Emerging Legal and Insurance Issues from the Gulf Oil Spill

Emerging Legal and Insurance Issues from the Gulf Oil Spill

   By John L. Watkins, Shareholder, Chorey, Taylor & Feil

Last week, courtesy of my friends at LEXIS, I attended the HB Litigation Conference in Atlanta on litigation and insurance coverage issues arising from the BP oil spill disaster in the Gulf of Mexico. The presenters included extremely well-known plaintiffs' attorneys (including the guys you see on CNN and MSNBC). Presenters also included well-known and credentialed insurance coverage attorneys, both for policyholders and insurance companies. Here are a few somewhat random thoughts following this experience.

1. There is lots of posturing, but there is also, with reason, lots of anger. The plaintiffs' attorneys, predictably, ranted and raved about BP, Haliburton, the Bush Administration (particularly Dick Cheney) and corporate America in general, coupled with generally favorable references to what one plaintiffs' attorney called "our administration." All of this largely partisan and self-interested rhetoric could not, however, mask the very real anger that rightly exists for the millions of Americans affected by this tragedy. Quite simply, this is a situation that simply does not require exaggeration to understand that, whatever its final scope may be, it is of great magnitude.

One of the younger plaintiffs' lawyers from Pensacola was supposed to talk about how to file a claim under the Oil Pollution Act ("OPA"), the federal statute that is the focus for addressing this issue. Because others had covered pretty much all of what he had to say, his speech instead was much like a jury argument on how the spill had affected the fabric of the way of life for people on the Gulf coast. On a day following photos and videos of oil washing up on the beaches of his hometown, it was very understandable. His anger appeared completely genuine and without doubt reflects how millions on the Gulf are feeling.

2. Right now, there is lots of uncertainty about the extent of the damage. No one really can assess the extent of the damage to the Gulf other than to say that it is really bad. The total damage will depend on unknown factors such as when the flow is finally stopped and whether there will be hurricanes in the affected areas. There was general agreement that a hurricane could make the situation much worse.

The plaintiffs' experts claim that the use of dispersants has made the environmental situation worse. There was no opposing view on this issue, so it was difficult for me to assess if this is correct, but it will certainly be an issue in claims and litigation.

The plaintiffs' attorneys are clearly gearing up for personal injury claims (including asthma and breathing problems allegedly caused or worsened by the oil) that may extend to residents many miles inland. Some of the experts claimed that chemical reactions related to the dispersants have resulted in the release of a carcinogenic substance. I have no idea if these statements are correct or whether the claims will have any merit, but they will be coming.

There will also be national resource damages claims pursued by State governments (and perhaps the federal government). The extent of this damage is not known, and could take years (if not decades) to resolve.

Finally, a number of the participants raised the possibility of criminal prosecution, particularly of BP. There will probably be a public hue and cry, at least in some circles, for criminal prosecution, notwithstanding the many legal issues that can result from parallel criminal and civil proceedings, including possible delay of the civil proceedings.

3. There is some uncertainty about how the claims process will proceed. The $20 billion fund that BP agreed to establish following jawboning from D.C. is without precedent. Although the money is undoubtedly welcomed by those affected, it creates a veneer of uncertainty about how to proceed. OPA, for example, has claims procedures. One of the attorneys said that he was advising his clients (claimants) to comply with OPA even if it may not be required for the fund. This seems sensible. Those affected should definitely seek legal advice from an attorney familiar with handling these claims, and who will keep on top of the situation, which could change rapidly as the claims process ramps up in the coming weeks.

There was general agreement that, to date, BP's claims process (the one that BP discusses in its public relations campaign on television) is still quite fragmented and that the claims BP has paid to date are quite small (speakers said largely under $5,000). The consensus seemed to be that resolving larger claims would require quite a bit longer.

The experts all agreed that anyone with a potential claim should do everything possible to document it and pursue all avenues of recovery. This would include providing records of financial performance (in the event of a lost profits claim), including records showing past performance and recent loss. In the event of any direct damage, documentation should include photographs and videotapes. A number of the speakers stressed that claimants need to understand that they will not be receiving compensation for gross revenues, but only net loss.

4. The insurers will attempt to deny or minimize their responsibility. Although there is a variety of first party and third-party insurance coverage potentially available, the lawyers for the insurance companies made clear that they would be carefully scrutinizing many claims. One of the insurance coverage lawyers said that, at present, he did not currently see the spill as a huge issue for the insurers, and that there would be "many hurdles" to insurance recovery. This speaker also suggested that claimants should look to the $20 billion fund, as it might be a far easier road to recovery. This observation (that it may be easier to get paid by the fund) may prove to have truth to it, but no one really knows.

There was general agreement that a bad hurricane could substantially worsen the potential losses for insurers, as the storm surge would result in many more claims.

The speakers generally agreed that parties most likely to achieve an insurance recovery would be larger businesses with relatively sophisticated risk management programs that use manuscripted policies (i.e., forms prepared, typically, by the insured's brokers, as opposed to insurer-generated forms). Many "mom and pop" operations are unlikely to have this type of coverage, if they have any coverage at all. Nevertheless, all of those potentially affected should review potentially applicable coverage.

The policyholder lawyers pointed out the importance of potential claimants carefully reviewing all possible coverage and putting all potential carriers on notice of a claim or of circumstances that may give rise to a claim. This only makes sense, as carriers routinely raise notice-based defenses. Coverage review is probably best done by an experienced insurance coverage lawyer.

Conclusion: No Answers Yet. Although the issues are emerging, there are no answers yet. Many of the speakers pointed out that legal issues stemming from the Exxon Valdez are still not completely resolved nearly two decades later. Given the known magnitude of the Gulf spill, this fact provides scant comfort for those affected.

Note: As stated by many of the participants at the conference, any views expressed herein are mine, and do not necessarily reflect the views of any clients of my law firm that may be affected by this event. Further, given the uncertainty of the circumstances surrounding the spill, the damage, and the legal issues, I reserve the right to change my views on any of these subjects as the circumstances develop and change.