Marsh Concerned Over Insurance Assumptions Implicit in U.S. House and Senate Energy Bills
Published: August 24, 2010 | Country: United States
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The U.S. House of Representative and U.S. Senate are considering separate versions of energy legislation resulting from the fire, explosion, and ensuing oil discharge from the Deepwater Horizon Offshore Drilling Unit. Although the ultimate outcome of such legislation is still very much up in the air, Marsh is actively involved in discussions regarding the availability and viability of relevant commercial insurance. Our principal focus rests with ensuring that legislators understand the fundamentals driving the existing insurance solutions under the Oil Pollution Act of 1990 (OPA), and the possible consequences of increased limits of financial responsibility and liability in legislation currently being promulgated.
Although much remains to be refined and defined, both the House and Senate are moving in directions that indicate there will be:
- increased limits of financial responsibility imposed upon offshore exploration and production companies; and
- possible unlimited liability for cleanup and economic damages resulting from a spill as defined by the legislation.
The current regulatory regime is guided by the stipulations of the OPA. The OPA imposes various levels of financial responsibility on the "responsible party" — defined as the company to which the United States government looks to pay for the cleanup and other liabilities emanating from a spill. Many companies operating in the U.S. Gulf of Mexico have relied on the commercial insurance market to issue insurance policies that provide the vehicle necessary to satisfy financial responsibility requirements. The policies provided to date have sufficed for government compliance purposes, and there has been sufficient capacity in the market to address industry needs. Other operators rely on their balance sheets to pledge assets to satisfy their financial responsibility obligations.
It should be noted that the coverage evidenced under OPA certificates is significantly broader than what is typically afforded under traditional energy-related insurance policies. The market for OPA coverage is limited. The other compounding factor is that self-insurance as an alternative to insurance requires the operator to have unencumbered assets worth up to 10 times the required amount. Raising the limits by multiples of their current levels will make self insurance less viable as an option and put even more pressure on an already stretched commercial insurance market.
As the OPA allows claimants to take direct action against the financial guarantor (the insurer in situations where OPA insurance is purchased), there is a significant credit risk assumed by said insurer. So, in addition to coverage issues, the increased financial responsibility requirements will exacerbate an existing credit risk issue.
Although there most likely will be opportunistic responses from sectors of the insurance industry to address the new requirements, any solutions that develop will increase operating costs for companies drilling for hydrocarbons in the Gulf of Mexico. Marsh believes the new products addressing the ultimately promulgated financial responsibility provisions and emerging credit risk may cost up to 10 percent of the required limits. Marsh is concerned that some exploration and production companies operating in the U.S. Gulf of Mexico may find the financial responsibility requirements very difficult to satisfy.
Marsh is actively working on Capitol Hill to express its views to involved members of Congress.