Deepwater Horizon


Catastrophes outside the U.S. this year are costing insurers a lot more than domestic disasters – at least so far – with overseas carriers absorbing losses from Chile’s earthquake and the Deepwater Horizon oil spill, according to a Bloomberg report.

The article quotes Insurance Information Institute (I.I.I.) president Dr. Robert Hartwig saying:

“More years than not it’s the U.S. that has the greatest insured catastrophe loss. Global losses dwarfed U.S. losses this year.”

The Deepwater Horizon oil spill has been the defining event for man-made disasters so far in 2010.

Earthquakes in Haiti, Chile and the U.S., winter storms in Europe and the U.S., and severe floods in Eastern Europe are just a few of the events that have defined a very active first six months for natural catastrophes, according to Munich Re.

An overview of U.S. and global natural catastrophe activity for the first six months of 2010 will be jointly presented by Munich Re and the I.I.I. in a webinar to be held Friday July 7.

Munich Re puts insured losses for global catastrophes in the first six months of 2010 at $23 billion – the highest on record for the same time period since 1994, and exceeding the 10-year average of $11 billion.

In contrast, in the U.S., insured losses for the first six months totaled $6.5 billion, in line with the 10-year average of $6.6 billion.

Register here to participate in next week’s webinar.

The Wall Street Journal reports on the Obama Administration’s plans to ask BP to establish a fund to compensate victims of the Deepwater Horizon oil spill.

The fund would be independently administered, in effect taking some of the decisions about compensation out of BP’s hands. The WSJ article notes:

White House officials on Sunday said they wanted BP to put “substantial” funds into an escrow account to cover claims by Gulf Coast businesses and residents affected by the spill.

President Barack Obama plans to bring up the idea at a White House meeting Wednesday with top BP executives, including Chairman Carl-Henric Svanberg.”

The WSJ goes on to quote a spokesman for BP saying that the company expects to discuss the proposal with President Obama on Wednesday.

The article also cites legal experts saying that while other government-run funds exist (e.g. Superfund legislation, asbestos liability funds, and the 9/11 victims compensation fund), they differ from the proposal facing BP.

As the responsible party, BP has already begun accepting claims filed by individuals and businesses to cover property damage and lost income as a result of the oil spill.

BP’s latest update of its response to the oil spill suggests that to-date over 51,000 claims have been submitted and more than 26,500 payments made, totaling over $62 million.

Industry commentators have noted that these claims totals will continue to rise as long as the oil continues to spill and affect the area and in the event of a large landfalling storm during hurricane season.

The Federal Emergency Management Agency (FEMA) has confirmed that National Flood Insurance Program (NFIP) policies will cover property damage caused by oil in flood waters in the event of a defined flood.

The clarification comes after rising concerns over whether flood insurance policies would cover damage to homes and businesses if oil from the Deepwater Horizon spill mixes with flood waters, comes ashore during a storm and causes pollution damage to buildings.

In a memorandum to Write-Your-Own (WYO) flood program insurer participants, James Sadler, director of claims at the NFIP, said:

“Oil in flood water is not new for the NFIP, especially in riverine flooding. In the past, the mixing of oil and other pollutants in flood waters resulted from damage caused by a storm.”

FEMA states that there must first be a defined flood as described in the Standard Flood Insurance Policy (SFIP) and that damage caused by the oil in flood waters is covered subject to the provisions of the SFIP. There must also be direct physical loss to property for flood coverage to apply.

Other key points made by FEMA are:

  1. Under the terms of the General Property Form of the SFIP (commercial buildings and contents coverages must be purchased separately), damage caused by pollutants is limited to $10,000.
  2. Damage to residential buildings and contents from pollutants is covered up to the policy limits, under the Dwelling form and the Residential Condominium Building Association Policy form.
  3. Damage to ground, soil or land caused by flood, oil, or flood water mixed with oil is not covered.
  4. The cost of complying with any local or State ordinance including one that requires special removal methods for oil is specifically excluded.
  5. There is no coverage for testing or monitoring of pollutants unless there is a law or ordinance requiring it.
  6. FEMA or the WYO companies retain the right to subrogate, i.e. if the policyholder makes a claim against an entity who caused a loss and recovers any money, the policyholder must pay FEMA or the WYO back before they may keep any of the money.

Check out I.I.I. facts and stats on flood insurance.

Should Federal offshore oil spill liability limits be raised or eliminated? That’s the question being debated on Capitol Hill following the Deepwater Horizon oil spill.

At Tuesday’s hearing before the Senate Energy and Natural Resources Committee, a U.S. Department of Justice official said Congress would be on solid constitutional ground if it wanted to retroactively raise the $75 million liability cap on BP to pay for economic damages from the spill. He also said that in future the cap should be eliminated. Check out a Greenwire story via the New York Times for more on the hearing.

Under the Oil Pollution Act of 1990 (OPA), responsible parties for offshore facilities are liable for up to $75 million per spill for economic damages, plus removal costs. The liability cap does not apply if the incident was caused by gross negligence, willful misconduct or violation of Federal regulations.

OPA also created the national Oil Spill Liability Trust Fund (OSLTF), which can provide up to $1 billion for any one pollution incident and is used for costs not directly paid by the polluter.

In this incident BP has already said it will assume liability for all legitimate claims caused by the oil spill. Meanwhile, legislation has been introduced in Congress seeking to raise the liability limit to $10 billion.

In case you were wondering what the Oil Pollution Act of 1990 says on the subject of raising liability limits, here’s the text:

The President shall, within 6 months after August 18, 1990, and from time to time thereafter, report to the Congress on the desirability of adjusting the limits of liability specified in subsection (a) of this section.

and

The President, by regulations issued not later than 3 years after July 11, 2006, and not less than every 3 years thereafter, shall adjust the limits on liability specified in subsection (a) to reflect significant increases in the Consumer Price Index.”

A growing issue of concern is how raising the liability limits might affect insurance costs. In a letter to U.S. Senator Robert Menendez earlier this month, broker Lloyd & Partners said that any significant increase in the liability limit will cause insureds operating in U.S. waters to face the prospect of significant self insurance.

Check out further I.I.I. information on the liability system and on offshore energy facilities and insurance considerations.

As Congressional hearings continue about the impacts of the recent Gulf oil spill, the National Law Journal via law.com reports that environmental law firm Earthjustice and New Orleans law firm Waltzer & Wiygul have filed a lawsuit in federal court on behalf of conservationists and fishermen against the U.S. Department of Interior’s Minerals Management Service (MMS).

According to the NLJ article, the suit – Gulf Restoration Network and Sierra Club v. Salazar – charges that the agency violated federal law by exempting oil companies that drill in the Gulf of Mexico from disclosing blowout and worst-case spill scenarios as well as plans for dealing with them before approving the companies’ offshore drilling plans.

For the BP Deepwater Horizon rig exploration plan, MMS had issued a notice to oil companies telling them that they didn’t have to comply with those blowout and worst case oil spill rules, according to Earthjustice. In addition, it alleges that MMS failed to produce an analysis of potential environmental impacts in the event of a blow-out despite being required by law.

The legal challenge asks the court to invalidate the MMS practice of sending notices to oil companies informing them that they don’t have to comply with the rules and to order review of existing offshore drilling plans that do not comply with existing rules.

A quote from Earthjustice attorney David Guest sums up the case thus:

This case is about lax regulation by the Minerals Management Service. It is actually easier to get a permit for an offshore oil well than for a hot dog stand.”

U.S. President Barack Obama recently criticized what he described as a “cozy relationship” between the oil and gas industry and the MMS and charged U.S. Interior Secretary Ken Salazar with reforming the agency. Salazar already has announced that MMS will be split into two, effectively separating its safety and environmental enforcement responsibilities from its leasing, permitting and revenue collection activities.

Check out an I.I.I. backgrounder on offshore energy facilities and insurance considerations.

All eyes are on Capitol Hill today where two separate Senate hearings get underway to examine issues and impacts of the recent Gulf oil spill. This is the first time that officials at the corporations involved in the spill, including BP, Transocean and Halliburton, will testify about the Deepwater Horizon accident.

This morning’s hearing before the Senate Committee on Energy and Natural Resources will be followed by an afternoon hearing before the Senate Committee on Environmental and Public Works. An article in the Wall Street Journal describes how the companies are trying to shift blame for who bears ultimate responsibility for the April 20 rig explosion and fire.

Meanwhile, a BP investor has filed a shareholders’ derivative lawsuit against the company’s chief executive officer Tony Hayward and its board of directors in Louisiana. The complaint alleges that BP has a long history of ignoring crucial safety issues related to the operation of offshore rigs such as the Deepwater Horizon rig, including problems with the blowout preventer devices that so spectacularly failed during this disaster.

Over at the D&O Diary, Kevin LaCroix offers his take on this lawsuit and what it may mean for BP’s directors and officers:

Where the BP derivative litigation may ultimately head remains to be seen. At a minimum, BP’s directors and officers face the prospect of enormous expense defending against this litigation, and significant potential liability.”

LaCroix goes on to note that this lawsuit represents yet another example of a company domiciled outside the United States facing a D&O claim in the U.S. courts. The susceptibility of non-U.S. companies to U.S.-based D&O litigation is a topic of recurring interest, not least to D&O insurers, he adds:

The most obvious concern to insurers is the extent to which non-U.S. companies face threats of D&O litigation in the U.S. and therefore should be paying D&O premiums commensurate with the existence of the U.S.-based litigation exposure.”

Check out the I.I.I. release on how insurance and reinsurance markets will play a key role in covering oil spill related claims in the Gulf. Check out an I.I.I. backgrounder on offshore energy facilities and insurance considerations.

The number of lawsuits being filed over the Gulf of Mexico oil spill is reportedly rising, as are the estimated losses expected from the event. Before we get ahead of ourselves, Randy J. Maniloff of law firm White and Williams offers his perspective on the spill and its insurance coverage implications in a May 4 article titled Gulf Oil Spill: Gusher of Insurance Claims.

Maniloff observes that while the claims picture is currently much more speculative than certain, one thing is sure – efforts will be made to place as much of the tab for the losses as possible at the feet of insurance companies and insurers are well-prepared to handle the claims.

Maniloff goes on to note that the BP oil spill is likely to give rise to a host of claims under first- and third-party insurance policies. His observations include:

  1. Third-party claims: Maniloff notes that oil companies and owners and manufacturers of oil rigs tend to have very complex insurance programs, including self-insured components. These companies likely have unique policies and perhaps policies that are specifically designed to address pollution exposures. It remains to be seen what the limits of these policies are and whether all of those limits are applicable to the relevant claims.
  2. First-party claims: Impending first-party claims offer more predictability, according to Maniloff, because businesses that are covered by commercial property and business interruption insurance often have policies that are written on standardized forms published by ISO. Maniloff predicts a lot of activity surrounding business interruption claims, but points out that under business interruption policies the suspension of the insured’s business operations must be caused by direct physical loss or damage to the insured’s property. This is likely to be a significant issue, he says, given that the consequences of an oil spill can be far reaching without any need for the oil itself to actually reach those affected.
  3. Another dynamic at work in the claims picture, according to Maniloff, is that history has shown that when there is a large-scale societal problem that requires significant funding to solve it, insurers’ policy language faces pressure to become more malleable than what was intended. As a result, sometimes the insurance industry finds itself being required or pressured to pay more than its appropriate share.

Maniloff concludes that on the one hand, both the litigation and insurance claims arising out of the BP explosion are in the opening minutes of a very long play. On the other hand, it’s one that we’ve all seen before.

The Wall Street Journal reports that lawyers are descending on the Gulf coast and preparing lawsuits over the oil spill from the sunken Deepwater Horizon rig. It notes that the regime for compensating those hurt by offshore oil spills is complex:

Individuals can file traditional lawsuits in court and receive money by proving liability. Or injured parties can make use of a claims process established under the 1990 Oil Pollution Act, in which the federal government makes payments from a fund collected through a tax imposed on the oil industry.”

Meanwhile the New York Times reports that while President Obama has called the spill “a potentially unprecedented environmental disaster” and doomsday predictions abound about its impact, the spill is not unprecedented nor yet among the worst oil accidents in history.

Its ultimate impact, according to the NYT, will depend on a long list of interlinked variables, including the weather, ocean currents, the properties of the oil involved and the success or failure of the frantic efforts to stanch the flow and remediate its effects.

Both articles reflect an important point. From the liability and environmental standpoint, it’s simply too soon to tell how this spill will develop and what its final impact will be. As insurers know, these kinds of events take many years to unfold.

Check out I.I.I. information on major oil spills in history. For the latest on the response to the disaster, check out a collaborative multimedia Web site being maintained by BP, Transocean and various government agencies including the U.S. Coast Guard and NOAA.

Speculation is mounting that the growing oil spill in the Gulf of Mexico following the explosion, fire and sinking of the Deepwater Horizon oil rig off the coast of Louisiana may prompt the declaration of a federal disaster. The Jackson Clarion Ledger reports that just as Mississippi Governor Haley Barbour submits a disaster declaration request to President Obama for last Saturday’s deadly tornado, another major disaster looms for Mississippi.

Latest reports suggest oil is leaking at the rate of 5,000 barrels a day from the damaged rig, not 1,000 as had been initially estimated and officials believe the spill could reach the coast of southeastern Louisiana as soon as Friday night. The Clarion Ledger reports:

The impact of the spill is a direct threat to the state’s shrimp and oyster fishermen and to some of the state’s most pristine and important wetlands. Those areas have only recently begun to recover from 2005′s Hurricane Katrina.”

Meanwhile, a post at the Mississippi Press blog cites experts saying that although federal disaster declarations usually follow hurricanes and other natural catastrophes, the manmade oil spill in the Gulf could conceivably qualify as well. It quotes a spokesman for Gov. Barbour saying that while officials are still focused on keeping the oil spill offshore, a disaster declaration “would be one of the options open to us.”

According to FEMA data, there have been 35 major disaster declarations in 2010 so far – all of which were for various weather-related events. A major disaster declaration must be requested in writing to the President by the governor of a particular state. In this request the Governor certifies that the combined local, county and state resources are insufficient and that the situation is beyond their recovery capabilities.

The Mississippi Press blog notes that in 2001 then-President George W. Bush issued major disaster declarations for Virginia and New York following the September 11 terrorist attack. Two years later, he also issued a less-weighty emergency declaration for Texas and Louisiana following the loss of the space shuttle. Check out I.I.I. information on offshore energy facilities and insurance considerations.

Concerns are rising about the potential environmental impact after the sinking of the Deepwater Horizon oil rig in the Gulf of Mexico about 50 miles off the coast of Louisiana. Eleven workers are feared dead and 17 others were injured following an explosion and fire that ripped through the rig late Tuesday. The rig, which is owned by offshore drilling contractor Transocean Ltd, was under contract to oil giant BP, according to media reports. Check out a Guy Carpenter risk report for more on this story. An article in the New York Times notes that the potential for environmental disaster from the spill would be greatest if the oil were to reach the Louisiana coast. BP was reported to be dispatching a flotilla of more than 30 vessels capable of skimming more than 170,000 barrels of oil a day to protect sea lanes and wildlife in the area of the sunken platform. A Reuters report focuses on the financial impact of the loss of the rig for Transocean Ltd, noting analysts’ comments that the cost of the rig will be largely covered by insurance. The comments underscore the point that insurance provides support to many different industries, including energy. Check out a recent presentation by I.I.I. president Dr. Robert Hartwig for information on the impact of the global financial crisis on the energy sector and trends and challenges in energy markets.

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