Tag Archives: DeepwaterHorizon

Funding Liabilities

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.

Oil in Flood Water

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.

Energy Security Supply Threat

As the New York Times reports on the lack of consensus surrounding how much oil is spilling from the Deepwater Horizon well in the Gulf of Mexico, a timely new study from across the pond says that green energy systems are essential in securing our energy supply and protecting the environment.

According to the report from Lloyd’s 360 Risk Insight and UK think tank Chatham House, the Deepwater Horizon oil spill is an example of how reliance on fossil fuels is pushing the search for reserves into more difficult and risky territories as declining production from easy to access oil reserves combines with growing global energy demand.

However, Lloyd’s reports that these trends could spur the transition to more cost-efficient clean and renewable energy systems. A press release quotes Lloyd’s CEO Richard Ward saying:

The current generation of business leaders need to rethink their approach to energy risks or be left behind as energy becomes less reliable and more expensive. The environmental and economic cost of our reliance on fossil fuels is too high. We need a long-term plan to reduce consumption and diversify our energy sources.†

As a result Lloyd’s says that all businesses, not just the energy sector, need to consider how they, their suppliers and their customers will be affected by energy supplies which are less reliable and more expensive.

With markets for low-carbon energy products likely to be worth at least $500 billion per year by 2050, Lloyd’s says this sector holds tremendous opportunities for business, though the lack of global agreement on carbon reduction is inhibiting commitment and investments.

The report calls on governments to set clear policies and create certainty in the transition to a low carbon economy. It also urges businesses to prepare for a new set of risks as our energy system changes. Check out I.I.I. energy facts and stats.

Moderating Rate Reductions

Energy industries, along with transportation and habitation industries, had the least premium reductions at minus two percent in May 2010, according to the latest market barometer from online insurance exchange MarketScout.

Just last month MarketScout CEO Richard Kerr warned that energy rates would increase, especially for offshore accounts in the wake of the explosion, fire and sinking of the Deepwater Horizon oil rig.

MarketScout’s latest analysis reveals that the premium and corresponding rates for all lines of commercial property and casualty business in the United States were down three percent in May 2010, compared to minus four percent in April and a six percent rate decrease a year ago.

Not since June 2005 has the average property/casualty rate decrease been as little as 3 percent.

Crime (flat), EPLI, fiduciary and surety (down 1 percent) were the coverage classes experiencing the smallest decreases in May, while general liability experienced the largest rate decrease at 5 percent.

Check out a new I.I.I. presentation on the Deepwater Horizon  event and I.I.I. information on the industry’s financial results and market conditions.

Oil Spill and Regulatory Fallout

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.

Gulf Oil Spill: Hearings and D&O Claims

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.

MarketScout: Energy Rates to Rise

Energy rates are going to increase, especially for offshore accounts in the wake of the explosion, fire and sinking of the Deepwater Horizon oil rig in the Gulf of Mexico. In its latest analysis of market conditions online insurance exchange MarketScout says the oil spill disaster is huge and will have an immediate impact on all offshore energy placements. Onshore insureds with offshore exposures may also be impacted. Richard Kerr, CEO of MarketScout observed:

British Petroleum is largely self-insured; however, energy underwriters across the globe will participate in this loss via either excess placement insurance on the non-operators (investors), drilling contractor or blowout prevention manufacturer. The non-operators, Anadarko and Matsui Oil, have extensive insurance placements, as does the drilling contractor, Transocean. It may take years to calculate the total insured loss from this disaster but premiums will increase immediately for offshore energy accounts.†

The comments came as MarketScout reported the premium and corresponding rates for all lines of commercial property and casualty business in the United States were down four percent for the month of April 2010. D&O Liability, EPLI, fiduciary, crime and surety were the coverage classes experiencing the smallest decreases in April (down 1 percent), while general liability experienced the largest rate decrease at 6 percent. Check out the I.I.I. backgrounder on offshore energy facilities and insurance considerations.

Expert: Gusher of Insurance Claims

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.

Oil Spill: Developing Story

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.

Gulf Oil Spill Worsens

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.