Commentary – Expect Gulf Oil Slick Claims To Be Extensive And Impact Multiple Lines Of Business

By Marc Lanzkowsky – June 5, 2010

As the losses in the gulf continue to rise, the true claims impact has yet to unfold

I don’t think the insurance industry has felt the true brunt of the horrific events of the April 20 blast on the Deepwater Horizon rig in the Gulf of Mexico. While losses have continued to come in, if some of the predictions about oil flowing up the Eastern Seaboard ring true, there will be significant claims and issues to follow.

Having been involved in a few claims involving lost oil platforms following the gulf hurricanes of several years ago, I remember the sheer costs involved in the loss of just one of these wells. From the business interruption, to the retrieval of the damaged well from the ocean floor, to the replacement of the rig itself, hundreds of millions of dollars will be spent. Operator Transocean has said the rig alone is insured for $560 million including total loss and wreck removal (see Deepwater Horizon oil rig continues leaking oil as claims rise). When the environmental and economic losses are added in, much of which cannot even be calculated yet, the numbers are sure to be astronomical.

What will the impact be?

What the impact will be is still largely unknown.  News reports of June 3, 2010 had a model showing the oil slick reaching around Florida, up the East Coast and out into the Atlantic (see Computer models show Gulf oil reaching East Coast). Oil, under this scenario, could be washing up on beaches in Virginia or New York by the middle of the summer. Add in the fact that hurricane season has just begun, which will only compound the potential damage and loss.

How much wildlife will be affected? How many fishing grounds will be shut down? Will the slick require booms and pontoons to drape the entire East Coast of the United States? No one really knows what will occur in the coming months, especially if efforts to contain the slick continue to fail.

With losses continuing to rise, does BP really have sufficient funds to pay for all the damages? There are estimates setting the cost between $30-$40 billion with all but a fraction of that covered by insurance (see Insurance Journal  – Oil Rig Tragedies Shock Insurers, Destabilize Market, Says Willis). Despite these high numbers being the responsibility of the self-insured BP, there will certainly be additional claims to impact the insurance industry as well.

Rising costs to the industry

Not surprisingly, the impact on insurance premiums is already being felt in the Reinsurance market – especially in the Energy sectors. Insurance Journal reported in BP Oil Spill Losses Hit Reinsurers; Premiums Jump that:

Reinsures have bumped up prices for offshore energy-related insurance premiums by 50 percent following insurance industry losses of up to $3.5 billion from the BP plc oil spill in the Gulf of Mexico, Moody’s Investor Service said in a report on Thursday.

Total insured losses from the worst oil spill in U.S. history are expected to be between $1.4 billion and $3.5 billion, although losses would be significantly higher if BP had purchased liability insurance instead of self-insuring its risks through its captive insurance program, said Moody’s.

As the true claims impact unfolds, it is likely that pricing could be affected in other parts of the industry, and across multiple lines of business, as well.

So what about the claims?

It is more than likely that claims for losses will extend beyond property and business interruption damages. Recently, the D&O Diary wrote Of Oil Slicks and D&O Claims and the soon to be expanding wave of D&O suits that will follow. Professional liability, property loss, business interruption, clean up costs, bodily injury claims, will probably follow affecting all manner of third parties yet to be impacted.

As losses develop, claim resources will be needed to manage a host of potential losses that, as noted, could spread up and down the US Coastline. Coverage disputes will likely be on the rise as homeowners, towns and businesses seek to recover for losses occurring hundreds of miles from the impact area. Pollution exclusions will almost certainly be debated again in the courts as claims are presented and challenged. And, like many massive disasters, the industry will deal with potential fraudulent claims and those set on taking advantage of a bad situation.

The problems and issues, from a claims perspective, are still being developed and only time will tell the true impact to the industry.

Let’s not forget the loss of life

As insurance people we are always dealing with tragedy and placing an economic impact on terrible situations. Let us not forget or diminish the personal tragedy for the loss of 11 well workers who were just trying to make a living and provide for their families like so many of us do.

As I have told family members in meditations – understand that as Insurance claims professionals we have to assess dollar values on things that truly can’t be valued such as the life of a loved one. It is easy to lose sight of the personal impact when dealing with a massive tragedy such as this.