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.