An Overview of Offshore Oil Drilling Risks, Legislation and Offshore Physical Damage Insurance Policies

An Overview of Offshore Oil Drilling Risks, Legislation and Offshore Physical Damage Insurance Policies

   By Rina Carmel and Ashkan Yekrangi, Carlson, Calladine & Peterson LLP

In their article appearing in the November/December 2010 issue of Coverage, “An Overview of Offshore Oil Drilling Risks, Legislation and Offshore Physical Damage Insurance Policies,” Rina Carmel and Ashkan Yekrangi initially explain why an increase in offshore oil spills is probable.  The article notes that an offshore oil and gas insurance and reinsurance market was established in the late 1960s to fill a gap in coverage. The article examines federal legislation that impacts coverage for offshore oil drilling, the risks that are specific to the offshore oil drilling industry, common terms and exclusions in offshore physical damage policies, and how they may apply to those risks. In terms of federal legislation, the article notes it became clear that the potential damages from the Deepwater Horizon Spill in 2010 would exceed the liability caps and Oil Spill Liability Trust Fund maximum payments provided under the Oil Pollution Act of 1990. Consequently, the House of Representatives passed a proposed “Big Oil Bailout Prevention Act of 2010” that would dramatically raise the liability caps and Fund maximum payouts. The article describes the potential impact of the proposed legislation on the offshore energy insurance industry. It then identifies a number of risks specific to the offshore oil drilling industry including the internal risks of property risks, layout and design risks, process hazards and loss control risks. It further identifies external risks to offshore drilling which include the weather, political risks and the risks posed by proximity to shipping lanes, and to other pipelines and platforms.  The article then examines offshore physical damage policies including the two Insuring Agreements of the London Standard Platform Form of 2009. Among other issues that the article discusses is coverage for pollution cleanup costs. It also delineates common exclusions found in offshore physical damage policies. The article concludes in part that “[c]overages that have previously been available may be limited or more expensive if proposed amendments to [the Oil Pollution Act] become law. … Insurers should consider underwriting cautiously and setting premiums in line with the risks.”

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