A steep hike in damage limits could drive offshore oil drillers out of U.S. waters, one insurance official warned in recent testimony before Congress.

Robert P. Hartwig, the industry's leading economist and president of the Insurance Information Institute, told the House Transportation and Infrastructure Committee that a proposed increase in the limits for environmental liability from an oil spill from the current $75 million up to $10 billion is beyond the capacity of the industry to handle. The proposal is contained in a bill, S. 3305, introduced in the Senate by Sen. Robert Menendez, D-N.J.

The American Insurance Association said Senate Majority Leader Harry Reid, D-Nev., expects a vote on the bill by July.

In his testimony before the House panel, Mr. Hartwig said the contemplated increase, combined with severe increases in regulation and oversight of offshore drilling, could raise the overhead for projects in U.S. waters to prohibitive levels, and thus drive this activity to other areas.

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

The hearings focused on the liability and financial responsibility for oil spills under the Oil Pollution Act of 1990 and related statutes, which are being reconsidered in the wake of the British Petroleum Deepwater Horizon Oil Rig spill in the Gulf of Mexico.

The American Association for Justice, which represents plaintiff lawyers, is pushing for the liability limit increase.

The AAJ–formerly known as the Association of Trial Lawyers of America–said the current cap on BP's liability at $75 million for economic damages inflicted on area residents and businesses "would barely scratch the surface of the catastrophic damage the spill has caused or even begin to hold accountable BP, which made almost that much per day–$62 million–in the first quarter of 2010."

The plaintiff lawyers contend that the "cap is an example on a grand scale of why arbitrary liability caps are just not reasonable. You cannot decide the expense of a disaster before it happens. Liability caps allow companies like BP to avoid bearing the responsibility for the full cost of the damage they inflict."

But Mr. Hartwig said there is simply not enough capacity to raise the limits to $10 billion. Doing so, he warned, will "significantly increase the demand for such coverage, and increase exponentially the risk and uncertainty associated with underwriting such coverage." The reason, he explained, is that "very low probability but extreme severity events are notoriously difficult for insurers to underwrite."

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

Currently, Mr. Hartwig said, smaller offshore insurers maintain coverage of about $1 billion and reinsure the rest. Multinational oil firms usually reinsure themselves through captive insurers, he noted, because they have the capacity through high operating earnings to deal with a large accident.

But such high limits could reduce offshore drilling, not just because of the higher cost of insurance but also due to new, stricter rules that could greatly increase the overhead for offshore drilling, according to Mr. Hartwig.

Meanwhile, Loretta Worters, vice president of communications for the Institute, told NU that Ken Feinberg–the independent administrator of a $20 billion claims fund set up by BP, which is self-insured–is "probably more experienced than anyone in these matters." But she added that his challenge, as it was after the Sept. 11 terrorist attacks, "will be to develop a fair and expeditious process given the resources available." (Mr. Feinberg was the special master of the federal compensation fund established for 9/11 victims.)

Moody's Investors Service said in a report that insurance claims will impact a number of lines, including marine hull, marine liability, general liability, environmental/pollution liability, control of well, business interruption, directors and officers liability, and workers' compensation.

In a related development, state attorneys general concerned about the oil's repercussions on wildlife announced they are suing BP. Connecticut AG Richard Blumenthal joined colleagues from 10 other Atlantic Coast states, sending letters to BP and its affiliated companies as a first step to protect states' interests from the potential effects of the oil spill.

Participating states include Delaware, Georgia, Maine, Maryland, Massachusetts, New Hampshire, New York, North Carolina, Rhode Island and South Carolina.

Mr. Blumenthal said that even if it is unlikely oil will actually reach the Connecticut shoreline, there remains a threat that wildlife–including injured or sick migratory birds that spend part of their life in Gulf area waters before heading north–could be severely impacted.

"We must protect Connecticut taxpayers from bearing any of BP's burden resulting from this outrageous oil spill," he said.

As fossil fuel supplies are stretched thinner, risks similar to the BP oil spill will increase, according to a recent report from Lloyd's and a U.K. think tank, which urges businesses to rethink their approach to energy.

Reliance on fossil fuels is pushing the search for reserves into more difficult and risky territories, making such efforts more dangerous and costly to insure, noted the report–"Sustainable Energy Security: Strategic Risks and Opportunities for Business" (http://www.lloyds.com/360). The report was prepared by Lloyd's "360 Risk Insight" initiative and the U.K. think tank Chatham House

Declining production from easily accessed oil reserves combined with rising demand from developing economies can result in events such as the current Deepwater Horizon disaster in the Gulf, the report said, adding that the BP spill could accelerate the transition to more cost-efficient, clean and renewable energy.

The study predicts that price spikes and supply disruptions will become more frequent due to rising consumption, insufficient investment, and threats to installations and transport.

These factors, the report notes, combined with political pressure to reduce greenhouse gases and protect the environment, will force businesses to be more efficient consumers of energy and adopt clean and renewable technology.

Lloyd's Chief Executive Officer Richard Ward said in a statement that business leaders "need to rethink their approach to energy risks or be left behind as energy becomes less reliable and more expensive."

"The environmental and economic cost of our reliance on fossil fuels is too high. We need a long-term plan to reduce consumption and diversify our energy sources," added Mr. Ward, who has direct experience with the energy sector. Before joining Lloyd's four years ago, he was CEO of the London-based International Petroleum Exchange, re-branded ICE Futures.

Mr. Ward said the report "should cause all risk managers to pause," adding that it outlines "that we have entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will have to pay for it."

Bernice Lee, research director at Chatham House, said that "businesses across the board need to make a serious assessment of their vulnerability to change and volatility on the energy scene." She warned that "there is also the potential for heavy or even catastrophic financial and environmental losses."

The study warns that preparations must be made for a new set of risks as the global energy system changes. Many renewable technology systems, for example, use rare materials, and the increasing reliance on electricity and IT could raise vulnerability to cyber attacks, according to the report, which advises businesses to reassess global supply chains and increase the resilience of their operations.

Special Reports /

Liability Cap Hike Could Drive Drillers Out Of U.S. Waters, Institute Warns

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