Handling claims in the energy sector presents unique challenges, particularly when dealing with high-severity events like explosions in upstream gas infrastructure.
 

For claims managers and insurance professionals, navigating these complex situations requires an in-depth understanding not only of the technical aspects of gas operations but also the nuances of policy coverage. The critical role of factors like ageing infrastructure and maintenance history.
 

Effectively investigating the cause, assessing the damage, verifying costs, and applying policy terms demands expertise and attention to detail, especially within intricate operational environments and joint venture structures common in the industry.
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This article aims to provide practical insights by analysing an anonymized, real-world claim involving a gas flow line explosion at an onshore facility. By dissecting this case study—from the pre-incident risk factors and operational context through to the detailed investigation, adjustment process, and final settlement—we will draw out actionable lessons.
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The goal is to equip claims managers and insurance professionals with enhanced knowledge and practical takeaways for assessing risks associated with gas infrastructure, rigorously investigating explosion claims, navigating the complexities of the adjustment process, and accurately applying relevant policy terms. This is to achieve fair and evidence-based outcomes.
 

Background: Gas Flow line Operations & Risks

Explosions involving natural gas infrastructure represent a significant peril within the upstream energy sector. Understanding the operational context and inherent risks associated with gas flow lines is fundamental for effective risk assessment and claims management.

Gas flow lines form a critical link in the production chain, transporting natural gas, often under high pressure, from the wellhead to central processing facilities. A typical onshore gas well setup, like the one involved in our case study, includes several key components:

- Wellhead & Christmas Tree: The assembly at the surface of the well provides structural support and pressure control. The “Christmas Tree” is a complex arrangement of valves, spools, and fittings used to control flow, shut off the well for maintenance, and manage production.
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- Flow line: The pipeline connecting the Christmas Tree to downstream gathering or processing systems. These can range in diameter (e.g., 4 inches (10.16 cm) in the case study) and material (e.g., stainless steel).
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- Safety Systems: Essential safety devices are integrated, such as Surface Safety Valves (SSVs) located on the Christmas Tree and potentially Subsurface Safety Valves (SCSSVs) down hole, designed to automatically shut off flow in abnormal conditions (e.g., pressure deviations, system failure).

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Operating pressures in these systems can be substantial; the flow line in the case study operated at approximately 2,800 psi. This high-pressure environment, combined with the nature of the product being transported, introduces several inherent risks:

- Corrosion: Both internal (due to constituents in the gas stream like water, CO2, H2S) and external (environmental factors) corrosion can degrade pipeline integrity over time, leading to leaks or ruptures.

- Pressure Fluctuations: While systems are designed for specific operating pressures, surges or unexpected pressure build-ups can exceed the pipeline's tolerance, especially if weakened.
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- Material Fatigue & Ageing: Like any infrastructure, pipelines are subject to wear, fatigue, and degradation over their operational life, increasing susceptibility to failure if not properly managed.

- Maintenance Deficiencies: Inadequate inspection (e.g., infrequent wall thickness surveys), lack of preventative measures (e.g., corrosion inhibition), or improper repairs can significantly elevate the risk of failure.

- Third-Party Damage: Although less common in secured locations, accidental damage from excavation or other activities can compromise flow lines.

An explosion can occur if a flow line ruptures under pressure, releasing a large volume of flammable gas that subsequently ignites. Or even if the rapid, forceful release of pressure itself causes explosive damage without ignition, as occurred in the incident examined later. Understanding these operational realities and risks is the first step toward effectively managing the associated insurance claims.

Case Study: Pre-Incident Factors and Risk Assessment

To understand the context of the claim, we first examine the situation before the explosion occurred. The incident involved a natural gas flow line associated with a specific well at a Gas Plant in Nigeria. This facility was operated by an independent Nigerian energy company, under a Joint Venture agreement.

Several key factors present before the incident are relevant from a risk assessment perspective:

- Ageing Infrastructure: The flow line and associated wellhead infrastructure were part of the assets acquired in 2010. Crucially, during the claims' investigation, there was no readily available evidence presented to suggest the specific flow line involved had been replaced or significantly upgraded since its original installation by the previous operator. Pipelines, particularly those operating under high pressure and potentially exposed to corrosive elements, are inherently subject to ageing and degradation over time.

- Maintenance & Integrity Management: The insured reported having systems in place for maintenance, including daily checks by an in-house team and scheduled preventive maintenance performed by specialized external vendors. Records such as Well Intervention Daily Reports were kept. However, the investigation highlighted potential gaps.

An internal report conducted by the insured after the incident pointed to “absence of a system for ensuring the integrity of the flow line throughout the lifecycle of the well,” specifically noting that flow line wall thickness surveys were carried out only once and not regularly, and citing a lack of corrosion inhibition injection. Furthermore, when adjusters requested the most recent corrosion test report for the specific flow line during their investigation, the insured was unable to produce it.

Underwriting/Policy Insights & Lessons Learned

These pre-incident factors offer valuable lessons for underwriting and risk assessment:

- Lesson 1: Scrutinize Acquired Assets: When underwriting assets acquired from previous operators, it's critical to probe the continuity and adequacy of integrity management programs post-acquisition. Assumptions about inherited maintenance standards should be verified.

Requesting and reviewing specific, dated inspection and testing records (like corrosion surveys, wall thickness measurements, inhibition schedules) for key infrastructure like pipelines is essential, rather than relying on general statements about maintenance practices. The age of the infrastructure itself is a key risk factor requiring specific attention.

- Lesson 2: Policy Clarity is Key: While standard Energy Package Policies often provide “All Risks” cover for physical damage, clarity on how gradual processes (like corrosion) versus sudden events (like explosion/rupture) are treated is vital.

Furthermore, the policy structure should clearly define how deductibles apply, especially when a single event might impact different types of property or fall under different coverage sections. In this case, having distinct deductibles for general property and specific equipment types, coupled with a clause stating the single highest applicable deductible applies, provided clarity during adjustment.

Case Study Part: The Claim & Adjustment Process

Following the pre-incident conditions, we now turn to the event itself and the subsequent claims process.

The Incident

On January 22, 2020, during normal operations, a sudden and violent event occurred at the wellhead and flow line. Personnel reported hearing a loud bang accompanied by a significant ejection of material (described as a “massive wave of red sand”) and a large, rapid release of natural gas. Fortunately, no fire ensued.

The site's safety team acted promptly, evacuating personnel, mobilizing emergency resources, and successfully closing the Xmas Tree valves to shut in the well, preventing further gas release and potential escalation. Physical inspection revealed the primary damage: a ruptured 4-inch diameter stainless-steel flow line and a section of the nearby perimeter fence wall that had collapsed due to the force of the event.

Claims Adjustment Process

The insured notified their lead insurer, who subsequently appointed experienced international and local loss adjusters (Matthews Daniel International and New Trend Loss Adjusters Nigeria) to investigate and manage the claim. The key steps included:

- Expert Involvement & Site Inspection: Adjusters engaged with the insured. Although the initial site visit was delayed due to external factors (COVID-19 restrictions and civil protests), a physical inspection was eventually conducted in December 2020. By this time, the insured had already completed repairs and restored the wellhead/flow line to operation.
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- Investigation & Causation Analysis: Adjusters interviewed key site personnel (including the Facility Manager and Production Engineers) and reviewed relevant documentation. This included the insured's incident reports, the internal investigation report (which cited integrity management lapses, although the Facility Manager disputed its direct relevance to this specific incident), maintenance records, and operational logs. Notably, adjusters confirmed the lack of recently available corrosion test reports for the failed flow line. Based on the evidence gathered, the age of the pipeline, and the nature of the failure, the adjusters formed an opinion that the likely proximate cause was a rupture due to pressure build-up at a weak point in the ageing flow line, potentially exacerbated by inadequate corrosion management or other maintenance deficiencies over time.

- Damage Quantification & Cost Verification: The insured submitted a claim totalling approximately USD 352,193, covering costs associated with rerouting and constructing the new flow line section, non-destructive testing (MPI/OPI), corrosion inspection activities, and general wellhead maintenance. Adjusters meticulously reviewed the supporting documentation, including invoices, purchase orders, daily work reports, and completion certificates, to verify the scope and quantum of the costs incurred.

Applying Policy Terms

The adjusters assessed the verified costs against the terms and conditions of the Energy Package Policy:

- Coverage Confirmation: The explosion and resulting pipeline rupture were accepted as a sudden and unforeseen physical loss event, falling within the scope of cover provided under Section 1 (Physical Damage – All Risks) of the policy.

- Basis of Settlement & Adjustments: The costs were adjusted based on the policy's provisions for reinstatement:

• ‍Improvement/Betterment: A 20% reduction (approx. USD 59.9k) was applied to the costs claimed for rerouting and constructing the new flow line section, as the adjusters considered aspects of the new configuration to represent an improvement over the original design.
  

• Duplicated Costs: Adjusters identified and removed apparent duplications where similar work elements (e.g., excavation, backfilling, gas testing, welding) appeared to be included in invoices across different work packages. This resulted in reductions totalling approximately USD 13.4k (USD 9.2k from construction, USD 4.2k from corrosion inspection).
  

• Unrelated Maintenance: Costs claimed for general wellhead maintenance (approx. USD 13.3k) were disallowed entirely, as this work was deemed routine scheduled maintenance not directly necessitated by the explosion damage itself.
  

• Deductible Application: The policy specified different deductibles for various property types and sections. As the claim fell under Section 1 (Physical Damage) and involved pipeline/wellhead property, the “All Property” deductible of USD 250,000 was deemed applicable, being the highest relevant deductible as per the policy conditions.
  
  
• Final Settlement Calculation: The total gross adjusted loss after cost verification and adjustments amounted to USD 265,235.82. After applying the USD 250,000 deductible, the net adjusted loss payable under the policy was USD 15,235.82. As the insured held a 45% interest in the Joint Venture, the final amount recoverable from underwriters representing their share was calculated as USD 6,856.11.
  
  
• Salvage: The damaged pipe sections were noted, but their salvage value was considered insignificant.
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Lessons Learned

This adjustment process highlights several critical takeaways for claims handlers:

- Lesson 3: Investigate Thoroughly, Verify Evidence: Don't solely rely on initial statements or even internal reports. Seek independent verification and objective evidence, such as specific, dated test results (e.g., corrosion surveys). The absence of such evidence can be as informative as its presence. Probe discrepancies between different reports or statements.

- Lesson 4: Meticulous Cost Verification is Non-Negotiable: Carefully scrutinize all claimed costs against supporting documentation and the actual work performed. Apply policy principles correctly to differentiate between indemnity (repair/replacement like-for-like) and betterment/improvement. Be vigilant in identifying and removing duplicated costs or expenses unrelated to the insured event (like routine maintenance).

- Lesson 5: Precise Policy Application: Ensure the correct policy sections, limits, and deductibles are applied based on the nature of the event, the type of property damaged, and the specific policy wording. Confirming the application of the single highest deductible in multisection or multi-item claims is crucial for accuracy.

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Key Lessons and Strategic Considerations

The analysis of this gas flow line explosion claim provides several critical lessons and highlights broader strategic considerations for claims managers and insurance professionals operating in the energy sector.

Synthesized Learnings from the Case Study:

Combining the insights from both the pre-incident assessment and the claim's adjustment process, five key actionable lessons emerge:

- Probe Ageing & Acquired Assets Deeply: Claims involving older infrastructure, especially assets acquired from previous operators, warrant heightened scrutiny. Don't assume maintenance continuity; actively verify the history and current status of integrity management programs through specific, dated evidence like corrosion surveys, wall thickness measurements, and inhibition records. The absence of such evidence is a significant red flag.

- Verify Maintenance Claims Rigorously: Move beyond accepting general statements about maintenance practices. Demand and review tangible proof of critical inspections and preventive actions relevant to the potential cause of loss. Inadequate maintenance, particularly concerning corrosion in pipelines, is a recurring theme in energy claims.

- Conduct Thorough, Evidence-Based Investigations: While initial reports and internal investigations provide context, they must be critically evaluated and independently verified. Investigate the root cause thoroughly, corroborate statements with physical evidence and documentation, and address any discrepancies identified.

- Apply Meticulous Cost Scrutiny: Effective claims adjustment requires diligent verification of all claimed costs against policy terms and principles of indemnity. Specifically identify and adjust for betterment/improvement, remove duplicated cost items across different invoices or work packages, and disallow costs related to routine maintenance or work unrelated to the insured event.

- Ensure Precise Policy Application: Accurate claim settlement depends on correctly applying the specific policy sections, definitions, limits, and deductibles relevant to the loss. Pay close attention to clauses governing the basis of settlement and how deductibles function across different types of property or coverage sections, particularly ensuring the single highest applicable deductible is applied correctly.

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Broader Implications

These lessons have wider strategic implications for insurers and claims departments:

- Strengthening the Underwriting-Claims Feedback Loop: Insights gained during claims investigations, such as identified gaps in maintenance practices (like infrequent corrosion testing revealed in this case), provide invaluable real-world data. This information should be systematically fed back to underwriting teams to refine risk assessment criteria, inform policy wording, and potentially adjust premiums or terms for similar risks across the portfolio.

- Importance of Specialized Expertise: Complex energy claims involving technical operational aspects, intricate failure modes (like pipeline ruptures), and significant quantum require adjusters and supporting experts (engineers, forensic accountants) with deep industry-specific knowledge. Investing in or accessing this expertise is crucial for accurate causation analysis, damage assessment, and cost verification.

- Proactive Risk Management Dialogue: Findings from claims can serve as a basis for constructive dialogue with insureds about improving their risk management practices. Highlighting how specific maintenance or inspection gaps contributed to a loss can encourage preventative actions, ultimately benefiting both the insured (through reduced operational risk) and the insurer (through reduced claim frequency/severity).

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Conclusion

This case study of a gas flow line explosion claim serves as a practical illustration of the multifaceted challenges faced by claims managers and insurance professionals in the energy sector.
 

It underscores that effective claims handling goes far beyond simply verifying the occurrence of an event. As demonstrated, a thorough investigation requires delving into pre-incident factors such as the age of infrastructure and the verifiable history of maintenance and integrity management, especially for assets acquired from previous operators.
 

Furthermore, the adjustment process demands meticulous scrutiny of claimed costs to differentiate valid repair expenses from unrelated maintenance or betterment, coupled with the precise application of policy terms, conditions, and deductibles.
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The core insights derived—the critical need for verifying maintenance evidence, rigorously assessing costs, understanding the nuances of ageing assets, and applying policy wordings accurately—are not merely academic. They are essential tools for managing claim outcomes effectively and fairly.
 

For claims managers and insurance professionals, embracing these lessons translates into more robust investigations, more accurate reserving, and ultimately, more sustainable insurance partnerships within the vital energy industry. As infrastructure continues to age and operational complexities evolve, a diligent, evidence-based, and technically informed approach to claims management will remain paramount.