that ’20 was our most difficult year as an insurance agency, due to the fact that our compensation, for the most part, is based upon premiums.” He estimated that his company returned somewhere between 25 and 40 percent of their total premiums during the COVID months. The toughest times were Q4 of 2019 and the first the quarters of 2020.
Because McAnally Wilkins focuses exclusively on oil and gas, there was no other area to fall back on during that time. “We are directly tied to what goes on.”
He also noted that auto and umbrella policies had the biggest premium jumps in recent years. These are driven, as one might imagine, by the courts. “We’ve had a series of really high verdicts—we call them ‘nuclear verdicts’—in regard to truck accidents,” he said. With such a large count of tractor-trailers constantly plying the highways and county backroads, Wilkins noted, a certain number of accidents are inevitable.
“People in the Permian Basin who are in the energy industry work under Master Service Agreements which require certain amounts of insurance,” he said. MSAs often require $10-$15 million in coverage, making them a particular target for plaintiff attorneys seeking large settlements when an accident occurs.
In some areas the pandemic saw a reduction in vehicle insurance rates due to reduced driving, which led to fewer accidents. In the Permian, where the oil business was considered an essential service, Wilkins said there was no such reduction.
He added that a conversation with a DPS officer led him to understand that that, while there was less traffic during the shutdown, those still on the road took advantage of the relatively open roads to boost their speed, which was a significant factor in accidents.
In late 2021, as prices climb higher, the recovery is slow in coming to a lot of service companies. Wilkins said many producers’ ESG concerns were stifling the expansion and rehiring that would boost insurance requirements.
Howard Flowers
Even before the official Downturn, things in the oil and gas insurance sector were tightening up, said Howard Flowers, Partner at InSource Insurance Group in Midland. “We already were in a pretty massive downturn before the pandemic hit,: Flowers said. “That just amplified it that much more.”
Times were difficult for clients and for InSource. By late 2021 Flowers could say, “We’re definitely on the other side of that now, for the most part.”
The wave of bankruptcies swept away some clients while others found every possible cost-cutting measure. However, “From an insurance standpoint, it’s difficult to do that,” he said. Many clients tried to cut limits, for example, from $10 million to $5 million. But, as Wilkins also noted, the higher amounts are often required by the service company’s clients. With lower coverage, the service company would not likely be hired.
Partner Michael McKeller added that the MSAs include indemnities along with insurance requirements. “With that, if you sign it, you’re obligated to keep the limit structure on the insurance that the MSA spells out.”
Operators themselves have been affected by rising insurance premiums, an issue that continues after the worst of the pandemic, said Flowers.
“Control-of-well policies have gone up in price. Umbrella and excess limits have gone up tremendously in price, and limited capacity.” Many of the major oil and gas insurers no longer sell coverages up to $20 million, as in years past. Now the top is often $5 million.
But if the producer needs the addition coverage, they now must go to the marketplace for the rest. “You’re also finding that you’re going to pay more for the second five than you did for the first five,” Flowers continued. Further costs are added because the additional coverage comes from the surplus lines market, a secondary marketplace. The main carriers are in what’s known as the admitted market.
Carriers in admitted markets must adhere to state insurance guidelines about pricing and allowed risk levels while those in surplus lines are outside those requirements, allowing the latter to take on additional risk—usually at a higher price.
Admitted carriers also benefit from access to the state guarantee fund which, as Flowers explained, pays claims if the insurer becomes insolvent and is unable to pay. It’s sort of “insurance on the insurance company.” But non-admitted insurers do not have access to the fund, which could leave an insured without backup if the insurer can’t pay. Flowers and McKeller both stressed that this is highly unlikely, and surplus-lines firms they work with are all A-rated.
New companies face additional insurance challenges with the two biggest providers, McKeller noted. They have put “moratoriums on newly established operators, or new-in-business operations.” This can apply even if the principals of the new company are established in the industry and have bought policies from the two insurers under the principals’ previous companies.
While there are exceptions to this exclusion, they are rare and they depend upon certain circumstances.
“With new startups there’s always more risk, and they [the insurers] have all the data and statistics to back that up, that it’s more likely for a startup venture to have more losses as opposed to an established company,” Flowers explained. “So if you’re starting up, it can be difficult to find a quality insurance program.”
If new companies do find insurance, it will be at a significantly higher price, which puts extra pressure on a startup if it’s not extremely well funded. “Insurance and taxes make it very difficult for businesses to succeed,” Flowers said.
Among the main driving factors is the litigiousness and regulatory nature of today’s society, he said. In addition to traditional insurance against damage and accidents, operators today “are under increasing scrutiny for pollution type incidents, for underground resources and equipment… they are under the watchful eye of a lot of regulators.” He listed the Texas Commission on Environmental Quality (TCEQ), the Railroad Commission and others.
“There’s a lot more opportunity to go after oil companies than there ever have been.” Most environmental settlements involve extraordinary dollars, so insurers must raise rates to cover the losses.
Helping train companies in safety and other procedures does help limit losses to some extent. “We have insurance companies that require you to have cameras in your trucks if you want a quote. They’re going to set rules, especially when it comes to vehicles.” Insurers do not tolerate repeat traffic tickets, at-fault accidents, or DWIs.
McKeller added that this type of involvement by insurance companies has increased greatly over the last five years. “Prior to underwriting a policy, they will come out, sit down with the owners or the powers that be, discuss what their safety culture is like, what they’re doing, how they’re doing it, and get very comfortable with it before they’ll produce a quote or underwrite that policy.”
In spite of the challenges, Flowers, McKeller, and Wilkins all said everyone is working hard to balance premiums and coverages with the need to stay afloat—both for the insurers and the insured. This in the midst of very challenging times.
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Paul Wiseman is a freelance writer in the oil and gas sector. His email is fittoprint414@gmail.com.