Deepwater Horizon


The two-year anniversary of the Deepwater Horizon oil rig explosion and spill in the Gulf of Mexico is understandably attracting some news headlines.

The Washington Post writes that many experts are reassessing U.S. progress since the accident, while environmentalists are assessing damages.

Pending spill litigation is the focus of a piece by the Huffington Post. It reports on the finalization by BP of a $7.8 billion settlement with more than 100,000 businesses and individuals harmed by the spill.

Yet according to legal experts cited by the HuffPost, the settlement with private plaintiffs, while significant, represents a relatively minor step in the resolution of the spill litigation.

Still to come is a civil trial brought by the federal government and several Gulf states against BP and its corporate partners, plus possible federal criminal charges related to the disaster.

Pending litigation from the Deepwater Horizon event is listed among the underwriting issues insurers continue to monitor in the Willis Energy Market Review published earlier this week.

Some 11 crewmen lost their lives in the explosion and fire that resulted in the April 22, 2010 sinking of the Deepwater Horizon oil rig in the Gulf of Mexico. The explosion of the rig, which caused $1 billion in insured property losses, was the biggest man-made disaster of 2010 (not including liability losses) and the tenth most costly insured catastrophe loss of 2010, according to Swiss Re.

Check out I.I.I. facts and statistics on energy.

U.S. tort costs increased by 5.1 percent in 2010, driven by the April 2010 Deepwater Horizon drilling rig explosion and resulting oil spill in the Gulf of Mexico, Towers Watson reports.

In its 2011 Update on U.S. Tort Cost Trends, Towers Watson notes that absent the cost from this event, tort costs would have shown an overall decrease of 2.4 percent in 2010.

Looking ahead, Towers Watson expects tort costs to decline by 4.4% in 2011 due to the lack of such an event during the year. Excluding the impact of the oil spill, Towers Watson forecasts tort costs in 2011 will show a modest increase relative to 2010, in the area of 3%.

The report finds:

The Deepwater Horizon spill was the single most important event affecting 2010 tort costs. In June 2010, BP established a $20 billion fund to compensate the spill’s victims. By November 1, 2011, BP had paid or approved for payment over $7.5 billion in claims related to the spill. While the ultimate tort costs associated with the spill remain uncertain, our estimate of tort costs from the spill was $19 billion.”

The increase in U.S. tort costs for 2010 – which confirms earlier estimates from Towers Watson – follows a more favorable year in which tort costs decreased by 2.7 percent in 2009.

The U.S. tort system cost $264.6 billion in 2010, which translates to $857 per person, versus $820 per person in 2009.

The weak U.S. economy continued to have an influence on costs in 2010, according to Towers Watson:

Due to a lower level of economic activity, opportunities for tort actions have also decreased over the last few years. The decline is most notable in the commercial auto line of business, perhaps the most economically sensitive coverage with a tort component. The line’s tort costs in 2010 were the lowest since 2000 and 19% lower than in 2004.”

Personal auto tort costs showed a 1.1% increase in 2010, and medical malpractice costs continued to be stable.

Overall economic growth in 2010 was 4.2%. As such, the ratio of tort costs to gross domestic product (GDP) rose in 2010 for the second consecutive year after five years of a decline in the ratio.

Since 1950, growth in tort costs has exceeded growth in GDP by an average of approximately two percentage points.

Towers Watson estimates growth in U.S. tort costs will range from 2% to 6% in 2012, with a midpoint of 4%. A similar increase is seen for 2013, with a midpoint of 4%.

Insurance Journal has more on this story.

The Deepwater Horizon disaster is just over a year old, but litigation arising from the explosion and oil spill is expected to unfold over the course of many years.

On Friday, the federal judge appointed to hear cases following the disaster, set out his plan for the trial that will start as scheduled on February 27, 2012.

At a monthly status conference on the oil spill litigation U.S. District Court Judge Carl Barbier said the trial will unfold in three phases. According to a report by Rebecca Mowbray of The Times-Picayune:

The initial “incident phase” of the trial will examine the role of the various defendants in the loss of well control, the explosion and sinking of the Deepwater Horizon drilling rig and the initiation of the flow of oil.”

The Times-Picayune notes that after a break, the court is expected to begin the second phase of the trial focusing on efforts to control and shut down the well and how much oil was actually lost.

A third phase would deal with other liability issues, such as efforts to skim and burn the oil, the use of dispersants and boom.

Some 549 cases over the April 2010 well-blowout and 86-day oil spill have been consolidated in Judge Barbier’s court, and 108,000 individuals have filed claims alleging harm, according to The Times-Picayune article.

Some 11 crewmen lost their lives in the explosion and fire that resulted in the April 22, 2010 sinking of the Deepwater Horizon oil rig in the Gulf of Mexico. The explosion of the rig, which caused $1 billion in insured property losses, was the biggest man-made disaster of 2010 (not including liability losses) and the tenth most costly insured catastrophe loss of 2010, according to Swiss Re.

Check out I.I.I. facts and stats on energy.

U.S. tort costs are expected to show a significant increase in 2010, due mainly to the Deepwater Horizon disaster.

In its annual update on U.S. tort cost trends, Towers Watson predicts U.S. tort costs will rise by 9 percent in 2010.

However, excluding the Deepwater Horizon event, it expects U.S. tort cost growth will be fairly stable relative to 2009 – at about 2 percent.

Towers Watson says:

Specifically, our 2010 tort cost estimate assumes a 1.5 percent increase compared with 2009, plus $18 billion due to the BP oil spill. This $18 billion amount for the oil spill is a provisional estimate only, which will be modified in our next study as more information regarding the ultimate tort costs of the spill becomes known.”

Looking further ahead, Towers Watson expects growth in U.S. tort costs to range from 1 percent to 5 percent in 2011, excluding the impact of the BP oil spill, and a higher increase in 2012.

Chinese drywall and automobile recalls were two new tort actions that surfaced during 2009, according to the study. Towers Watson estimates total economic losses related to Chinese drywall in the range of $15 billion to $25 billion and total costs from Toyota auto recalls in excess of $1 billion.

The predicted increase in U.S. tort costs for 2010 follows a more favorable year in which tort costs decreased by 2.7 percent in 2009. An increase in personal tort costs was more than offset by a decrease in commercial tort costs, Towers Watson says.

The U.S. tort system cost $248.1 billion in 2009, which translates to $808 per person, versus $838 per person in 2008. Tort costs in 2009 were lower than four of the previous five years.

A major factor was the U.S. economy. Overall economic growth in 2009 was -1.3 percent. As such, the ratio of tort costs to gross domestic product (GDP) shrank in 2009.

This was the sixth consecutive year that tort costs rose less than GDP, according to Towers Watson.

However, since 1950, growth in tort costs has exceeded growth in GDP by an average of approximately two percentage points.

Check out an I.I.I. presentation on the Deepwater Horizon disaster and a recent I.I.I. paper Tort Inflation 2010.

Executives from BP, Transocean and Halliburton, are due to face the National Oil Spill Commission – the presidential panel appointed to investigate the Deepwater Horizon disaster at a hearing in Washington D.C. today.

The primary focus of the two-day public hearing will be on the causes of the rig explosion.

This is the fifth public meeting held by the commission as part of its investigation into the disaster. A final report on its findings is due to the President on January 12, 2011.

A cover story in the New York Times magazine this weekend by Douglas McCollam (a contributing editor for the Columbia Journalism Review and The American Lawyer) tells the story of how trial lawyers are competing to gain a piece of the action in the litigation against BP.

The article notes that BP is facing the most expensive corporate environmental catastrophe in history, but that the disaster comes at a pivotal juncture for the American trial bar:

In many respects its [the American trial bar’s] power and influence hit its zenith in the late 1990s, when a coalition suing the tobacco industry on behalf of 46 states reached a landmark $206 billion settlement in a case that both fundamentally altered the public’s perception of cigarette smoking and made billionaires out of several of the lawyers involved. That settlement led to predictions, both dire and hopeful, that the trial bar would use its newfound financial clout to go after a host of other industries, transforming the face of American capitalism.”

Instead, the article goes on, the past decade has seen a series of roadblocks in the trial bar’s influence across the country, due to setbacks in the courts, in Congress and state legislatures due to the tort reform movement spearheaded by the U.S. Chamber of Commerce, and especially in the court of public opinion.

It then discusses the $20 billion compensation fund established by BP that is now being administered by Ken Feinberg:

The Feinberg fund represents an alternative model for the resolution of big disasters, one that moves trial lawyers from center stage to a spot in the chorus. Over the last few decades the trial bar has built what amounts to a private-enterprise regulatory machine, compiling an impressive string of victories over – or at least a series of large settlements from – the most powerful corporations in the world. Some call them parasites and label their style of litigation the “American disease.” Others see them as the last truly effective check on corporate power left in the U.S. system. With the Feinberg model comes the prospect of their further diminishment, a blueprint for a future without big-time trial lawyers. And they are not willing to accept that future without a fight.”

Check out the I.I.I. backgrounder on the U.S. liability system.

No single factor, rather a sequence of failures involving a number of different parties led to the Deepwater Horizon explosion and fire which killed 11 people and caused widespread pollution in the Gulf of Mexico earlier this year.

That’s the upshot of a report released by BP today based on a four-month internal investigation led by Mark Bly, BP’s head of safety and operations.

BP concludes that decisions made by “multiple companies and work teams” contributed to the spill which it says arose from “a complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces.”

Based on the findings of the report, BP says it is unlikely that the well design contributed to the incident. Check out BP’s report website for further info.

The Wall Street Journal notes that the BP report boils the investigation down to eight key findings, with BP accepting some responsibility for the disaster. The New York Times describes the report as a preview of BP’s probable legal strategy as it prepares to defend itself against possible federal charges, penalties and hundreds of pending lawsuits.

At the end of the report BP’s investigation team has proposed a total of 25 recommendations designed to prevent a recurrence of such an accident.

The recommendations are directed at strengthening assurance on blow-out preventers, well control, pressure-testing for well integrity, emergency systems, cement testing, rig audit and verification and personnel competence.

Check out our updated presentation on the Deepwater Horizon Disaster for a review of the insurance issues relating to the loss.

The explosion of the Deepwater Horizon rig has had dramatic consequences in terms of loss of life and pollution, but is not a market changing event for offshore energy insurers, according to a new report by Marsh.

In its latest Energy Market Monitor, Marsh says the most recent market moving event was Hurricanes Katrina and Rita when rates in the Gulf of Mexico went from the ranges of 0.4 percent to 3.5 percent and limits dropped by 75 percent.

In contrast, while energy insurers have been unsettled by the Deepwater Horizon losses, capacity has not constricted and price increases are likely to be modest unless further major losses occur. Marsh explains:

The market is getting rises on offshore renewals but not large rises. There isn’t a lack of capacity and, as things stand, no one looks as though they are ‘leaving the party’. Until that happens, the offshore market will continue to drift unless the reinsurers inflict ‘market moving’ reinsurance prices.”

Nevertheless, Marsh reports that many firms involved in offshore activities are reviewing their current insurance programs and are seeking to top up their cover. A press release cites Jim Pierce, chairman of Marsh’s Global Energy Practice:

Some insurers have been capitalizing on their clients’ concerns and have been hiking up their prices for higher limits and deepwater drilling wells, regardless of where they are located.”

For more on this story, check out a Wall Street Journal online article. Check out the I.I.I. presentation on the Deepwater Horizon event and primer on offshore energy facilities and insurance considerations.

In our PowerPoint report on the Deepwater Horizon disaster we note that one of the many likely legal avenues to be pursued in post-spill litigation includes health claims by workers assisting in the cleanup.

Given the sheer scale of the cleanup, the use of chemical dispersants and the numbers of workers involved in the Deepwater Horizon response, the potential for some type of work-related injury or illness claim appears inevitable. At last count, BP said approximately 43,100 personnel were involved in the response effort.

Now the Wall Street Journal law blog reports on a lawsuit filed by a Louisiana fisherman against BP calling for a court-supervised health monitoring program for volunteers and workers who say they have been exposed to the oil, fumes and other chemicals while cleaning up the spill.

According to the WSJ law blog, the fisherman filing suit (who apparently was hospitalized in late May for illnesses caused by the use of chemical dispersants) says that he and others now suffer new risks of contracting lung cancer, esophageal cancer and leukemia because they didn’t have proper respiratory protection during the cleanup.

Whatever the merits of this individual case, this is an emerging issue to watch.

The latest Deepwater Horizon Response BP injury and illness data report showed a total of 1602 incidents to-date and earlier this week the Louisiana Department of Health and Hospitals said to-date some 290 oil spill exposure-related cases have been reported.

In its seventh surveillance report released Monday, the Louisiana DHH said that 216 of those cases involved workers on oil rigs or workers involved in the cleanup efforts, while 74 were reported by the general public.

A NIOSH report of BP illness and injury data issued July 12 did not reveal unrecognized or unreported occupational illness, however.

Latest news that BP has finally managed to cap the well that has spilled millions of gallons of oil into the Gulf of Mexico comes as the latest Gallup poll says the spill is fading as an issue for the American public, as reported by the Washington Post’s The Fix blog.

Just 7 percent of respondents in the July Gallup poll mentioned “natural disaster response/relief” as the most important problem facing the country, a significant drop from 18 percent in June (in May just 1 percent said natural disaster relief was the top problem).

Frank Newport, editor-in-chief of the Gallup Poll observes:

Americans’ reduced likelihood to see the spill as the top problem could reflect the reality that the spill is no longer “new” news or perhaps that Americans are becoming more confident that the spill will be fixed.”

 The Fix blog puts its money on the former, observing that “the wall-to-wall coverage of the spill (as symbolized by the ever-present “spill cam”) has effectively dulled the public’s outrage about the spill.”

It’s an interesting point. Is our attention span in the wake of the worst environmental disaster in U.S. history this short?

As tweeted by I.I.I., a post on social media blog Mashable recently noted that interest in the oil spill was on the decline, at least according to its review of Internet search and discussion topics.

Yet while discussion of the oil spill on Twitter, Google, blogs and YouTube overall has dropped off, Mashable did find that local residents are still searching for information about the disaster.

Not surprisingly, Louisiana residents are still searching for “oil spill” on Google, as are the residents of many other Gulf Coast areas. New Orleans-area Google users are by far the largest geographical group still looking for information.

We’d hazard a guess that a major hurricane in the Gulf of Mexico could reawaken interest in the oil spill.

For insurers’ part, I.I.I. has a number of resources available on the Gulf oil spill. Check out our presentation on the Deepwater Horizon event and primer on offshore energy facilities and insurance considerations.

Despite significant catastrophe losses during the first half of 2010, including the Chilean earthquake, reinsurance rates continued to decline at the July 1, 2010 reinsurance renewal, according to a newly released report from Guy Carpenter.

The report found that U.S. property rates decreased by as much as 15 percent, with pricing for the year down 12 percent. Meanwhile, across the energy and casualty sectors, conditions were flat or down, though the Deepwater Horizon rig disaster has the potential to put upward pressure on rates.

Predictions of an active hurricane season have had only a slight impact on June and July renewals, with quoting behavior firmer than expected, but if the forecasts are right, there is a greater chance the marketplace will look very different at the January 1, 2011 renewal, Guy Carpenter said.

It went on to explain that while the Deepwater Horizon loss is potentially a market-changing event, it is geared principally towards energy and liability exposures. Reinsurers will be hard-pressed to justify rate increases for clients writing traditional marine cargo/hull accounts, it suggested.

Reinsurers’ quotes on international placements were unaffected by the Deepwater Horizon loss, as accounts were underwritten separately based on specific account losses and exposures.

However, marine excess of loss pricing is expected to increase substantially for reinsurance buyers with energy exposures. Increases of greater than 10 percent were seen for deepwater drilling risks similar to those of the Deepwater Horizon, Guy Carpenter said.

Check out I.I.I. background information on reinsurance.

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