EED (8/86) – Basis for policy wordings

The complexity and exposure of the risk led to the development of the Energy Exploration and Development wording in 1986 by the London market. Commonly referred to as EED (8/86), this wording is still the basis for the majority of covers on offer in the market today. EED (8/86) successfully translates the intent of coverage into contractual clarity. For instance, the wording considers the issue of excluding coverage for what are called "kicks". These are uncontrolled flows of oil or gas into the well bore which are, however, contained by way of appropriate remedial action. Kicks may cause additional expense for the oil and gas company but they are deemed to be non-fortuitous events by the insurance industry and therefore not insurable.

The following brief analysis of the wording provides a good overview of the covers currently on offer. There are three main sections of coverage: control costs, costs for re-drilling, and costs for seepage and pollution liability.

The key element of the wording is that cover is triggered by a "well out of control":

"For the purposes of this insurance, a well(s) shall be deemed to be out of control only when there is an unintended flow from the well(s) of drilling fluid, oil, gas or water above the surface of the ground or water bottom,

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  which flow cannot promptly be • stopped by use of the equipment on site and/or the blow-out preventer, storm chokes or other equipment required by the Due Diligence and Warranties clauses herein; or • stopped by increasing the weight by volume of drilling fluid or by the use of other conditioning materials in the well(s), or • safely diverted into production, or
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  which flow is declared to be out of control by the appropriate regulatory authority.

Nevertheless, and for the purposes of this insurance, a well shall not be deemed out of control solely because of the existence or occurrence of a flow of oil, gas or water into the well bore which can, within a reasonable period of time, be circulated out or bled off through the surface controls."

This definition is the critical element of the wording. It defines the point at which coverage is activated. The coverage then ceases as soon as the well has been brought under control. This, too, is subject to a precise definition in the wording.

In the event that the well is deemed "out of control", any applicable well re-drill or restoration costs are also recoverable. Such coverage would not include betterment of the well but is limited to costs incurred as follows:

"Underwriters shall be liable for costs and/or expenses incurred

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  with respect to drilling wells, to drill below the depth reached when the well became out of control as defined in Clause 2 of Section A of this policy and
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  with respect to producing or shut-in wells, to drill below the geologic zone or zones from which said well(s) was (were) producing or capable or producing."

Pollution cover can also be included, indemnifying the oil and gas company for clean-up and remedial costs for which it is legally liable.

In addition to these three core lines of coverage, there are some important optional coverages. Firstly, coverage is available for the risk of an underground blowout; this provides for the indemnification of costs incurred in controlling the unintended flow of fluids from one subsurface zone to another via the well bore. Although this coverage extension may seem to have limited impact, it should be noted that this cover is a major risk potential for the insurer. Another optional coverage is for physical damage to equipment under the care, custody, and control of the oil and gas company. Coverage is only provided for loss or damage caused by a "well out of control".

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