Insurance and the Gulf of Mexico Oil Spill

   By Michael Kotula, Partner, Rivkin Radler, LLP.

The explosion on the Deepwater Horizon platform and rupture of an oil well in the Gulf of Mexico, and the ensuing oil spill, is likely to result in significant liability exposures for a number of companies.  Here is what is currently known about the players involved in the incident.  The majority stakeholder in the Macondo oil well off the coast of Louisiana, BP Plc, has largely been identified with the spill.  Anadarko Petroleum Corp. and Mitsui Oil Exploration Co. own 25% and 10% stakes in the well, respectively, and may share in the cost of responding to the oil spill.  The oil platform was being leased by Transocean Ltd. to BP, and it now sits on the sea floor over 5,000 feet below sea level.  Prior to the explosion on April 20, 2010, Halliburton Co. had been engaged in cementing operations on the well, and cementing operations have previously been associated with other oil well accidents.  In addition, it has been widely reported that the oil well blowout preventer, manufactured by Cameron International Corp., which is a failsafe protection against an ongoing oil spill, failed in this case.  Other parties may also have been involved in the explosion and resulting oil spill. 

The incident is likely to be one of the most intensively investigated disasters in United States history, with some in Congress vowing an investigation the likes of which has not been seen in this country since the Three Mile Island nuclear accident.  With time, much more will become known about the sequence of events that caused or contributed to the explosion, rupture and release of oil.  Many lawsuits have already been filed over the incident, including suits on behalf of some of the missing workers presumed dead and classes of affected coastal property owners and fishermen.  Claims between the players in the incident are also likely to follow. 

The oil spill in the Gulf of Mexico is likely to result in a number of insurance claims.  While it is possible to make some generalizations, each claim turns on its own facts and the actual insurance contract language at issue.  What may be true with a particular type of liability or one version of an insurance policy provision may not be true with another type of liability or another policy provision.  Here is what is presently known about possible insurance cover held by the players in the incident.  BP Plc is reported to be self-insured or insured under a program issued by captive insurance company, Jupiter Insurance LTD, which is said to have retained its BP liabilities with no reinsurance.  Anadarko is reported to have cover for $178MM in expenses excess of a $15MM deductible.  No information is available concerning Mitsui's potential cover.  

Transocean Ltd. reportedly has cover for the total loss of the Deepwater Horizon oil platform and wreck removal to the extent it may be required, with a reported total insured value of the platform at $560MM.  Because the platform now lies over 5,000 feet below sea level it is possible that only limited wreck removal may ultimately be required.  However, if more substantial wreck removal were to be required, then the wreck removal costs could be quite significant.  Transocean also reportedly carries $950MM of third-party liability coverage excess of deductibles.  According to Transocean's most recent SEC filings, its "customers generally assume, and indemnify us against, well control and subsurface risks ... such as blowout ..., the cost to regain control of or redrill the well and associated pollution."  The extent of Halliburton's potential cover has not been reported.  Cameron reportedly has $500MM in liability insurance.

It will take a full investigation to determine which of these players may have liability for the explosion, well rupture and oil spill, and perhaps even more time before we learn whether the insurance coverage reportedly carried by these companies may apply.  It is possible that certain of the coverage issues may be determined under Louisiana law, which would potentially apply under the federal Outer Continental Shelf Lands Act ("OCSLA"), 43 U.S.C. § 1333, as the Macondo oil well lies off the coast of Louisiana.  While the insurance contracts held by the players in the incident are sure to vary, many of the issues likely to be encountered will require a deep understanding of insurance issues that have been encountered in countless other pollution claims.  

In my forthcoming new chapter Environmental and Toxic Tort Insurance Coverage Issues from the Second Edition of New Appleman Law of Liability Insurance, co-authored with my colleague, Anne Murray, we discuss many of the coverage issues raised in pollution claims.  As noted in § 15.09, for example, "[i]n only a small number of cases has a court declined to enforce the absolute pollution exclusion for pollution-related environmental claims."  Even if pollution coverage may be afforded under a particular type of policy, such coverage may be limited in some fashion.  Each claim must be examined under the potentially applicable policies in light of all relevant case law.  Because, thankfully, few incidents of this kind have taken place, creative thinking is needed.

Michael Kotula is a partner in the Insurance & Coverage Litigation Practice Group in the Uniondale, NY office of Rivkin Radler LLP and is the co-author of the upcoming chapter Environmental and Toxic Tort Insurance Coverage Issues in the Second Edition of New Appleman Law of Liability Insurance. Mr. Kotula counsels insurance companies in significant environmental and toxic tort insurance coverage matters.

Access Chapter 14, Environmental and Toxic Tort Insurance Coverage Issues, in lexis.com.