BP Oil Spill Damages to Stretch Insurance Coverage

BP and its partners on the Deepwater Horizon oil rig do not have enough insurance to cover the potential damages sought in litigation so far, according to an analysis by insurance information provider Advisen.

Advisen maintains a database tracking significant lawsuits filed against companies and their directors and officers. A search of the database identified 158 unique cases related to the Deepwater Horizon oil rig which exploded in the Gulf of Mexico. But the firm believes that more than 400 individual cases have been filed so far, according to David Bradford, executive vice president for Advisen in New York.

Of the cases where Advisen has enough information to estimate potential damages, BP and its partners could be looking at costs of up to $37.6 billion, he said.

BP, which leased the rig and owned 65% of the project, is the most named defendant in the lawsuits at 24%, followed by rig owner Transocean at 21%, according to Advisen. 

BP is self insured, with its own dedicated 'captive insurance company' that provides $700 million in coverage. Excluding BP, the other defendants named in the lawsuits have about $2 billion in coverage, Bradford said, noting this is only the first wave of litigation.

Twenty insurers and reinsurers have estimated losses of more than $10 million, led by Lloyd's of London, which pegged its losses at between $300 million and $600 million. "I guarantee those numbers are going to continue to go up," said John O'Brien, president of insurer Ironshore Environmental. "I would expect the number of firms involved in paying for the loss will also go up."

Rates for insurance coverage in the oil and gas sector will increase, perhaps 10-20%, and insurers are already introducing exclusions when firms are renewing their policies, he added.

But the insurance industry's exposure is limited by policy terms and reinsurance, said Curtis Porterfield, a Los Angeles-based partner with law firm Howrey who represents policyholders against insurance companies. "I don't think it's going to burden the global market," he said.

Claims related to environmental damage comprise of the vast majority of complaints in the Advisen database at 62%, but 9% of the lawsuits are claiming that the companies violated securities laws and regulations, Bradford said.

"This just isn't an environmental and property damage liability situation," he added. "It's also a management liability situation. A lot of these companies are being sued for basically failing to report to shareholders the extent of their exposure to financial loss from a situation such as this."

Violations of the Oil Pollution Act of 1990 will be the basis for many claims, including the cost of removing oil and economic losses related to property damage, but there is uncertainty about the scope of the law, said Stuart Smith, a partner with New Orleans environmental law firm Stag Smith representing the United Commercial Fisherman's Association and independent fishermen.

"The statute itself is very poorly drafted and that's going to be a big problem in this case because the interpretations of this statute are all over the place," he said. "It has not been decided by the Supreme Court as to where the line is going to be drawn and how far removed from the oil are you going to be able to be and still make a claim. There's going to be a lot of litigation and that's going to take a long time I'm afraid."

By. Gloria Gonzalez

Source: Environmental-Finance