Oil in the ocean, BP in the courts

As BP’s clean up team continue to work overtime, the company’s legal team are dodging bullets

James Zhan examines how international investment policies have come to an important crossroads

The BP oil spill dominated the news for many months. Now that the leaking well has been plugged the focus is on the extensive legal action which is being taken against BP. The estimation by Lloyds of London is that net claims already lodged amount to between £210m and £420m. Lloyds have confirmed that around half of their syndicates have already launched action against BP.

BP was leasing the drilling rig from Transocean when it exploded on 20 April 2010, resulting in 11 deaths. The claims are now pouring in but BP has no valid insurance policy in place. They are now attempting to attach themselves to a Transocean policy, claiming entitlement to $700 million. The Lloyds syndicated insurers, alongside many others, have refuted BP’s cover under this policy.

Of course, if BP wins their battle to claim cover under this policy there will still be a deficit. Estimations to the total costs to BP have ranged from $3.5bn to $12bn. To onlookers it may seem absurd that an oil giant like BP is under-insured to this extent, but BP is a self-insured company. This means that they hold insurance when it is a legal requirement but if they were to insure against all risks it would not be financially viable as their business is very risky indeed. The insurance they do hold is through their subsidiary company, Jupiter Insurance.

There have been many victims of this oil spill, most of whom are likely to be fighting BP for years to come. BP has stated that the company “takes full responsibility for the Deepwater Horizon incident.” However, there are an indeterminable number of individuals affected, both directly and indirectly, by this oil spill which has changed the ecology of the Gulf of Mexico forever.

Following the Exxon Valdez case, people affected by oil spills now have more rights to claim under the Oil Pollution Act passed by Congress in 1990. This law makes oil companies liable for the costs and losses associated with the cleanup of the spill and the subsequent damages to property, natural resources and revenue. This may appear to provide the answers regarding the likely payouts from this disaster, but it is not that simple

There are limits on the damages payable under this Act which can only be overturned by Congress. These are also not applicable if BP is found to be responsible for wilful misconduct, gross negligence or government regulatory violations. Otherwise, the limits are capped at $350m for spills from offshore facilities and $75m for spills from vessels. It is currently unclear which applies with regards to the Deepwater Horizon mobile rig. Once this money has run out there is the Oil Spill Liability Trust Fund which is funded through petrol tax in the States. Claimants can expect payouts capped at $1bn, but they must be able to prove the costs of damages incurred and the amount of lost revenue whilst proving that the spill is to blame.

This Act does not apply to all possible claimants though. In fact, evidence from the Exxon lawsuits would suggest that most lawsuits and claims for damages will come from businesses and communities. Anyone can make these claims and there will be no applicable caps on payouts. This is going to play out for many years and, while BP has stated their expectation to exceed the Oil Pollution Act caps, the true costs and expected payouts are currently unimaginable.