What is underground resources and equipment coverage?

A 2012 Fifth Circuit opinion quotes the definition from an oil and gas GL policy. The "underground resources and equipment hazard" included property damage to:

• "Oil, gas, water or other mineral substances which have not been reduced to physical possession above the surface of the earth or above the surface of any body of water;"
• "Any well, hole, formation, strata or area in or through which exploration for or production of any substance is carried on;"
• "Any casing, pipe, bit, tool, pump or other drilling or well servicing machinery or equipment located beneath the surface of the earth in any such well or hole or beneath the surface of any body of water."

In plain terms, it is damage to what is in the ground and in the hole. For well servicing, workover, wireline, and other downhole work, that is where some of the biggest property damage claims live.

ISO has two endorsements built around this exposure: CG 22 57, "Exclusion: Underground Resources and Equipment," and CG 22 62, "Underground Resources and Equipment Coverage." The exclusion removes the hazard from the GL. The coverage endorsement puts it back.

The standard CG 00 01 04 13 form itself does not contain an exclusion by that name. It shows up by endorsement on policies written for oil and gas work. So the only way to know where you stand is to read the endorsement schedule on your own GL policy.

Even with the coverage endorsement, the rest of the policy still applies. Your own downhole tools are property you own, which exclusion j.(1) removes from GL. And damage to the particular part of property you are working on can run into exclusions j.(5) and j.(6), covered in our page on the care, custody, or control exclusion.

In the 2012 case, a contractor had been hired to help plan wells and oversee drilling. The well came in dry and was later found to have been drilled on the wrong lease. The operator and working interest owners sued. The contractor's GL policy carried the underground resources and equipment endorsement, and the contractor asked its insurer to defend.

The court affirmed that there was no duty to defend. It held that the underground resources coverage "is a specific type of 'property damage,'" and because the suits did not allege property damage in general, they did not allege damage to underground resources.

The lesson for you: this endorsement is not a promise to pay for any downhole problem. A claim that is really about money, like a dry hole, a delay, or a well in the wrong place, may not involve "property damage" at all. That kind of claim is closer to a professional liability exposure than a GL one.

Chapter 127 of the Texas Civil Practice and Remedies Code limits some oilfield indemnity, but Section 127.004 says the chapter does not apply to "property injury that results from reservoir or underground damage, including loss of oil, gas, other mineral substance, or water or the well bore itself." That means an indemnity for underground damage is generally governed by the contract, not capped by that statute. See our Texas oilfield anti-indemnity act page.

The IADC model U.S. daywork contract shows the traditional allocation:

• Does my GL carry an underground resources and equipment exclusion? If so, is the coverage endorsement attached?
• Does the coverage endorsement have its own limit, and is it lower than my per-occurrence limit?
• Does it extend to additional insureds the MSA requires?
• Does my umbrella follow it, or does the umbrella have its own underground exclusion? See umbrella vs excess liability.
• How are my own downhole tools covered? That is a property question for your equipment policy, not the GL.