Transocean’s Excess Insurers Ask Court to Clear Them of Obligation to BP

Lloyd's is asking a U.S. District Court judge to declare that it and other excess liability insurers have no obligation to BP plc in relation to damage claims resulting from the oil clean up in the Gulf of Mexico.

In a complaint for declaratory judgment filed in the Southern District of Texas in Houston, Lloyd's and the other insurers providing excess coverage to Transocean Ltd. are looking for the court to say they "have no additional insured obligation to BP with respect to pollution claims against BP for oil emanating from BP's well."

Some of the other insurers noted in the complaint include Axis Specialty Europe Ltd.; Berkley Insurance Co.; Houston Casualty Insurance Co.; National Union Fire Insurance Company of Pittsburgh; Navigators Insurance Co.; XL Specialty Insurance Co. and Zurich American Insurance Co.

Transocean owned the Deepwater Horizon oil drilling rig, which was leased by BP, off the coast of Louisiana in the Gulf of Mexico. The rig exploded and caught fire April 20. The rig then sank and oil continues to pour from an underwater pipeline. BP gave Transocean's excess carriers a notice of claim on May 14, the complaint said.

Transocean's liabilities are limited under the terms of a customary contract in the industry between it and BP, according to the complaint. Transocean's pollution-related responsibilities are for pollution or contamination "originating above the surface of the land or water from spills, leaks or discharges."

"Because liabilities BP faces for pollution emanating from the well are from below the surface, those liabilities are not within the scope of the additional insured protection," the complaint reads.

BP said it had no comment on the complaint.

Earlier in May, Transocean and several affiliates filed a petition in the same court looking to cap their potential liability to $26.8 million as already more than 100 lawsuits have been filed against the companies in various states and courts. The filing was made under the federal Limitation of Shipowner's Liability Act, which dates to the 19th century. It asks a judge to deem Transocean not liable for claims, according to court records. The fund to pay claims of $26.8 million is derived from the worth of the rig, which is now at the bottom of the Gulf of Mexico (BestWire, May 17, 2010).

Insurers and reinsurers are likely to pay about $1.4 billion in connection with the sinking of the Deepwater Horizon oil rig in the Gulf of Mexico, according to the Insurance Information Institute (BestWire, May 5, 2010).

Transocean said it has received $481 million of the $560 million it expects in insurance proceeds to cover the cost of its oil drilling rig. Of the insurance money, Transocean predicts an accounting gain of $270 million for the total loss of the rig. The company said it expects an increase of about $200 million in operating and other expenses in 2010 due to insurance deductibles, higher premiums and legal expense (BestWire, May 10, 2010). Transocean established its own wholly owned captive insurance company, according to its annual report. Under 12-month policy periods that started May 1 last year, Transocean's insurance program consists of commercial market and captive insurance policies (BestWire, April 26, 2010).

BP, an oil and gas producer, will be paying the cost for cleaning up the mess, meaning the company has been deemed the "responsible party" under the Oil Pollution Act of 1990. Jupiter Insurance Ltd., BP's captive insurer, has a retention limited to $700 million for any one event -- about 13% of the company's 2009 capital and surplus of about $6 billion, according to BestLink, which provides online access to A.M. Best's Global Insurance & Banking Database. The insurer does not buy reinsurance (BestWire, May 10, 2010).

Jupiter Insurance Ltd. currently has a Best's Financial Strength Rating of A+ (Superior). Lloyd's currently has a Best's Financial Strength Rating of A (Excellent).

(By Chad Hemenway, associate editor, BestWeek: [email protected])