UK: Pipelines – Insurance & Legal Aspects In Cases Of Damage

Last Updated: 7 June 2011
Article by Ian Woods

INTRODUCTION

The United Kingdom alone relies of thousands of kilometres of oil and gas pipelines that stretch across the ocean floor of the North Sea alone. Each pipeline project is unique and possesses its own constraints, difficulties and risks, not only during the construction stage but also during its lifetime. There are many case histories illustrating the risk involved and the legal implications that can arise in relation to pipelines and associated insurance. These include, inter alia, instances of corrosion, pollution, weld damage and damage resulting from anchor drag. These are but a few examples that demonstrate the problems in relation to installation, maintenance/operation and third party interference as well as the public interest concerns when pollution is concerned.

An understanding of causes and consequences of loss together with the legal position is important to both the insured and insurer especially with regard to mitigating or eliminating legal exposure. This article seeks to cover the various problems encountered by pipelines and the implications for and position of the insurer in each instance.

CORROSION & POLLUTION

Before pipelines are laid they are subjected to a rigorous system of anti-corrosion measures appropriate to the environment in which they are located. The possibility and rate of corrosion to a pipeline will obviously depend on the salinity of the water and prevailing temperatures. Various methods of cathodic protection have been developed. Under section 5 of the 'London Standard Platform Form (2009)' ("LSPF"). 'Exclusions', subsection A(vii)(d) insurers will have no liability in respect of corrosion unless that corrosion causes a fire or explosion. In this case insurers are liable for any direct physical loss or physical damage directly arising. Practically it is not the corrosion itself that is likely to incur a large liability but the consequences of the corrosion.

ANCHOR DRAG

Damage to submarine pipelines resulting from anchor drag can be significant and some sources have suggested that up to 48% of damage to submarine assets is caused by anchor drag. This cause is particularly relevant to pipelines near the shore or located close to Port or Harbour locations, although, damage has also been known mid-channel in open seas. Anchor damage can cause significant and high value loss to an assured owner of a pipeline. Damage can be in the more obvious forms, which include rupture, pollution and explosion or in the less obvious form of being dragged out of its trench and having protective coating damaged. An example of the latter damage can be seen from damage caused to the Central Area Transmission System ("CATS") in the UK sector of the North Sea by Motor Vessel "Young Lady". This incident concerned an oil tanker anchor snagging a UK energy pipeline close to a large ship anchorage area during strong winds and rough seas. The vessel lifted the pipeline out of its trench and dragged it causing damage to the outer protective layers. The pipeline had to be closed down completely for two months to allow repairs. Since this incident, awareness has been raised substantially with guidance being published for anchor hazard protection and ports and harbours being provided with guidance.

Another notable case was the case of the "The Marion" [1984]2 LLR 1 that fouled an oil pipeline whilst weighing anchor. The shipowner ("owners") admitted that the severe damage was caused partly by the negligence of the master who had been navigating with an out of date chart. Owners brought a limitation action that, at first instance, was upheld as the owners established that the damage had not been caused "with their actual fault or privity". The defendant successfully appealed in the Court of Appeal and the case was taken to the House of Lords by the owners. The House of Lords upheld the Court of Appeal's decision dismissing the owners appeal on the basis that three requirements with regard to charts had to be fulfilled in order to ensure the safe navigation of a ship on the voyages undertaken by her:

  1. Current versions of relevant charts should be available for use;
  2. Obsolete/superseded charts should be destroyed or segregated from the current charts;
  3. Charts should either be corrected up to date at all time or at least such corrections should be made prior to their use on a particular voyage.

It was held that the managing director of the vessel's management company had a duty to supervise the master in the keeping of up-to-date charts and failure to do so constituted actual fault of the owners.

In pipeline anchor drag cases it is becoming more important to research ship movements at the time the damage occurred in order to determine to whom a claim for damages can be made. Every commercial vessel must now transmit its position to every other vessel using the Automatic Identification System ("AIS") so that the location, speed, heading and destination of the vessel can be viewed by other ships or online. By tracking data recorded by this system it is possible to identify a ship responsible for causing damage. This technology is currently being developed further to create a damage prevention system alerting pipeline owners and ship owners to any imminent damage. This relies on pipeline owners establishing a zone around areas at high risk, so that when a vessel crosses the perimeter automatic alerts are sent to the pipeline owner to warn them of the possibility damage.

Damage caused from anchor drag must be scrutinised carefully especially where a ship owner is claiming a limitation to their liability under the Convention on Limitation of Liability for Maritime Claims 1976 ("the Convention"). The case of Strong Wise Limited v Esso Australia Resources Pty Ltd (The "Apl Sydney") [2010] FCA 240, contains some useful guidance from the Federal Court of Australia. In this case the vessel dragged anchor during a gale, between 1544 and 1545 the vessel's starboard anchor fouled a submarine gas pipeline. At about 1546 the vessel's engine was put astern and then stopped after one and a half minutes. The vessel yawed from side to side for about 35 minutes before her engine was put ahead at about 1620, soon after this the pipeline ruptured. The engine was stopped but eight minutes later put astern, this dragged one end of the ruptured pipeline out of its trench and was severely bent before a piece of the pipe broke off, freeing the anchor. The Convention states that a shipowner may limit their liability for claims "arising on any distinct occasion". In this particular case the shipowner argued that the whole episode constituted one distinct occasion, the pipeline owners argued that it constituted four occasions of damage.

It was held that where there is a subsequent act, neglect or default of the same shipowner separately operated to cause different or separately identifiable loss or damage to the same third party a new claim would arise on that later distinct occasion. In this case the court held that there were two distinct occasions that occurred in direct connection with the operation of the vessel. The first distinct occasion was the chain of events leading to and immediately following the anchor fouling the pipeline at about 1544 to 1545. The second distinct occasion was the chain of events leading to and immediately following the rupture of the pipeline at about 1620 to 1621.

EXCLUSION FOR CIVIL WAR AND REBELLION

Pipelines provide essential fuels to power stations and commercial/domestic users vital to the sustainability of a modern society. The reliance placed upon them and their importance to providing those supplies has made them an accessible target in times of unrest, war or terrorism. Under the 'Exclusions' in the LSPF terms, subsection (x) states:

"5. Exclusions

Notwithstanding anything to the contrary which may be contained in this Section:

A

Insurers shall have no liability under this Section in respect of:

 

...

 

Loss, damage, cost or expense caused by or resulting from or arising out of:

 

(a) ...

 

(b) political or labour disturbances, riots or civil commotions"

On of the leading cases on this point is National Oil Co of Zimbabwe (Private) Limited and Others – v – Nicholas Collwyn Sturge [1992] 2 Lloyd's Rep 281. The facts were that between 14th July 1982 and 5th January 1983 persons or supporters of the Mozambique National Resistance (Renamo) blew up the Beira to Feruka pipeline in Mozambique on five occasions. Losses of gasoil and mogas resulted from these events and the plaintiffs claimed for such losses under a marine cargo insurance policy subscribed by the defendant Lloyd's underwriters.

In the action the issue was whether Renamo were engaged in civil war, rebellion or insurrection in Mozambique and carried out the attacks as part of that engagement for the purposes of terms of the contract. The policy incorporated provisions of the Institute Strike Clauses dated 1st January 1982 and the material clauses provided inter alia:

Risks Covered

1.

This insurance covers, except as provided in Clause 3 and 4 below, loss of or damage to the subject-matter insured caused by

1.1

Strikers, locked out workmen, or persons taking part in labour disturbances, riot, or civil commotions;

1.2

Any terrorist or any person acting from a political motive...

Exclusions

3.

In no case shall the insurance cover...

3.10

loss damage or expense caused by war, civil war, revolution, rebellion, insurrection or civil strife arising therefrom or any hostile act by or against a belligerent power...

It was contended by the defendant that the loss was excluded by clause 3.10 on the basis that it was caused by civil war, rebellion or insurrection. As a result it was left to the court to determine whether Renamo were engaged in any of these activities. The court held that the ordinary "business" meaning of "Civil War", "Insurrection" and "Rebellion" had the characteristics of being civil, i.e. internal, although the latter two having a lesser degree of organisation than the first. On the evidence before the court in the particular case it was found that the loss was caused by insurrection within the meaning of the policy; Renamo was an organisation of Mozambicans (with some outside encouragement) with the intent and object of overthrowing the Mozambique Frelimo government.

CONCLUSION

This is a rapidly expanding area of law that will become more frequent with the increase in oil platforms and sub-sea cable and pipeline networks. The value of these claims is often significant and the necessity for a specialist firm with access to industry experts is necessary for the effective handling of such a case. Technologies available for the tracing of vessels that may be involved in any one incident should be utilised where possible and used to their full potential in establishing liability.

www.bjm-co.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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