Raising Liability in Oil Spills Could Raise Needs for Insurance

Amid the near-constant congressional scrutiny on the details of the oil spill in the Gulf of Mexico has been a repeated effort from Democrats on Capitol Hill and in the White House to expand or eliminate the cap on damage liability for companies responsible for such accidents. So, even in the aftermath of an event that will cost insurers millions of dollars, future increased liability could mean increased insurance business.

Under current law, established after the Exxon Valdez spill in Alaska in 1989, companies are required to pay the entire cost for cleaning up the spill, but they are only subject to a maximum of $75 million in economic damages payouts. One legislative effort, authored by Sens. Robert Menendez, D-N.J., Frank Lautenberg, D-N.J. and Bill Nelson, D-Fla., would raise that cap to $10 billion. "We can't let the burden fall on the taxpayers; we should ensure that those who cause the damage are fully responsible," said Menendez, in a statement. "There is no such thing as a 'Too Big to Spill' oil well, which is why we need this economic protection in place." Others have been arguing for a complete elimination of the cap.

"If you take away the cap, [oil companies] are going to need more excess coverage," said Robert Friedman, head of the insurance coverage practice at Gunster, Yoakley & Stewart in Florida. But he said he wouldn't anticipate a huge boost to what would likely be a very limited market of major players. "A lot of these companies shoulder a lot of the risk themselves," he said of the big energy firms. "With a $75 million cap, that's not catastrophic to a company that's making billions of dollars a year. They can front all or most of that risk themselves."

While insurers and reinsurers expect to pay out about $1.4 billion in this disaster, most of the losses may be paid not by the private insurance market but by the energy companies' own self insurance, said Robert Hartwig, president of the Insurance Information Institute, earlier this month (BestWire, May 10, 2010).

Also, companies may not believe they are in any particular danger of spurring a repeat of the BP situation. "It's very rare," Friedman said. "There's no particular reason to think that all of a sudden there's going to be a rash of oil platform collapses."

Republican lawmakers have been blocking cap-raising legislation. GOP opponents have said that such a change would block smaller energy companies from being able to compete in the market. Sen. Lisa Murkowski, R-Alaska, was among members of her party blocking the attempt, though she said she supports some level of cap increase. In this case, "such a cap would only exclude all but the biggest oil companies from operating offshore," she argued.

The Obama administration has stepped in as a major proponent of lifting the cap. "The administration believes it is both fair and constitutional to enact legislation that would ensure that those who have caused environmental damage are held responsible for the damages they caused rather than imposing these costs on society more generally," Associate Attorney General Thomas J. Perrelli argued in testimony before the Senate's Committee on Energy and Natural Resources. "Our experiences over the last 20 years, and with the current disastrous chain of events, have convinced us that the old liability caps are simply inadequate to deal with the potentially catastrophic consequences of oil spills."

(Jesse A. Hamilton, Washington bureau manager: Jesse.Hamilton@ambest.com)