NU Online News Service, June 8, 3:25 p.m.EDT

WASHINGTON–An industry official will testify beforeCongress Wednesday that a steep hike in the damage limits from anoffshore drilling accident could drive offshore drillers out ofU.S. waters.

Robert Hartwig, an economist and president of the InsuranceInformation Institute, said he will tell the House Transportationand Infrastructure Committee Wednesday that a proposed increase inthe limits for environmental liability from an oil spill from thecurrent $75 million to $10 billion is beyond the capacity of theinsurance industry.

That proposal is contained in a bill, S. 3305, the Big Oil Bailout Prevention Liability Act of 2010,introduced in the Senate by Sen. Robert Menendez, D-N.J.

According to the American Insurance Association (AIA), SenateMajority Leader Harry Reid, D-Nev., said he expects a vote on thebill in the Senate floor in July.

In his testimony before the House panel, Mr. Hartwig said hewill testify that the contemplated increase, combined with severeincreases in regulation and oversight of offshore drilling, couldraise the overhead for offshore drilling in U.S. waters toprohibitive levels, and drive this activity to other areas.

"Collectively, the impact could be less drilling if it becomesnoneconomic to continue the operation at the higher cost levels,"he said. "These rigs could be relocated to some other part of theworld where operating costs are lower."

The hearings are focusing on the liability and financialresponsibility for oil spills under the Oil Pollution Act of 1990and related statutes, which are being reconsidered in the wake ofthe Deepwater Horizon Oil Rig spill in the Gulf of Mexico.

The American Association for Justice (AAJ), which representstrial lawyers, is pushing for the liability limit increase.

The AAJ said the current cap on BP's liability at $75 millionfor economic damages inflicted on area residents and businesses"would barely scratch the surface of the catastrophic damage thespill has caused or even begin to hold accountable BP, which madealmost that much per day – $62 million – in the first quarter of2010."

The trial lawyers contend that the "cap is an example on a grandscale of why arbitrary liability caps are just not reasonable: youcannot decide the expense of a disaster before it happens.

"Liability caps allow companies like BP to avoid bearing theresponsibility for the full cost of the damage they inflict," theAAJ argued.

But Mr. Hartwig contended that there is simply not enoughcapacity to raise the limits to $10 billion.

He said that "raising the limit to $10 billion willsignificantly increase the demand for such coverage, and increaseexponentially the risk and uncertainty associated with underwritingsuch coverage."

The reason, Mr. Hartwig said, is that "very low probability butextreme severity events are notoriously difficult for insurers tounderwrite."

The implication, he said, is that such limits could push morefirms to self-insure.

Currently, Mr. Hartwig said, smaller offshore insurers maintaincoverage of about $1 billion, and reinsure the rest. Multinationaloil firms usually reinsure themselves through captive insurers, hesaid, because they have the capacity through high operatingearnings to deal with a large accident.

But such high limits could reduce offshore drilling, not justbecause of the higher cost of insurance, but also due to new,stricter rules, as well as higher insurance rates and other higheroperating costs that could greatly increase the overhead foroffshore drilling, Mr. Hartwig said.

The Senate Environment and Public Works Committee will also holda hearing on Wednesday to discuss the bill.