The oily mess in the Gulf threatens to get messier if and when Floridians start making claims for damages. Insurance industry experts cite several scenarios for compensation, as well as many slippery pitfalls.
The good news for policyholders is that a newly issued Federal Emergency Management Agency bulletin declares the National Insurance Flood Program policy will cover floodwater and storm surge that is contaminated with oil.Individuals and businesses along the coast and in flood-prone areas are required by their banks/mortgage companies to have a flood policy if they hold mortgages.
But the absence of a storm could undercut FEMA's assurance, since "pollution" is usually excluded as a covered peril in admitted market policies.
Even under benign weather conditions,legal experts suggest the BP oil spill is likely to give rise to a host of claims under first- and third-party insurance policies.
Bob Hartwig of the Insurance Information Institute, in an advisory to insurers, listed the types of claims and their likelihood of success:
- First-party claims: Impending first-party claims offer more predictability because businesses covered by commercial property and "business interruption" insurance are often on standardized forms. A lot of activity is expected around business interruption, but under business interruption policies the suspension of the insured's business operations must be caused by direct physical loss or damage.
- Third-party claims: Oil companies/rig owners tend to have complex insurance programs with unique policies. It remains to be seen what policy limits are in place and whether applicable to relevant claims.
- Insurers' policy language: History shows that when there is a large-scale societal problem that requires significant funding to solve it, insurers' policy language faces pressure to become more malleable than intended. As a result, insurers may find themselves under pressure to pay more than their appropriate share.
But Hartwig said insurers' business interruption losses may not be as high as expected due to a number of "mitigating factors":
- Physical damage: Business interruption losses may not be triggered for many third parties (hotels, commercial fishing), because the coverage typically responds in the event of physical damage from a covered peril, such as a storm.
- Civil action: Civil authorities may limit access to an area after a disaster, forcing an industry to shut down, but losses are covered if they arise out of a covered peril.
- Subrogation: Insurers can try to recover losses by suing the BP consortium if the cause was pollution. However, this would imply paying losses first and then suing BP which could be a long-drawn-out and costly litigation process.
With the 2010 Atlantic hurricane season under way, Hartwig said "Concerns are rising over the impact of the oil spill if a major storm makes landfall."
The National Flood Insurance Program dwelling form and the Residential Condo Building Association policy contain no pollution exclusion for property damage due to flood. As a result, policyholders would be able to apply up to their policy limits to pay for damage from pollution caused by flood.
Hartwig cautioned, however, that both the dwelling form and RCBA policy exclude the cost of testing for, or monitoring of, pollutants -- unless it is required by law or ordinance.
Non-residential and commercial policies generally contain some limitations for pollution damage due to flood to commercial properties under the NFIP.
The NFIP General Property form (non-residential) covers pollution damage to covered property up to a $10,000 limit for each occurrence.
Storms aside, Gary Landry of the Florida Insurance Council listed the types of insurance products affected by the BP oil spill:
- Business Interruption/Loss of Production Income: Provides coverage for energy businesses against loss due to temporary interruption in oil/gas supply from an offshore facility as a result of physical loss or damage to an offshore facility.
- Comprehensive General Liability: Provides coverage for claims an energy business is legally obligated to pay as a result of bodily injury or property damage to a third party.
- Environmental/Pollution Liability: Provides coverage for bodily injury, property damage, and cleanup costs as a result of a pollution incident from a designated site.
- Operators' Extra Expense (Control of Well): Provides coverage for costs incurred by energy businesses when regaining control of a well after a blowout. Coverage may include redrilling expenses incurred in the restoration of a well after a blowout, as well as the legal expenses emanating from an incident such as the sinking of a rig, or oil spill.
"We currently have no estimates of what has been paid or any total of claims. Obviously, the spill has not been stopped and therefore claims will continue to grow," Landry said.
Ultimately, the Florida Office of Insurance Regulation said legal action may be corporate claimants' first, last and best resort.
"In terms of companies recouping costs for lost revenue, they will likely have the best luck filing civil lawsuits with BP because the losses they are incurring were a direct result of the water, which is not technically theirs; therefore, it is not a direct impact," OIR spokeswoman Brittany Benner stated in an e-mail.
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Contact Kenric Ward at kward@sunshinestatenews.com or at (772) 801-5341.
