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Claims could get messy after huge, costly oil spill

Claims could get messy after huge, costly oil spill

VENICE, La.—The total cost of the huge Gulf of Mexico oil spill is difficult to calculate and fraught with legal complexities, but experts agree it likely will be several billion dollars.

The Deepwater Horizon, a semisubmersible rig that BP P.L.C. was using to drill an oil well, sank April 22 after an explosion and fire two days earlier. The accident killed 11 workers and caused three leaks that could spew as much as 60,000 barrels a day into the Gulf of Mexico, according to BP.

As of May 6, London-based BP had sealed one leak and had begun lowering a 100-ton containment dome over another, although company and government officials acknowledged it could take several months to completely stop the leak.

BP will bear the cost of the cleanup, which could top $3 billion, experts say. In addition, at least 70 liability lawsuits have already been filed seeking damages from BP; Zug, Switzerland-based Transocean Ltd., which owns the rig; Houston-based Halliburton Co., which cemented the oil well; and Houston-based Cameron International Corp., which manufactured the wellhead equipment.

Of those firms, legal experts said BP likely would foot much of the bill. But it's also possible that a government fund, financed through taxes on energy companies, could pay some of those damages, because U.S. law currently limits energy companies' liability to $75 million per spill.

Companies exposed in the accident are insured for $1.4 billion in losses under business interruption, general liability, pollution liability, control-of-well, property and workers compensation coverage, according to the New York-based Insurance Information Institute.

The spill likely will generate extensive claims from downstream entities affected by the pollution, including fishing and tourism operations. In addition to damages sought in litigation, many also may file claims under their own business interruption, contingent business interruption and similar policies, legal experts said.

Generally, claimants are entitled to liability damages only if pollution touches their property, said Richard Hobbie III, president of New York-based underwriter Water Quality Insurance Syndicate. Business interruption claims might not have such a restriction and could arise further downstream, such as a New England restaurant that imports seafood from the Gulf Coast, he said.

The Gulf of Mexico produces more seafood than the entire East Coast from Maine to Florida, according to the Corpus Christi, Texas-based Harte Research Institute for Gulf of Mexico Studies. The institute estimated conservatively that the oil spill endangers $1.6 billion of tourism, recreational and commercial fishing, and economic benefits from coastal wetlands.

Business interruption policies typically appear within a commercial property policy, so such claims will depend on the definition of property, which often excludes land, such as a beach at a coastal hotel, said Marshall Gilinsky, a New York-based attorney and shareholder at Anderson Kill & Olick L.L.P.

“If the only thing damaged at the resort is the waterfront, I won't be surprised if the insurance company argues, "We don't insure the water offshore of your property and therefore...your property insurance policy is not triggered, including business interruption,'” Mr. Gilinsky said.

Randy J. Maniloff, a Philadelphia-based partner with White and Williams L.L.P., said few downstream entities such as seafood restaurants likely have contingent business interruption coverage that would apply in this case.

Lorelie S. Masters, a Washington-based partner in Jenner & Block L.L.P., said she was certain that insurers would use pollution exclusions, which appear in most policies, to deny coverage. Florida courts have interpreted pollution exclusions broadly and Louisiana courts have viewed them in a more policyholder-friendly light, she said.

Mr. Maniloff said many pollution exclusions have exceptions for pollution caused by fires or explosions, the apparent cause of the Deepwater accident.

White House and congressional leaders were working last week on proposals to raise the $75 million cap on liability damage that BP would have to pay.

Under the Oil Pollution Act of 1990, damages in excess of that cap are paid by the Oil Spill Liability Trust Fund, which is financed primarily through a fee on imported oil. The fund also pays for pollution cleanup in cases where the spiller can't or where the spiller can't be identified.

“$75 million in 1990 seemed like a pretty reasonable figure,” Mr. Hobbie said. “Since 1990...there hasn't been an offshore spill, so no one has ever thought to revise upward the $75 million.”

James E. Mercante, an admiralty attorney at New York-based Rubin, Fiorella & Friedman L.L.P. who has worked on Oil Pollution Act cases, said BP likely could seek reimbursement from the liability trust fund for payments above the current liability limit.

BP CEO Tony Hayward said publicly that the company expected to pay liability damages above $75 million and would honor all “legitimate claims.” Some observers expressed doubts that applied to liability damages.

A Senate measure introduced last week would raise the liability trust fund limit to $10 billion. Mr. Hobbie said that limit would not be a problem for the largest oil companies.

“My question—and it's just a question, I don't have the answer—is: What is the long-term effect on smaller operators? Could this bill possibly drive all the small operators out of the offshore market in the U.S.?”

The Obama administration last week announced a three-week moratorium on new offshore drilling permits until an investigation into the Deepwater incident has been completed.

In an earnings conference call late last week, Transocean executives said the company's contract provides for “broad” indemnity from BP, which Transocean expects the oil company to honor.

“Under our drilling contract for Horizon, BP has agreed to assume full responsibility for pollution and contamination,” Transocean CEO Steven L. Newman said during the call.

Underwriters declared the rig a total loss and Transocean already has received $481 million of the $560 million insured value, executives said.

Transocean carried $950 million in excess liability coverage, but did not have insurance for loss of revenue, according to records filed with the Securities and Exchange Commission.

Transocean's insurance policies expired May 1, but its underwriters granted a one-month extension in light of the accident, according to the records.

In the conference call, Trans-ocean executives said a preliminary estimate suggests that the company will incur about $200 million in higher insurance premiums, deductible payments and additional legal expenses this year as a result of the accident. Transocean also said it is considering increasing its retentions.