The Gulf Oil Spill: Considerations for Insurers

There are difficult issues posed by claims for insurance coverage for the costs of cleaning up oil spills, as can be seen from the many litigated cases spawned by such coverage claims. See, e.g., Jefferson Block 24 Oil & Gas LLC v. Aspen Ins. UK Ltd., No. 08-4792 (E.D. La. Jan. 29, 2010) (ruling on coverage under an oil pollution act policy and addressing whether a facility was appropriately within the terms of coverage); Aspen Ins. UK Ltd v. Dune Energy, Inc., No. 09-2906, 2010 WL 996550 (E.D. La. March 16, 2010) (ruling that a pollution exclusion barred coverage for an oil leak despite policyholder's argument that it had mere mineral lease rights to the land). Moreover, first-party claims for damage and for business interruption have prompted serious litigation in recent years, and many of the most hotly contested issues are likely to be posed by claims here, whether by the first-party claims of those directly involved in the ownership and operation of the oil rig for their own losses, or by business interruption or other first-party claims of Gulf Coast businesses. For instance, the existence and extent of an interruption in business will be disputed where hotels and motels may suffer decreased tourism business, but losses may be offset by bookings made by environmental response teams working in the Gulf. See 730 Bienville Partners, Ltd. v. Assurance Co. of America, No. 02-106F, 2002 WL 31996014 (E.D. La. Sept. 30, 2002) (ruling that New Orleans hotel that suffered loss of business following grounding of planes in wake of 9/11 could not recover on business interruption claim). Similarly, if business allegedly is affected by the concern that the coastline will be polluted, but the spill does not affect a particular area, limitations on coverage may apply. See United Air Lines, Inc. v. Ins. Co. of State of Pa., 439 F.3d 128 (2d Cir. 2006) (ruling that airline could not recover for loss of business following 9/11 because loss was not caused by direct physical harm).

Third-Party Liability

However, the issues under specialty environmental policies and first-party policies may be dwarfed by the significance of potential third-party liability to others, such as fishing and tourism businesses and individuals along the Gulf Coast, and the coverage disputes that are likely to follow concerning coverage for such claims. Already, numerous class action lawsuits have been filed alleging that BP and the Transocean entities owned and operated the Deepwater Horizon oil rig, that BP held the lease permitting the offshore drilling at that site, that Cameron supplied the so-called “blow-out preventers,” and that Halliburton was involved in operations on the rig at the time of the explosion and resulting oil spill. Although the lawsuits are, generally, light on specific allegations regarding the details of the incident, they allege that the defendants should be held liable for negligence resulting in the oil spill and/or that liability should attach under the Oil Pollution Act. They cover a broad range of alleged injuries, including harm to fish, birds and other wildlife, destruction of vulnerable wetlands areas, threats to human health including increased risk of cancer and other illnesses, and economic harm to the fishing, seafood, and tourism industries.

These cases, moreover, are likely to implicate many additional companies that may belatedly be added as defendants or that will be third-partied into the litigation for allegedly causing or contributing to the circumstances of the oil spill. These might be parts manufacturers and suppliers, contractors who installed or serviced parts of the rig, or companies with some other relationship to the operation. The multiplication of targeted defendants, as well as the broad range of possible plaintiffs, will ensure that liability claims arising from the spill will be litigated for many years. Key general liability coverage issues are likely to include questions about the existence of property damage (as opposed to simple economic loss), the meaning of bodily injury (and whether claims for, inter alia, medical monitoring and fear of illness qualify as bodily injury), and whether pollution exclusions bar coverage for the third-party claims for injury or damage, as well as for any cleanup expense. Questions such as whether coverage encompasses the costs of injunctive relief or payment for punitive damages also may be posed.

State Law

Because insurance coverage issues are governed by state law, there are different approaches to some of these key coverage issues depending on the applicable state's law. There are significant differences in the laws of Louisiana, Texas, Mississippi, Alabama, and Florida on some of the issues likely to be of central importance in coverage for third-party harm allegedly caused by the Gulf Oil spill. With respect to the pollution exclusion, for example, Louisiana courts have sometimes limited the reach of newer pollution exclusions (e.g., Doerr v. Mobil Oil Corp., 774 So. 2d 119 (La. 2000)), whereas the rest of the gulf coast courts generally have enforced the straightforward meaning of pollution exclusions. See, e.g., National Union Fire Insurance Co. v. CBI Industries, Inc., 907 S.W.2d 517 (Tex. 1995) (bodily injuries arising out of release of hydrofluoric acid); Abston Petroleum, Inc. v. Federated Mutual Insurance Co., 967 So. 2d 705 (Ala. 2007) (barring coverage for an above-ground storage tank petroleum spill); Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Insurance Co., 711 So. 2d 1135 (Fla. 1998) (barring coverage for bodily injury arising out of ammonia spill and bodily injuries arising out of insecticide overspray claims); Am. States Ins. Co. v. Nethery, 79 F.3d 473 (5th Cir. 1996) (applying Mississippi law and barring claims alleging injury caused by paint fumes). Moreover, jurisdictions differ on their approach to choice-of-law issues and some may favor the application of their own law when injuries to claimants take place within the state, as opposed to the law of the place of contracting, i.e., where the insurance contract was formed. Because the jurisdiction whose law is applied can be outcome-determinative, insurers facing coverage claims from companies brought into the Gulf Oil spill litigation should evaluate whether initiating a coverage declaratory judgment action is prudent to preserve a choice of forum and obtain court guidance on disputed issues.

Laura A. Foggan, a member of this newsletter's Board of Editors, is a partner in Wiley Rein LLP's insurance practice and co-chair of the firm's appellate practice. She has more than 25 years of trial and appellate experience in insurance-related litigation. Benjamin Theisman is an associate in Wiley Rein LLP's insurance practice and represents insurers in coverage disputes nationwide.

The recent oil spill in the Gulf of Mexico threatens to be an unprecedented disaster as the resulting oil slick begins to move ashore. At this point, a large number of lawsuits already have been filed against the entities associated with the Deepwater Horizon Oil Rig, many of which raise interesting coverage issues, particularly with respect to specialty environmental coverages and first-party business interruption and damage claims. Even more significant insurance exposures may be posed in the future, however, as new parties are joined to the litigation and general liability policies are tested in response to third-party claims for bodily injury and property damage.

As has been widely reported, the Deepwater Horizon offshore oil rig suffered an explosion resulting in the sinking of the oil rig and causing an unprecedented oil spill that, as of press time, is beginning to make landfall. Companies that have been identified as principal targets for responsibility for the oil spill include BP, plc; BP Products North America, Inc.; BP America, Inc.; Transocean, Ltd.; Transocean Offshore Deepwater Drilling, Inc.; Halliburton Energy Services, Inc.; and Cameron International Corporation. These companies face important issues in response to the spill, including the operation and extent of self-insurance for losses, the application of insurance policies providing specialty environmental coverage that may be tapped for cleanup expenses and liability and, in some cases, whether there is coverage for their own first-party losses, including destruction of property and business interruption.

Coverage for Cleanup, Business Interruption

There are difficult issues posed by claims for insurance coverage for the costs of cleaning up oil spills, as can be seen from the many litigated cases spawned by such coverage claims. See, e.g., Jefferson Block 24 Oil & Gas LLC v. Aspen Ins. UK Ltd., No. 08-4792 (E.D. La. Jan. 29, 2010) (ruling on coverage under an oil pollution act policy and addressing whether a facility was appropriately within the terms of coverage); Aspen Ins. UK Ltd v. Dune Energy, Inc., No. 09-2906, 2010 WL 996550 (E.D. La. March 16, 2010) (ruling that a pollution exclusion barred coverage for an oil leak despite policyholder's argument that it had mere mineral lease rights to the land). Moreover, first-party claims for damage and for business interruption have prompted serious litigation in recent years, and many of the most hotly contested issues are likely to be posed by claims here, whether by the first-party claims of those directly involved in the ownership and operation of the oil rig for their own losses, or by business interruption or other first-party claims of Gulf Coast businesses. For instance, the existence and extent of an interruption in business will be disputed where hotels and motels may suffer decreased tourism business, but losses may be offset by bookings made by environmental response teams working in the Gulf. See 730 Bienville Partners, Ltd. v. Assurance Co. of America, No. 02-106F, 2002 WL 31996014 (E.D. La. Sept. 30, 2002) (ruling that New Orleans hotel that suffered loss of business following grounding of planes in wake of 9/11 could not recover on business interruption claim). Similarly, if business allegedly is affected by the concern that the coastline will be polluted, but the spill does not affect a particular area, limitations on coverage may apply. See United Air Lines, Inc. v. Ins. Co. of State of Pa. , 439 F.3d 128 (2d Cir. 2006) (ruling that airline could not recover for loss of business following 9/11 because loss was not caused by direct physical harm).

Third-Party Liability

However, the issues under specialty environmental policies and first-party policies may be dwarfed by the significance of potential third-party liability to others, such as fishing and tourism businesses and individuals along the Gulf Coast, and the coverage disputes that are likely to follow concerning coverage for such claims. Already, numerous class action lawsuits have been filed alleging that BP and the Transocean entities owned and operated the Deepwater Horizon oil rig, that BP held the lease permitting the offshore drilling at that site, that Cameron supplied the so-called “blow-out preventers,” and that Halliburton was involved in operations on the rig at the time of the explosion and resulting oil spill. Although the lawsuits are, generally, light on specific allegations regarding the details of the incident, they allege that the defendants should be held liable for negligence resulting in the oil spill and/or that liability should attach under the Oil Pollution Act. They cover a broad range of alleged injuries, including harm to fish, birds and other wildlife, destruction of vulnerable wetlands areas, threats to human health including increased risk of cancer and other illnesses, and economic harm to the fishing, seafood, and tourism industries.

These cases, moreover, are likely to implicate many additional companies that may belatedly be added as defendants or that will be third-partied into the litigation for allegedly causing or contributing to the circumstances of the oil spill. These might be parts manufacturers and suppliers, contractors who installed or serviced parts of the rig, or companies with some other relationship to the operation. The multiplication of targeted defendants, as well as the broad range of possible plaintiffs, will ensure that liability claims arising from the spill will be litigated for many years. Key general liability coverage issues are likely to include questions about the existence of property damage (as opposed to simple economic loss), the meaning of bodily injury (and whether claims for, inter alia, medical monitoring and fear of illness qualify as bodily injury), and whether pollution exclusions bar coverage for the third-party claims for injury or damage, as well as for any cleanup expense. Questions such as whether coverage encompasses the costs of injunctive relief or payment for punitive damages also may be posed.

State Law

Because insurance coverage issues are governed by state law, there are different approaches to some of these key coverage issues depending on the applicable state's law. There are significant differences in the laws of Louisiana, Texas, Mississippi, Alabama, and Florida on some of the issues likely to be of central importance in coverage for third-party harm allegedly caused by the Gulf Oil spill. With respect to the pollution exclusion, for example, Louisiana courts have sometimes limited the reach of newer pollution exclusions ( e.g., Doerr v. Mobil Oil Corp. , 774 So. 2d 119 (La. 2000)), whereas the rest of the gulf coast courts generally have enforced the straightforward meaning of pollution exclusions. See, e.g., National Union Fire Insurance Co. v. CBI Industries, Inc. , 907 S.W.2d 517 (Tex. 1995) (bodily injuries arising out of release of hydrofluoric acid); Abston Petroleum, Inc. v. Federated Mutual Insurance Co. , 967 So. 2d 705 (Ala. 2007) (barring coverage for an above-ground storage tank petroleum spill); Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Insurance Co. , 711 So. 2d 1135 (Fla. 1998) (barring coverage for bodily injury arising out of ammonia spill and bodily injuries arising out of insecticide overspray claims); Am. States Ins. Co. v. Nethery , 79 F.3d 473 (5th Cir. 1996) (applying Mississippi law and barring claims alleging injury caused by paint fumes). Moreover, jurisdictions differ on their approach to choice-of-law issues and some may favor the application of their own law when injuries to claimants take place within the state, as opposed to the law of the place of contracting, i.e., where the insurance contract was formed. Because the jurisdiction whose law is applied can be outcome-determinative, insurers facing coverage claims from companies brought into the Gulf Oil spill litigation should evaluate whether initiating a coverage declaratory judgment action is prudent to preserve a choice of forum and obtain court guidance on disputed issues.

Laura A. Foggan, a member of this newsletter's Board of Editors, is a partner in Wiley Rein LLP's insurance practice and co-chair of the firm's appellate practice. She has more than 25 years of trial and appellate experience in insurance-related litigation. Benjamin Theisman is an associate in Wiley Rein LLP's insurance practice and represents insurers in coverage disputes nationwide.