Halliburton Energy Services will plead guilty for destroying evidence related to BP's 2010 oil spill in the Gulf of Mexico, in which Halliburton acted as the cement contractor on the exploded drilling rig that caused the disaster.

Although the case brought against the company shows that it thoroughly tested the Macondo oil wells' safety capabilities, an insurance expert says Halliburton's decision to meddle with its evidence may cause liability fallout that will be difficult to control.

“Halliburton is publicly traded. As a publicly traded company, any D&O coverage for the entity only extends to Securities Claims,” says Monica M. Minkel, senior vice president of Executive Protection at Colorado-based Poms & Associates Insurance Brokers, Inc. “There would be no coverage under the entity portion of the D&O contract for fines, penalties or even defense costs that are tied to the entity itself.”

After the U.S. Department of Justice provided evidence for a misdemeanor arraignment brought against Halliburton last Wednesday, the company agreed to pay a statutory maximum fine of $200,000, cooperate with the government's ongoing criminal investigation of the case, and be on probation for three years. The federal hearing will be held on Sep. 19.

“Criminal acts and intentional wrongdoing are effectively uninsurable issues,” Minkel says. “D&O insurance is there to protect innocent directors and officers who have acted in good faith on behalf of the company.”

Halliburton conducted its own review of the design and construction of the Macondo well site following the explosion that killed 11 workers and spilled 4.9 million barrels of oil into the Gulf Coast. According to the U.S. Department of Justice, in May 2010, Halliburton's cementing technology director directed a senior program manager to run a “Displace 3D” simulation to model fluid interfaces and their movement through a well.

The simulations were meant to find out how many centralizers—metal collars that keep heavy metal casing pipes away from the walls of an oil well as they are placed inside it, and contribute to the quality of the cement around the bottom of the casing—should have been used. Halliburton had recommended that BP use 21 centralizers inside the Macondo well. Instead, only six centralizers were used.

Although Halliburton's simulations indicated that there was little difference between using six and 21 centralizers, the technology program manager directed the program manager to get rid of the test results. The same test was run by another employee in June 2010 with similar results, and again the technology director ordered the evidence destroyed.

Minkel says that a D&O policy commonly has 'personal conduct' exclusions, which prevent coverage from applying in the event of deliberate fraud.

“Good policy language has personal conduct exclusions that will defend innocent directors and officers up through a final adjudication of the litigation,” says Minkel. “A guilty plea generally is going to be considered final adjudication. What this means is that even if the policy began defending the individual directors and officers, the policy would stop defending upon the guilty ruling and would have the right to subrogate back against the parties and recover the defense costs that were outlaid.”

She says that even if coverage had applied, fines are generally not insurable, so D&O insurance would not have paid any portion of the $200,000 fine.

The Department of Justice's case against Halliburton is part of an ongoing investigation by the New Orleans-based Deepwater Horizon Task Force into matters related to the April 2010 Gulf oil spill. Halliburton made a separate, voluntary contribution of $55 million to the National Fish and Wildlife Foundation that was not conditioned on the court's acceptance of its plea agreement.

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