Insurance Implications of the Deepwater Horizon Disaster

    By Michael Cessna, of Counsel, Lathrop & Gage LLP

The potential financial impact of the April 20, 2010 explosion and sinking of the Deepwater Horizon in the Gulf of Mexico may well eclipse the financial impact of the Exxon Valdez spill in 1989, which resulted in a $3.5 billion dollar settlement and $5 billion in legal and financial settlements. As efforts to contain the oil spill continue without success, the insurance ramifications of the disaster loom large.

The explosion led to the deaths of 11 crew workers and the loss of the $560 million dollar drilling rig. Reportedly, the well is gushing 5,000 barrels of oil a day, forming a 600-mile oil slick, which threatens to cause extensive environmental damage to the coastline of Louisiana, Mississippi, and Alabama. The claim thus presents Transocean Ltd, the owner and operator of the rig, British Petroleum PLC, who holds a 65 percent interest in the oil drilling lease, Halliburton Energy Services, Inc., who was engaged in cementing work on the well cap prior to the explosion, and Cameron International Corp., the manufacturer of the blow-out preventer, with a wide range of potential losses and liabilities.  

Given the scope of this disaster, the claims will implicate property liability, environmental liability, and business interruption insurance coverages. The insurance loss will be spread throughout insurance markets in London, the United States, and Bermuda.  

BP has already incurred $30 million in its clean-up effort. The ultimate costs of the clean-up may ultimately approach $2 to $7 billion. The projected cost to the Louisiana fishing industry is $2.5 billion, whereas the cost to the Florida tourist industry is $3 billion.  

The disaster has already engendered over three dozen lawsuits, including a staggering 31 class actions. The lawsuits range from actions for wrongful death and personal injury - brought by families of the crew members who were killed or injured - to actions for economic losses resulting from environmental damage brought by fishermen, property owners, and others who have economic interests that were affected by the oil spill.

Under the Oil Pollution Liability Act ("OPA"), BP, as lessee of the drilling area, is responsible for removal and government response costs, property and natural resource damages, and economic losses resulting from the oil spill. BP's liability is subject to a $75 million limitation of liability, subject to an exception for gross negligence or willful misconduct. OPA does not limit the liability of Transocean, Halliburton, or Cameron. Nor does OPA limit actions for contribution or contractual indemnification.   

BP is required under OPA to maintain financial responsibility either in the form of self-insurance or stand-alone pollution insurance with liability limits that are adequate to meet its maximum statutory liability. BP self-insures its statutory obligations through its own insurance company, Jupiter Insurance Ltd. Jupiter has an underwriting limit of $700 million and does not reinsure its risks. According to Bestlink, Jupiter had $6 billion in capital and surplus at year-end of 2009.

Transocean has stated that the drilling rig was subject to a $560 million hull insurance policy, with a deductible in the event of constructive total loss of $500,000 to $1.5 million. The hull policy also covers the cost of removing the sunken rig. In an SEC filing, Transocean has reported that it has recovered $401 million from its hull insurer.

As for pollution insurance, Transocean carries $700 million of environmental liability insurance. Hanover Re is the reinsurer of this policy. Hanover Re forecasts a loss of $53 million for the claim. Transocean also maintains a $950 million third-party liability insurance policy for collision, personal injury and death to crew, and third party liability. Transocean maintains a $10 million per occurrence deductible on crew claims, $5 million per occurrence deductible on non-crew claims, and an aggregate deductible of $500 million. Transocean retains the risk for liability losses in excess of $950 million. Cameron maintains a $500 million liability insurance policy.

As for coastal businesses who suffer business interruption losses, business owners may face difficulty in recovering those losses from their property insurers under business interruption coverage. First, commercial property insurance policies generally condition coverage on physical loss or damage to the insured property, so that recovery may depend on whether oil actually touches their property. Yet, such business owners may have alternative theories of coverage available to them if their business is interrupted due to the property loss of a key supplier or customer, or if access to their property is denied by the government due to the threat of the oil spill or the ongoing cleanup efforts. Even in such cases, the insuring agreement may exclude claims that pertain to property damage to the water or water front. Finally, such claims may be subject to a pollution exclusion.

Coastal business owners will likely have a better prospect of recovering those economic losses from BP under OPA. But, even under OPA, the $75 million limit on liability may prove problematic. Finally, the maritime economic loss doctrine will preclude business owners whose properties do not suffer physical loss or damage from asserting economic loss claims against Transocean and Cameron.

Michael Cessna practices business litigation law and focuses his practice on general appellate litigation. His experience includes insurance coverage disputes, pharmaceutical products liability, commercial and transportation litigation. Michael has handled appellate litigation in the U.S. Court of Appeals, presenting oral arguments before the Fourth, Eighth and Eleventh Circuits, the Missouri Supreme Court, and the Missouri Court of Appeals for the Eastern and Western Districts. He can be reached at www.lathropgage.com/mcessna. The Lathrop & Gage blog can be found at http://www.insurancelawanddisputesblog.com/2010/05/insurance-implications-of-the-deepwater-horizon-disaster/ . The topic of the insurance implications of the Gulf Oil spill will be discussed in the Environmental Liability Insurance chapter of the forthcoming Volume 4 of the New Appleman Insurance Law Library Edition. It will be written by members of the law firm of Lathrop & Gage LLP.