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Energy & the Law

Lessons in Administering a Master Service Agreement

Posted in Litigation, operations

fireIs condensate a contaminant? When it spills and burns a worker, yes. In Hiland Partners v. National Union Fire Insurance Company the operator, an additional insured under a contractor’s commercial general liability insurance policy, was deprived of coverage – and a duty of the insurer to defend. We’ll get to the lessons.  But first, …

The accident

Hiland owns a gas processing facility in North Dakota and had an MSA with Missouri Basin under which MB would provide services. MB procured the insurance policy and included Hiland as an additional insured. As always, the insurer had a duty to defend. There was an exclusion in the policy for bodily injury arising out of the discharge, release, etc. of pollutants, which were defined as any “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acid, alkali, chemicals and waste”.

Am MB employee was removing water from a condensate tank when the tank overflowed, causing a fire that seriously injured the worker. Because of the exclusion, there was no coverage for Hiland under the policy. And now, …

The lessons

Should Hiland have adjusted language in its MSA to protect itself? I don’t see how it could have. They made themselves an additional insured. The problem was with the policy exclusion. Everybody (whether contractor or operator) must be diligent in confirming that liability insurance coverage tracks – and covers – the liabilities and obligations in the MSA. But here’s the problem: It was MB’s policy. How may additional insureds study the other guy’s policy? I venture to say not many.

Then there was an administration problem: The insuror’s duty to defend was nullified by Hiland’s failure to give the court evidence that it reported the pollution claim to the insurer within 21 days of discovering it – the deadline required in the policy. Timely reporting would, perhaps, have established an exception to the exclusion. Was notice not given, or did Hiland just didn’t show it to the court? The opinion doesn’t say.

Why the exclusion applied

The definition of pollutant is not subject to strict technical usage so the court – as it should – went to the dictionary. A pollutant is something that irritates, or causes irritation, … or contaminates. The injured worker’s suit described condensate as flammable, volatile and explosive.  Cases discuss petroleum products being toxic by nature. The fact that condensate caused harm other than by contamination and is a product that causes harm in a manner other than by irritating or contaminating, didn’t matter to the court.

The court rejected Hiland’s argument that the condensate caused harm in a manner other than by contamination and thus the exclusion did not apply, and rejected the argument that condensate is not a “pollutant” under the exclusion because Hiland is in the business of selling condensate, which makes it a product.

For today’s musical interlude, more girl singers you need to know about: A black, guitar-playing, gospel singer who was around so long she’s no longer around, and a more recent underappreciated country singer.