Drilling Down into Gulf Spill Claims
British Petroleum (BP) oil rig explosion leaves lessons and questions in its wake.
Claims Advisor will be following the claims angles of the Gulf oil spill over the next several months in a series of online and print articles. Check back monthly for updates. —Editor
The Gulf oil spill, which began April 20, has already cost more than $600 million in insurance claims paid and is expected to generate anywhere from $1.4 billion to $3.5 billion in total insurance payouts. Upcoming claims will likely be filed with business and personal carriers throughout the Gulf region—against BP (the lessee of the rig), Halliburton (the company that cemented the now infamous cap onto the well), Cameron International (the manufacturer of the failed blowout preventer), and liability and excess policies of Transocean (the owner of the rig). Outside the insurance industry, claims can be expected to be filed under the Oil Pollution Act and the Oil Spill Liability Trust Fund, which were created after the Exxon Valdez spill.
Many claims have already been satisfied, but there is smoke on the horizon, so to speak: Denials could lead to litigation. Claimants include a growing number of businesses and individuals, and the whole scene is ripe for fraud. In fact, one oracle from the Exxon Valdez days, Steven Rosenthal, portends that as many as 20% of claims ultimately filed in this incident could end up being fraudulent. The FBI opened a fraud reporting line in early May, expecting scam fundraisers, phony cleanup specialists, and falsified insurance claims.
Within the first 10 days after the blowout, Lloyd's made a payment of $560 million under a Transocean hull policy for the loss of the rig. Transocean holds a second policy, reported at $700 million, for environmental liability. It also has a $950 million third party liability policy for collision, personal injury and death to crew, and third party liability. It has a $10 million per-occurrence deductible on crew claims, a $5 million per-occurrence deductible on non-crew claims, and an aggregate deductible of $500 million. It retains all liability loss risk above $950 million. As for BP, it self-insures. Cameron is reported to have a $500 million liability policy.
Bernstein Research has said that losses to Louisiana's fishing industry could hit $2.5 billion, and Florida tourism could lose $3 billion. Already, claims are flowing in from Gulf Coast fishermen, restaurants, and ancillary businesses hurt by the spill.
BP's Response—A Teaching Moment
Despite all the bad press, BP does appear to be taking the claims side as seriously as the mitigation side. BP's vice president, Darryl Willis, says that the company has established 25 claims offices, employed 515 adjusters, and has 125 telephone operators. It has paid 17,000 claims for a total of $46 million so far. It has taken an average of five to seven days to get the checks in hand once the claim has been presented with documentation to substantiate the loss. There are about 17,500 additional claims in process.
The claims filed will stretch far beyond property loss and business interruption. Workers' compensation, health and wrongful death claims will be among others extending into all areas of liability lines. The directors and officers at BP can surely expect accusations of negligence or malfeasance.
As evident in history, policy language will once again come under close scrutiny and be the center of debate and litigation. The pollution exclusions in policies will be examined and challenged, especially if Gulf storms this hurricane season mix oil with floodwaters. Louisiana Insurance Commissioner Jim Donelon has pointed to flood policies as potential aids for businesses and residents who hold them. If oil damage to a structure occurs as part of a flood peril, the flood policy would pay, he says. He has petitioned Louisiana's U.S. congressional delegation to retroactively include flood insurance coverage for ground contamination, but no action has yet been taken on that.
The Legal Environment
Massive disasters like this are like an ant colony for claims. There are too many to count, and they are always moving. Each has their special niche, but they seem to run over each other and cut through territories willy-nilly. Investigations of fact will drag on as insurers attempt to establish who is truly liable for claims payments at the corporate level and at the local business and individual level. Even though claims are being paid by carriers, self-insureds and other entities, recovery from claims paid may be pursued through subrogation once it is determined who is responsible for the damages.
At the tip of the iceberg are the corporate claims, the biggies. For instance, in May, BP submitted a notice of claim against Transocean's excess insurers for pollution coverage as an additional insured. On May 21, in the Houston Division of the Southern District of Texas, Transocean's excess insurers sought a declaratory judgment that they have no additional-insured obligation to BP with respect to pollution claims. The suit focuses on the depth at which the pollution is flowing.
There are class actions along with individual and business claims. Exposure cases and lost income claims may be the most difficult at the local level. There are already accusations that local assistants in the cleanup and containment are not being properly protected from health hazards. Lawyers and others are criticizing BP for hiring fishermen to set out oil-containment booms. They argue that BP has failed to outfit these fishermen with proper equipment and has asked them to sign releases with indemnification. U.S. District Judge Ginger Berrigan in New Orleans enjoined BP from having workers sign such agreements.
Most litigation work will begin after July 29, when a panel of federal judges meets in Boise, Idaho, to consider whether the cases should be consolidated into one big case in New Orleans, as most people harmed by the spill want, or in Houston, as BP has requested.
BP wants more than 70 lawsuits over the Gulf of Mexico oil spill consolidated before a federal judge in Houston. The oil giant is asking the U.S. Judicial Panel on Multidistrict Litigation to have U.S. District Judge Lynn Hughes hear pre-trial matters for all the cases. Potential class action lawsuits have been filed in every Gulf Coast state. Plaintiffs include commercial fishermen, business interests, property owners and others.
There are alternatives for filing claims outside the insurance industry. Many claims will be made under the Oil Pollution Act, 33 U.S.C. §2702 et seq. A trust fund financed by a tax on oil is also available to pay for the spill cleanup when the responsible party is incapable or unwilling to do so.
The Oil Pollution Act allows government agencies to recover costs associated with the cleanup, harm to wildlife, and damage to coastal businesses and tourism. There is a $75 million cap on this type of liability payment. BP, which self-insures, has already acknowledged that it will have to spend more than that.
The Oil Spill Liability Trust Fund, which holds $2.7 billion, provides up to $1 billion per incident for damages. It also proposes that claimants would be able to collect damages from future revenues from the fund, with interest.
Mary Anne Medina is a Dallas, Texas-based freelance writer specializing in, but not limited to, insurance claims, claims management, expert services, claims education and training. Maureen Latimer is managing editor of Claims Advisor.