The FC&S editors analyzed how various lines of business could respond to oil spill claims. Talk of the Deepwater Horizon oil spill has seeped into many areas of life, from serving as fodder for late-night talk show hosts to spurring political debate. Recently a comedian even mused that not only was BP responsible for destroying the Gulf of Mexico, but that it also had a hand in the recent volcanic eruptions that disrupted air travel in Europe (and should thus be blamed for all of the ills in the world).

While BP probably should not take the fall for Eyjafjallaj?kull’s ash spewing or other disasters, it has promised to take responsibility for the oil spill and pay all legitimate claims for damages resulting from the spill and necessary response costs.

BP’s web site lists the types of claims the company will pay: property damage; net loss of profits and earning capacity; subsistence loss and natural resource damage; removal and cleanup costs; cost of increased public services; and net loss of government revenue.

The list is derived from the Oil Spill Pollution Act of 1990 (OPA), which requires these types of claims to be paid by the responsible party. BP says that it will also evaluate bodily injury claims even though those are not required to be compensated by the Act.

The OPA caps liability for non-cleanup costs at $75 million, but BP says it will pay for all costs, even if they top the cap. However, there may still be individuals and businesses whose claims may not be paid or fully satisfied or that do not qualify for coverage under the OPA. These parties will likely then turn to their insurance policies for compensation. The FC&S staff has analyzed how various lines of business could respond.

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Commercial and Personal Property

As Diana Reitz discussed in her column in the July 2010 issue of Claims Magazine ["Wind Versus Water Versus Oil"], hurricane-induced floods or winds carrying oil and other debris from the Gulf may impact property owners and generate a significant amount of damage. An above-average hurricane season is predicted for 2010, and residents are naturally concerned.

The standard homeowners’ and commercial property policies do not cover flood damage, which is often the type of damage sustained from hurricanes. But what happens if the property is somehow damaged by oily water that is not caused by a flood? Is there any coverage? The water damage exclusion on both policies is fairly broad and includes surface water, waves, flood, overflow, or spray from any of these whether or not driven by wind. Reports from Hurricane Alex stated that oily water was being pushed onto roads and beaches. This oily water is either flood water or surface water, and is excluded under the property policies. It is not a stretch to see how oil could be pushed into yards and against homes or businesses.

Obviously, oily water is not the only hazard, as tar balls and mousse patties are appearing on seawalls and could be pushed into yards or structures. Tar balls and mousse patties are substances in and of themselves, and could be blown by strong winds.

The policies exclude the discharge, dispersal, seepage, release, or escape of pollutants unless the discharge, dispersal, or release is caused by a specified peril.

While most of the perils listed could not cause damage from oily water or tar balls, the specified perils of windstorm or hail might. The peril includes coverage for property inside a building if the direct force of wind or hail has created an opening within the structure. Hurricane-force winds could not only push tar balls and mousse patties onto a house or building itself, but these substances could also be blown inside if the wind first creates an opening. There is coverage for this type of loss unless the policy excludes windstorms and hurricanes, something that is common in coastal areas. In such instances, there would not be coverage.

Many property policies also include explosion as a specified peril. It could be argued that the explosion at the Deepwater Horizon rig is the cause of the dispersal, making pollution exclusions inapplicable.

Standard commercial property forms also often contain additional coverages for the cleanup of pollutants from land or water, property that is not normally covered. So if pollutants from the spill or its cleanup make its way onto land or bodies of water on the insured premises, the cost to cleanup would be covered.

What About Commercial General Liability?

Commercial General Liability

Because BP is self-insured and probably has many excess policies, there is very little, if anything, to say about coverage under the commercial general liability (CGL) form from BP’s stance.

Considering that there are many other actual and potential players involved, however, some may have CGL exposures and pollution liability exposures that the CGL form and the pollution liability form address. For example, if a claim is made against the manufacturer of a part that failed and was a cause of the spill or contributed to it, then that manufacturer’s CGL form may handle the claim.

Presuming the company is small enough to have a CGL form and a pollution liability form, the CGL form would apply to bodily injury and property damage claims for which the manufacturer/named insured is held legally responsible. The pollution exclusion on the CGL form would not apply to a products claim or a completed operations claim.

For instance, if the named insured manufactured a part of the oil rig and that part failed and contributed to causing the spill, that is a products claim and the pollution exclusion would not apply. Or, if the insured worked on a part of the rig and that failed and contributed to the spill, then the pollution exclusion would not apply in that case, either. Nevertheless, cleanup costs are usually excluded under the CGL form.

If the insured has an insured contract with another party as defined in the CGL form, or has listed some other party that is found to have contributed responsibility to the spill as an additional insured on the CGL form, that might pose a problem. It depends on the wording of the contract and the additional insured endorsement; however, if any exclusions apply, then the insured contract or additional insured endorsement still will not give coverage to the other party.

If the manufacturer has a pollution liability coverage form, it applies only to bodily injury or property damage caused by a spill from an insured site. So, unless the named insured manufacturer had listed the BP oil rig as the specific location in the declarations of the form, the pollution liability form would not help the manufacturer for a claim. Besides, the standard pollution liability form contains an exclusion for bodily injury, property damage, or environmental damage arising out of the operation of any offshore facility as defined in the Outer Continental Shelf Lands Act or the Clean Water Act, which would apply to BP’s Deepwater Horizon oil rig.

Will Business Interruption Coverage Intervene?

Business Interruption

Much like with the terrorist attacks on Sept. 11, 2001, those seeking business interruption compensation for losses due to the oil spill may find they do not have coverage. Business interruption policies typically require a triple trigger: an actual loss of business income, a suspension of operations, and the loss must result from covered, direct physical loss or damage to the premises. Without the third element, the loss would not be covered.

Many businesses, notably those tied to tourism and seafood, have experienced a significant slowdown or a cessation of business because of the oily waters and beaches in the Gulf region. Even though tourists are staying away and fishing is banned in some areas, most of these businesses have suffered no damage to their actual premises.

For many business interruption forms, a causes-of-loss form like that described in the discussion of commercial property forms is attached, and the same exclusions and exceptions would apply if the insured suffers damages to its premises.

For instance, if a pay-to-fish lake becomes contaminated with pollutants related to the spill and causes the lake to shut down while it is cleaned up and restocked, loss of income during that suspension could be covered. If the policy has an additional coverage for pollutant cleanup of land and water, then the insured would have covered direct damage that would trigger the business interruption coverage.

What About Directors and Officers Liability?

Directors and Officers Liability

Corporate directors and officers may be held personally liable for damage arising from wrongful acts or decisions they made on behalf of their companies. However, the majority of D&O policies include a broad-based pollution exclusion that eliminates coverage for directors and officers (and other insured groups) for damages arising from pollution events. The exclusions may range from voiding coverage for actions that the directors and officers knew—or should have known—could result in pollution damage to voiding coverage for direct shareholder actions or derivative suits alleging that stock prices fell because of a pollution event.

BP Oil and other major players in the Deepwater Horizon event probably have policies that were amended to provide at least some pollution liability coverage for alleged wrongful acts of their directors and officers. As with the other coverage lines discussed in this column, however, numerous companies with peripheral Deepwater Horizon connections may also find themselves without the D&O coverage they presumed they would have.

Of paramount concern from a D&O standpoint has to be the question of whether derivative suits for lower stock values arising from the event will be covered by their D&O insurance. This specter is looming near as we watch the stock value for BP itself tumble.

Losses from this spill are vast, but it does not appear that insurance will be the best route to recovery in many instances. Still, those who have experienced damage may be able to find some compensation from their carriers.