Oil and Gas Leases

Question: A gas exploration company land man has offered me a large sum of money to explore for gas on my property and an even larger sum of money to extract the gas if they find it. What potential liabilities do I face if I accept the offer and what insurance is available to protect me if something goes wrong?

Answer: That’s an excellent and timely question, considering all the new exploration and extraction activity going on in our area lately.

First, you should consult with an attorney who has experience in the oil and gas lease industry to be sure you have appropriate advice concerning your legal rights, obligations and exposures involved in this undertaking. Our advice will be limited to the insurance aspects.

The hazards of oil and gas operations are numerous. Exposures include accidents involving rigs and other equipment where people are injured or property is damaged, damage to underground resources such as a local water table, or pollution events. These exposures may be addressed in the lease with a broad indemnification agreement wherein the company agrees to make the owner financially whole for damages and defense costs involving liability claims and suits. Some lease agreements will go an extra step by obligating the company to provide liability insurance to the owner. In either case, the company agrees to defend the owner in court and pay any resulting damages assessed against the owner.

Even if the company agrees to defend you and pay damages, you are right to be concerned about how your own insurance will respond. What if the company is bankrupt or refutes the agreement when you get sued and have to go to court? How will the liability insurance on your homeowners or farm and ranch insurance policy respond if the company doesn’t honor its indemnification obligations?

Your policy probably won’t respond at all. Why? Because the Texas Supreme Court says a “business pursuits” exclusion in your personal insurance policy applies to lawsuits involving oil and gas activity on your land (Allstate Insurance Co. v. Hallman, 2005). In that decision, the Court said the exclusion applied because the owner leased her property for a mining operation and that this constituted a regular business activity with a profit motive. It could be reasonably inferred that an oil and gas lease would be viewed in the same manner.

If you want to be sure you have liability protection for ongoing operations involving a mineral or surface rights lease, beyond the promises of the oil and gas company, please talk to your agent about it. You may want to consider purchasing a special liability policy designed specifically for a royalty or revenue interest in oil or gas production.

This article was prepared and made available to your agent by the Independent Insurance Agents of Texas, which is solely responsible for its content. Please read your insurance policy. If there is any conflict between the information in this article and the actual terms and conditions of your policy, the terms and conditions of your policy will apply. The Independent Insurance Agents of Texas is a non-profit association of more than 1,800 insurance agencies in Texas, dedicated to helping its members succeed, in part by providing technical resources that explain insurance policies sold to their customers.

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