Onshore Energy Conference — Dubai Onshore Energy Conference — Dubai 01 | Page 39

RGL FORENSICS

Sales Commitments
A supply agreement to a customer may be for
a specified volume each month / year or as
stipulated by a forward sales commitment.
Although in some regulated markets, the
volume may simply state “market demand”.
If an insured incident occurs where such
supply of final product cannot be satisfied, the
options to the insured supplier would include:
i  Incur the contractual penalties –
which may have major financial implications;

ii Outsourcing
– this is where the Insured buys

in final products from a third party to meet
supply obligations. These costs may mitigate
a loss of turnover; however they are unlikely
to be economic as the cost of buying-in would
be at market price plus transport / import
costs, which is likely to exceed the insured
gross profit per tonne produced. An example
of the financial implication is set out here:

EXAMPLE OF FEEDSTOCK CONTRACTUAL COST

• Long term crude oil supply agreement – 150,000 barrels per day
• Monthly rolling plan for three months ahead
• Fire leads to 75 day outage –
buyer cannot take supply of feedstock
• 60 day waiting period
• Seller has the “right” to sell the crude oil in “private sale” due to
failure of buyer to take supply. Proceeds of sale after “reasonble
expenses” incurred shall be compared to the contracted price.
DESCRIPTION

UNIT

Barrels per day

BBL

COST
150,000

Days outage (outside the waiting period) days

15

Contracted price

US$/BBL

50

US$

112,500,000

%

20%

US$

22,500,000

Force Majeure
Another option that may be open to the
Insured is to declare Force Majeure.
This clause is frequently included in
contracts and releases both the buyer and
seller from the obligation to perform when
an extraordinary circumstance beyond the
control of the parties prevents either party
from fulfilling its contractual commitment.
The ability to declare Force Majeure can
depend on many factors, including the wording
of the clause and the nature of the event.
If the declaration is successful, this
could avoid the obligation to incur the
contractual penalties for feedstock / sales
commitments, or to buy in final products.

Summary
The Insured’s response following an
incident may not always be in its control,
but driven by contractual commitments.
Understanding the contractual commitments
for both feedstock and product sales are
key to ascertaining the potential impact
to both the Insured and the Insurer, and
whether suitable cover has been provided
to indemnify the Insured for its losses
to successfully transfer the risk.

The level of uneconomic costs being
incurred could be significant, therefore
consideration needs to be taken as to whether
the AICW or EE cover would indemnify
such costs, and if a sub limit is in place to
provide the appropriate amount of cover.
Such losses may be diminished or avoided if
the contract allows mitigation measures such as
outsourcing, make-up clauses or Force Majeure.
However, these deliberations would need to be
carried out early in the claims review to ensure
the window for viable mitigation measures
or Force Majeure declaration is not missed.
Assuming at the underwriting stage that it
would be possible to declare Force Majeure in
the event of a loss is risky for both parties.

ABOUT THE AUTHORS
Justin Crick FCA, ACIArb is a partner in the London
office of RGL Forensics
Clive Burrows ACA is a senior manager in the firm’s Dubai office.
RGL Forensics is a global forensic accounting and consulting
firm specialising in the quantification of Business Interruption
losses. RGL supports insurance professionals with independent
calculations, analysis and reporting throughout the claims process.
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