Blow and cratering in the oil and gas industry refers to the uncontrolled release of oil, gas, water, or drilling fluid from a well that is being drilled (blow), or the collapse of a well that has already been drilled. Blowouts are usually caused by an intrusion into a reservoir containing gas or oil that is at a higher pressure than allowed; often oil or gas catches fire. When a funnel forms in a well, often the drilling rig itself goes under water along with the well. Coverage of the insured person’s liability for damage to property of others caused by a blowout or cratering is not mandatory under a commercial liability policy (CGL). A special cover, Well Control Insurance, provides coverage for the cost of eliminating a controlled release, cleaning up any resulting contamination, and damage to operator property.
Insurance is a contractual relationship that arises when one party (the insurer), for a fee (premium), agrees to compensate the other party (the insured) for losses caused to a certain subject (risk) caused by certain unforeseen circumstances (hazards or dangers). The term ‘guarantee’, commonly used in England, is considered synonymous with ‘insurance’.
The 10/10 Rule is a matter of analyzing and demonstrating the transfer of risk as a precondition for the use of reinsurance accounting, which was codified in the early 1990s with the adoption of Financial Accounting Standard (FAS) 113 (and its statutory counterpart, SSAP 62). FAS 113 itself was a response to alleged abuses and set the standard for testing whether something should be called an insurance contract. FAS 113 required that the transfer of risk be demonstrated by comparing the present value of the cash flows associated with the contract and, in particular, by exceeding certain thresholds of “significance” of risk. The thresholds, often referred to as the 9a and 9b tests, are: 9a. The reinsurer assumes significant insurance risk under the reinsured parts of the underlying insurance contracts. 9b. It is possible that the reinsurer could suffer a significant loss from the transaction. While neither “significant” nor “reasonably possible” was defined in this context, standard rules of thumb quickly emerged in the implementation of FAS 113. The most commonly cited is the “10/10 Rule”. This rule states that a contract reaches a threshold if there is at least a 10 percent chance that it will suffer a loss of 10 percent or more in present value (expressed as a percentage of the contract premium ceded).