03
May
2010

BP Oil Spill Sparks Chain Reaction Of Insurance Claims

Law360

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Cleaning up the thousands of barrels of oil leaked in the BP PLC-operated Deepwater Horizon rig blast may take years, and untangling the complex web of insurance claims and litigation stemming from the projected $3 billion in environmental and economic damage may take even longer, experts say.

The April 20 blast — which has resulted in a massive oil leak affecting vast portions of the Gulf Coast — has already spawned at least 27 lawsuits, including two putative class actions, in seven different federal district courts, alleging various claims for negligence with Deepwater operations, operators and design, negligence with regard to federal environmental and labor safety rules, violations of water pollution laws, and wantonness in regard to rig operator BP and owner Transocean Ltd.

Two of the companies whose work on the rig has been called into question by federal investigators — Halliburton Co., which performed cement casing work on Deepwater, and Cameron International Corp., which supplied safety mechanisms known as blowout preventers — have also been cited as potentially liable in the explosion.

“There is plenty of potential liability to apportion at this point, but things are only likely to grow more complex,” said John G. Nevius, an environmental insurance expert and shareholder at Anderson Kill & Olick PC. “Major legal disputes over coverage liabilities are almost certain given the scope of the environmental disaster and the stakes involved, including the impacts on fishing and tourism.”

According to experts, the coverage issues will fall into several major categories: first-party claims against insurers by policyholders whose property has been damaged by the oil spill; third-party claims against major Deepwater players BP, Transocean, Halliburton and Cameron; claims by the major Deepwater players for defense and indemnity costs in claim litigation; director and officer policy claims for any individual directors or officers sued for breach of fiduciary duty; lawsuits from families of workers injured or killed by the blast; and claims by the companies against their insurers for the cleanup costs.

“This is a like a three-dimensional chess game,” said Matthew L. Jacobs, a partner in the insurance litigation practice at Jenner & Block LLP. “There are things going on in all directions.”

In an effort to mitigate the inevitable public relations nightmare, BP has leaped into action to address claims. The company said in a recent statement that it intended to take responsibility for responding to and cleaning up the spill and had established a “robust process” to manage “legitimate and objectively verifiable claims,” including claims for assessment, mitigation and cleanup, real and property damage, personal injuries, and commercial losses.

A bulk of those claims will come in the form of relatively small sums demanded in first- and third-party claims against insurers and liable Deepwater players by Gulf Coast business and property owners, Jacobs said.

“There are going to be a lot of small claims,” he said. “BP is likely to pay off these claims and obtain releases as quickly as possible, so they don't become class members.”

“The bigger claims will be from the property owners on the Gulf Coast — for instance, those in the resort industry,” Jacobs said. “They're going to have larger business interruption claims” against their individual carriers to compensate for lost operating time and income.

BP, almost completely self-insured, will be tapping its own captive insurance subsidiary — Jupiter Insurance Ltd., located on the U.K. island of Guernsey — to help offset cleanup costs that, according to early projections, may exceed $3 billion, Jacobs said.

In addition to dealing with the consequences of the spill, Transocean is still grappling with the massive rig, which remains submerged several hundred feet below the ocean's surface.

The company has disclosed that the fully insured value of the rig is $560 million, and its major insurers, including Lloyd's of London, are expected to offset most of its tab, Nevius said, noting that most major petroleum players have sophisticated systems in place to help manage their risks.

One way of hedging that liability, both for the major Deepwater players and other insurers whose policies will be invoked by property and business owners along the Gulf Coast, include the use of reinsurance, experts said.

Already, major reinsurers are announcing that they expect to see claims worth tens of millions of dollars from the explosion coming up the chain and hitting them over the next several quarters.

Partner Re Ltd. said it expected the insured losses from the explosion to top $1 billion, projecting its second quarter 2010 results to include claims stemming from the blast in the range of $60 million to $70 million.

Hannover Re CEO Ulrich Wallin expected his company to take a net loss of approximately €40 million ($53 million) from the explosion, which, he said, was still “considerably below our major loss expectancy for the second quarter.”

“Several reinsurers have come out and said that this is bad, but it's not catastrophic,” Nevius said. “But what all of the participants — whether it's BP, Transocean, Halliburton or Cameron, as well as the reinsurers — are looking at is the impact it will have on their stock prices, which will in turn impact the resources that are available” throughout the crisis.

Although insurers and Gulf Coast-based businesses are already bracing for future claims, much about where the blame will wind up — and how high damages will ultimately go — remains to be seen, as the situation continues to unfold, experts said.

“It's too early to say how liability will be apportioned,” Nevius said. “BP has the major cleanup obligation, and they won't be able to get out from under that. But what the technical investigation reveals will go a long way to determining what the ultimate liability winds up being.”

That determination of liability could spark litigation between the larger players, Nevius said, as it becomes clear how much of a role something like Cameron's blowout protectors, or Halliburton's contracting work, played in the disaster.

“You may also end up with lots of insurance company versus insurance company disputes, which is one of the collateral consequences of having multiple claims against multiple companies, multiplied by the volume of oil and the square miles of coastline being threatened,” Jacobs said.

The extent to which claims and ensuing litigation will reach is also dependent on whether insurers are able to invoke pollution exclusions in their policies and whether businesses on the Gulf Coast found themselves holding the right kind of coverage at the time of the spill, Nevius added.

“It depends on the claim-handling philosophy,” he said. “If it's a very straightforward claim with a high public profile, then insurance companies will often pay the claim because they want to be seen as acting responsibly. When things are a little bit more disputed, you can expect to see it take longer.”

While it might take as long as a decade to fully sort out the insurance coverage stemming from a spill expected to rival the Exxon Valdez disaster, experts urged businesses and insurers to get their plans of attack lined up now.

“Everybody here, whether you've been damaged by the spill or you're being sued, has available insurance to look at,” Jacobs said. “They need to locate their policies, read them carefully, submit their claims and pursue them aggressively.”

For policyholders hoping to join litigation, filing suits now will help them gain an edge when it comes to selecting forums and possibly positioning themselves to take lead counsel or plaintiff status, he added.

“These complex claims with a lot of money at stake tend to drag out for a long time, which is unfortunate in the context of an environmental disaster,” Nevius said. “You should discuss your insurance program with your broker and give notice under any policy which might potentially respond, no matter what level you carry in terms of excess or umbrella policies.”

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