U.S. refineries and petrochemical plants are cutting back on insurance because several years of severe accidents have driven up the cost of coverage, industry and insurance sources said.

With less insurance coverage for physical damage and business interruption, energy companies could be liable for millions of dollars of costs in repairs and lost business in the case of an explosion or fire. In the worst-case outcome, entire refineries could close if insurance coverage is inadequate.

Insurance rates for property damage and business interruption have increased as much as 100% for some refiners, particularly those that have experienced explosions or fires in the past. Energy companies, which have traditionally bought billions of dollars in insurance, are buying less coverage than in the past.

Unexpected refining outages have soared in recent years, surpassing 2,000 incidents in 2019, quadruple 2015 levels, according to Industrial Info Resources, a provider of industrial process and energy market intelligence.

With U.S. energy and chemical production at an all-time high, increasingly complex refineries have been running full-tilt, eschewing planned downtime to try to boost profits.

The heightened risk comes after a series of high-profile accidents, including several explosions at petrochemical plants in Texas and last year’s blaze that shut the Philadelphia Energy Solutions refinery.

None of the nation’s large independent refineries, including Valero, Phillips 66 or PBF, would comment on the record for this story.

More Money, More Problems

The overall liability to insurers for global refining and petrochemical incidents over the last three years comes to more than $12.5 billion, according to global insurance broker Marsh/JLT. That is more than double the gross premiums paid to insurers, the broker said in a January report.

Annual insurance premiums are costly. A refiner worth $1 billion will likely pay $2.5 million or more, according to loss adjusters.

Losses are mounting for what is known as business interruption policies, which provide coverage for companies that lose income after operational problems, according to Michael Buckle, managing director of downstream natural resources at rival broker Willis Towers Watson.

Last year’s fire that shut the Philadelphia Energy Solutions refinery could cost $1.25 billion in insured losses alone, though industry sources say PES will likely receive less than that amount from its insurers. Husky Energy is counting on insurers to fund the $400 million rebuild of its refinery in Superior, Wisconsin after a 2018 explosion.

Insurance companies with sizable energy exposure such as AIG and CV Starr are responding by offering less overall insurance capacity or reducing exposure, according to insurance industry sources. AIG did not return a request for comment and CV Starr declined comment.

Insurers have increased the cost of coverage by 25 percent to 100 percent, depending on a variety of factors including the insurer’s assessment of risk based on a history of losses. Some refiners are responding by curbing their coverage.

“Refiners are choosing to buy coverage for only 90, 80, 70% of their total asset value in response to insurance rate hikes,” said one senior refining executive, who spoke to Reuters on condition of anonymity.

Some refiners also choose to delay the number of days before their business interruption coverage to cut costs, the executive added.

Changing Risks

Gross crude oil inputs into U.S. refineries reached a record high in 2018 of 17.3 million barrels per day. Refinery utilization rates rose to 93.1% in 2018, the fifth straight annual increase, according to U.S. Energy Department figures.

Refining margins were strong through 2018 and 2019, which discourages refiners from shutting down for maintenance.

“When refinery margins are high, there can be a tendency for refineries to extend turnarounds in order to take advantage of the more profitable environment,” said Ian Robb, head of risk engineering at insurance carrier Liberty Specialty Markets.

Many U.S. refineries have added units to take advantage of growth in chemicals and plastics demand. Insurance sources said the growing size and complexity of refineries adds to insurance risks, because an interruption in one unit can affect production in several other units, such as petrochemical production.

These new “interdependencies” expose insurers to increasing business interruption risk, said Steffen Halscheidt, global practice lead for oil & gas of Allianz Global Corporate and Specialty.

The growth in joint refining ventures and increased acquisition activity can add to risk for insurers, Halscheidt said. Acquisitions that cause workforce turnover can lead to changes to a refinery’s operations and the departure of experienced workers. (Reporting by Laura Sanicola.)