Jay MacDonald, of Bankrate.com, read a number of our posts and interviewed me regarding insurance coverage issues pertaining the BP Oil Spill. In his insurance blog post, Will Homeowners Insurance Absorb Oil?, he noted a number of my observations concerning the major issues facing policyholder insurance claims resulting from the BP Oil Spill:

Chip Merlin, founder and president of Tampa-based Merlin Law Group, fights insurance companies for a living. Chip likens the Deepwater Horizon disaster to one of those best-selling thrillers where you know who the bad guy is from Page 1 but you keep reading for the ironic twists and turns that follow.

Ironic insurance twist No. 1: Despite the acid-reflux-inducing news footage, the raw crude oil from the BP spill may not fall under the standard insurance definition of a "pollutant," and hence may not be covered under the $10,000 standard pollution cleanup provisions. Chip explains the subtleties:

"As a naturally occurring substance that hasn’t been refined at all, crude oil itself might not be a pollutant under the policy," Merlin says. "A lot of the attorneys in my firm say it might not."

Ironic twist No. 2: Homeowners may receive some cleanup assistance under standard insurance coverage against explosions if it is determined that the explosion that sank the Deepwater Horizon rig directly led to the spill.

Ironic twist No. 3: Unless the spill physically smears your house, your homeowners insurance likely won’t cover it. Many policies define “property not covered” to include “roadways, other paved surfaces, land and foundations.” Direct damage to insured property is usually required to trigger coverage.

“Because the property policies don’t cover land, the insurance companies are going to argue that there is only damage to the land and we only cover damage to structures,” Merlin says.

Ironic twist No. 4: Should the sticky stuff be washed ashore by a hurricane, your insurance company would likely deny claims involving storm surge, which courts have ruled fall under flood insurance.

“The insurance industry is going to argue that it is excluded because the damage is the result of storm surge, which has been held to be excluded every single time it pops up,” Chip predicts.

Ironic twist No. 5: Owners of beach rentals may not be able to recover business insurance losses.

“Most lost income claims on a rental property require some property damage,” Merlin says. “Most insurers are going to deny those claims based upon the fact that they do not involve property damage; the oil is just floating out there and people are just canceling reservations.”

Residential and commercial insurers will likely seek reimbursement via subrogation from BP’s insurers for any oil-related claims. Federal and state agencies are expected to do likewise, as well as tap the Oil Spill Liability Trust Fund, which taxes the petroleum industry to help clean up its spills.

Whether homeowners insurance will absorb the oil spill remains to be seen. Merlin predicts years of litigation ahead as legions of claimants and scores of class action suits wash up on BP’s doorstep.

That is exactly what I concluded this morning in The BP Oil Spill Causes an Epidemic of Claims. However, every homeowner and businessowner should first read the language of their policy. Commercial policies have various coverages that may provide benefits, including event coverage, contingent income loss coverage, environmental coverage, debris coverage, trade loss coverage and supply chain coverage. Policy wording is crucial when analyzing these losses under first party insurance policies.