Catastrophic Oil Spills and the Problem of Insurance

By Abraham, Kenneth S. | Vanderbilt Law Review, November 2011 | Go to article overview

Catastrophic Oil Spills and the Problem of Insurance


Abraham, Kenneth S., Vanderbilt Law Review


The BP oil spill of 2010 focused considerable attention on the operating conduct of BP, on the potential liability of BP and other entities associated with the spill, and on the fund that BP established to provide compensation to victims of the spill. Much less attention has been paid, however, to the nature and scope of insurance covering losses caused by catastrophic environmental disasters such as oil spills. BP's establishment of the Gulf Coast Claims Facility, and the compensation that will be paid by that facility, will likely dampen awareness of the mismatches between the resulting losses and the insurance available to cover such losses. What might otherwise have been a very dramatic demonstration of the ways in which our insurance and liability systems fall short in such situations will probably be much more muted. Future spills, however, may not follow this pattern. Understanding the structure of insurance and liability that are and are not available when spills occur is therefore critical to developing satisfactory approaches to dealing with the consequences of spills. This Article identifies the matches, and mismatches, between the losses resulting from oil spills, the insurance available to the victims of spills, the liability of the parties responsible for losses caused by spills, and the insurance available to the parties who face such liability. The Article then attempts to make sense of the situation it has identified, considering three explanations for the mismatches: difficulties associated with proving the cause of pure economic loss, traditional challenges to the insurance of pollution loss and liability, and preexisting portfolio diversification by potential spill defendants that discourages the purchase of large amounts of insurance. Finally, the Article critically analyzes two proposals that have been made for remedying the insurance mismatches in this field: the imposition of an ex ante drillers' tax on the amount of their potential liability in excess of their combined assets and liability insurance and the imposition of mandatory liability insurance requirements far in excess of the amounts of insurance that are currently available or purchased.

INTRODUCTION ........................................................................... 1770

I. THE MATCHES ................................................................. 1771

II. FOUR IMPORTANT MISMATCHES ....................................... 1772

A. First-Party Property Insurance ............................ 1772

1. Homeowners Insurance ............................. 1773

2. Commercial Property Insurance ................ 1773

B. First-Party Business Interruption Insurance ........ 1774

C. Insurance of Liability for Pollution-Related Damage and Loss ................................................. 1776

III. EXPLAINING THE MISMATCHES ........................................ 1781

A. Difficulties Associated with Proving the Cause of Pure Economic Loss ............................... 1781

B. The Pollution Insurance Predicament .................. 1784

1. Moral Hazard ............................................ 1784

2. Juridical Risk ............................................ 1785

3 . Trigger of Coverage Uncertainties ............ 1785

4. The High Cost of Pollution Cleanup .......... 1786

C. Liability for Catastrophic Loss and the Uses of Portfolio Diversification ........................... 1787

IV. AN ANALYSIS OF TWO REFORM PROPOSALS ...................... 1788

A. Prospective Excess Liability ................................. 1789

B. Mandatory Liability Insurance ............................ 1790

CONCLUSION .............................................................................. 1791

INTRODUCTION

The BP oil spill of 2010 has focused considerable attention on the operating conduct of BP, on the potential liability of BP and other entities associated with the spill, and on the fund that BP established to provide compensation to victims of the spill. …

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