This morning’s edition of Business Insurance has an article, Claims Could Get Messy After Huge, Costly Oil Spill, which explains that insurance claims are going to be complex and that the cost will certainly be in the billions. My reading of a FC&S discussion on the issue of "pollution" exclusions in homeowners policies indicates the same thing. Indeed, given the definition of a "pollutant" in the standard form policies, one may question whether oil escaping in a natural form would be a "pollutant."

Business Insurance indicated in part the following:

BP will bear the cost of the cleanup, which could top $3 billion, experts say. In addition, at least 70 liability lawsuits have already been filed seeking damages from BP; Zug, Switzerland-based Transocean Ltd., which owns the rig; Houston-based Halliburton Co., which cemented the oil well; and Houston-based Cameron International Corp., which manufactured the wellhead equipment.

Of those firms, legal experts said BP likely would foot much of the bill. But it’s also possible that a government fund, financed through taxes on energy companies, could pay some of those damages, because U.S. law currently limits energy companies’ liability to $75 million per spill.

Companies exposed in the accident are insured for $1.4 billion in losses under business interruption, general liability, pollution liability, control-of-well, property and workers compensation coverage, according to the New York-based Insurance Information Institute.

The spill likely will generate extensive claims from downstream entities affected by the pollution, including fishing and tourism operations. In addition to damages sought in litigation, many also may file claims under their own business interruption, contingent business interruption and similar policies, legal experts said. Generally, claimants are entitled to liability damages only if pollution touches their property, said Richard Hobbie III, president of New York-based underwriter Water Quality Insurance Syndicate. Business interruption claims might not have such a restriction and could arise further downstream, such as a New England restaurant that imports seafood from the Gulf Coast, he said.

The Gulf of Mexico produces more seafood than the entire East Coast from Maine to Florida, according to the Corpus Christi, Texas-based Harte Research Institute for Gulf of Mexico Studies. The institute estimated conservatively that the oil spill endangers $1.6 billion of tourism, recreational and commercial fishing, and economic benefits from coastal wetlands.

Business interruption policies typically appear within a commercial property policy, so such claims will depend on the definition of property, which often excludes land, such as a beach at a coastal hotel, said Marshall Gilinsky, a New York-based attorney and shareholder at Anderson Kill & Olick L.L.P. “If the only thing damaged at the resort is the waterfront, I won’t be surprised if the insurance company argues, "We don’t insure the water offshore of your property and therefore…your property insurance policy is not triggered, including business interruption,’” Mr. Gilinsky said. (emphasis added)

I think the losses will be far in excess of this figure unless BP figures out how to stop the flow of oil immediately. Over the weekend, the containment dome failed. In addition, while it has not been determined where they came from, tar balls started washing up on Alabama’s Dauphine Island. Here is a YouTube video:


I also agree with Gilinsky. I noted in First Party Property Coverage for the Oil Spill to Shoreline Owners that:

A second major issue will be whether "physical damage" to "insured property" has occurred. Many policies define "property not covered" to include "roadways, other paved surfaces, land, and foundations." Direct damage to "insured" or "covered" property is generally a requirement to trigger coverage. So, even if the property policy may provide some limited coverage for the extraction of the oil, most can anticipate litigation over whether the property and economic loss is covered under the property and business income forms and whether the oil damage to property is not covered because it was uncovered "land."

Still, a number of attorneys in our firm are questioning whether the oil, spilling from the oil well, is a "polluntant," as defined under various property insurance policies. The FC&S has an excellent article, Homeowners Pollution Exclusions: The ISO and AAIS Forms. I suggest that coverage counsel subscribe to this service and carefully read the entirety of it. The policies define "pollutants:"

Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

I imagine many will argue that unrefined oil is not a "pollutant," as defined in the policy. The article does not say whether oil is or is not a "pollutant." Instead, its conclusion tends to indicate exactly what the title to this post implies:

Pollution, how it’s defined and how courtsview the policy exclusions are still large issues for the insurance industry. Many of the cases referred to in this article have been disagreed with by other cases, but the net result is that the courts are still divided on the definition of pollution and the application of the exclusion in homeowners policies. The definitions of pollution and the exclusions have changed over time; but the issue remains unresolved.

This insurance coverage issue is going to be a messy and a very costly one.