Reed Smith Client Alert

Authors: Emily E. Garrison John D. Shugrue Kevin B. Dreher

The damage caused by the recent flooding in Colorado is catastrophic and has evermore changed the lives of many who live in and around the affected communities. As the waters recede, the impact of the destruction is being uncovered. Many roads, houses, and businesses have forever been washed away, and the recovery effort will take years to rebuild what has been lost.

Among the businesses hit the hardest were the oil and gas industry. There are about 20,000 oil and gas wells across Weld County, Colorado, and about 1,900 of them had to be closed off — "shut in" — as the floodwaters poured down from the mountains and spread out across the plains. When the floodwaters reached Colorado’s drilling center, they poured into wells, broke pipes and swept huge oil tanks off their foundations. The state has counted at least a dozen "notable" spills stemming from the catastrophic floods. According to officials, the heavy floodwaters caused more than 37,000 gallons of oil to spill into or near rivers, and the state’s oil and gas industry is racing to assess and fix the damage to wells, pipelines, and storage facilities that occurred during the storm.

While the resulting environmental impact caused by the recent Colorado flooding may pale in comparison to other catastrophic disasters, such as the Deepwater Horizon blowout or the Exxon Valdez oil spill, the physical damage and loss of operations sustained by many oil and gas companies that operate in the affected area will be significant. Fortunately, the affected companies likely have insurance coverage in place to assist with physical repairs to wells, pipelines, and storage facilities, as well as coverage to assist with any environmental cleanup, resultant third-party claims, and loss of business income and production.

Commercial insurance policies may provide coverage to affected policyholders in the oil and gas industry who sustained property damage and consequential loss of business income and production, to aid in recovery from the flooding and to mitigate business and production losses. Business income, or loss of production insurance (LOPI), may allow affected businesses to recover their lost earnings and pay for expenses that continue during the time they are affected by the flood. Such coverage extends to business and production losses caused by the flood itself, but also may extend to losses as a result of civil evacuation orders, well closures in anticipation of the flood, and losses to the customers and suppliers of the policyholder. These losses and associated extra expenses to restore operations may continue for months into the future.

Commercial insurance policies also may provide coverage to affected oil and gas policyholders for resultant third-party liability and environmental clean-up costs resulting from any oil spill, leak, or discharge caused by the flooding. Affected policyholders should be aware that unlike many conventional commercial insurance policies, coverage under these policies often is triggered at the time of the discharge – referred to as the incident or event – and not at the time a claim or suit is initiated. For this reason, policyholders need to act quickly to preserve coverage by timely notifying insurers.

Reed Smith has more than 80 insurance recovery lawyers with extensive experience assisting policyholders affected by catastrophic losses such as the Colorado flooding. If policyholders have experienced damage or loss as a result of the recent flooding in Colorado, Reed Smith’s insurance recovery lawyers can help evaluate applicable coverage for loss to property, loss of income and production, extra expense caused either directly by the flooding or because the property of their customers and suppliers has been damaged, or loss due to environmental damage or third-party liability. In the aftermath of a catastrophe such as the Colorado flooding, affected policyholders should immediately review their applicable insurance coverage, determine their notice obligations, and timely notify insurers to preserve coverage. Reed Smith represents many clients in the oil and gas industry (and other affected policyholders across other industries), and is familiar with the applicable insurance policies and notice obligations.


Client Alert 2013-257