Anderson Kill & Olick Examine Insurance Implications of Gulf Oil Spill

   By John G. Nevius, Shareholder, Anderson Kill & Olick P.C.

Reports on the recent collapsed of the Deepwater Horizon rig and associated oil spill in the Gulf of Mexico seem to be going from bad to worse.  It's too early to predict how insurance claims will come out, observes attorney John G. Nevius, an expert in environmental insurance coverage and shareholder at Anderson Kill & Olick in New York, but it is certain there will be many.  The first lawsuits have already been filed and inevitably exclusionary language involving pollution will be cited as liability insurance companies seek to minimize their defense obligations to policyholders.  Meanwhile, the harm is expected to increase exponentially when the oil washes up on-shore.

Numerous other coverage issues exist.  For example, BP PLC, or British Petroleum, and Transocean, Ltd., a Geneva, Switzerland based exploration company, face substantial potential liabilities as the respective owners of the well and off-shore oil rig at issue.  BP is reportedly responsible for the clean-up and is known to self-insure against many risks.  Transocean is reported to have stated that its insurance will cover not only the $560 million value of the lost rig (which is said to have cost $365 million to build), but also wreck recovery and disposal costs.  It is unclear whether, and to what extent, BP or Transocean have business interruption coverage, but BP was reportedly leasing the rig for $500,000 per day.

Cameron International Corp. and Halliburton Co. have also both been identified in recent articles as having potential liability.  On Wednesday, Cameron announced that it had provided so-called blowout preventers for the rig to address the crushing pressures experienced by equipment more than a mile deep.  Halliburton is known to have provided oil field services on the project.  Such services reportedly include cementing of the well being drilled.  Halliburton, through a spokesperson, stated Thursday that it is assisting in on-going investigations of the cause of the explosion and spill.

Although BP has taken a lead in responding, it is not the sole owner as it only has a 65% majority stake.  Texas-based Anadarko Petroleum reportedly has a 25% stake and there are several other smaller stakeholders.  BP, however, is reportedly spending $6 million per day.  As of this writing, both additional state and federal resources were being called upon to supplement existing private efforts as well as the significant initial Coast Guard response.

"There is plenty of potential liability to apportion at this point, but things are only likely to grow more complex", observed Mr. Nevius, adding that many companies in the petroleum business have complex risk management programs in-place. 

In addition to traditional liability and business interruption insurance, specialty spill-related or other environmental cleanup coverage is available domestically, generally on a surplus or specialty market basis.  Numerous off-shore international underwriting syndicates, including the London Market, likely will face large claims as well.  However, many companies have been known to accept large portions of major oil-spill risk themselves through the use of large Self Insured Retentions and/or so-called Fronting Policies. In addition, captive insurance programs are often used by sophisticated policyholders to, among others, provide various tax benefits, direct claim-handling, and potential direct access to reinsurance markets.   "Major legal disputes over coverage liabilities are almost certain given the scope of the environmental disaster and the stakes involved, including the impacts on fishing and tourism," Mr. Nevius said.  He compared the situation with the losses in the area and related and continuing coverage litigation following hurricane Katrina.

Anderson Kill's Managing Partner, Robert M. Horkovich, who has helped policyholders secure insurance recoveries to help fund the clean-up of hundreds of environmental sites, emphasized the need for prompt notice by those with potential liability to all the insurance companies in their insurance program no matter how high. Mr. Horkovich, who served as lead trial counsel for the State of California in the Stringfellow Superfund environmental insurance coverage litigation, added "It is unclear at this point just how devastating the damages may be. The prudent course of action would be to try to get as many insurance companies on notice as soon as possible. Being aggressive in pursuing a potential insurance recovery now is important." Mr. Horkovich added, "It is unfortunate that it frequently takes years, or even decades, to get the insurance industry to recognize their obligations for policyholder liabilities under the liability insurance policies they sold. Only by aggressively pursuing recoveries can policyholders potentially shorten the time the policyholders will be able to get access to the insurance funds they need to help with a significant clean-up".  In the meantime, the oil keeps flowing out of the ground with no end in sight.