June 28, 2010
Written By Attorneys: William Krekstein and Elizabeth Dill
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
The on-going oil spill crisis in the Gulf of Mexico continues to wreak havoc on the Gulf and surrounding coastline. Fishing in the Gulf has been partially banned and beaches are beginning to see oil balls coming ashore. Some experts have even warned of the possibility that the oil will be caught up in the Gulf Stream and travel farther up the east coast than previously predicted.
Many insurers are already bracing for claims under liability policies for defense and indemnification as suits are currently being filed against numerous companies for property damage arising out of the explosion aboard the BP vessel and ensuing oil spill. In fact, on May 21, 2010, Certain Underwriters at Lloyd's, London filed a declaratory judgment action in the U.S. District Court for the Southern District of Texas, seeking a declaration that its excess policy does not provide coverage for the spill.
Lloyd's issued an excess insurance policy, in the amount of $700 million, to Transocean, Ltd., the owner of the Deepwater Horizon, the rig that exploded. In the contract between Transocean and BP, Transocean agreed to obtain insurance for certain pollution related liabilities and to name BP as an additional insured on any such policy. However, Lloyd's argues that the only liability Transocean contractually agreed to assume was that arising out of contamination originating above the surface of land or water. Here, Lloyd's says, since the oil is spilling out of the ocean floor, the contamination has not originated above the surface of land or water, and its policy is therefore inapplicable.
To be sure, many other suits will be filed arising out of this disaster, and liability insurers are likely to be facing a large influx of claims for defense and indemnification in the near future. However, as property damages begin to mount and businesses begin to lose revenue, insurers should also be aware of the issues surrounding the potential for claims in the first party arena.
Obviously, fishing industries, beach resorts and businesses in Gulf towns are likely to be hard hit by this disaster. Equally concerning is the impact that the oil spill could have on businesses that depend on products from the Gulf to generate their revenue. All these industries could look to their commercial property insurers to compensate them for any property damage suffered as well as for loss in revenue through business interruption coverage. Numerous coverage issues are certain to arise from these types of claims.
The standard business interruption provision provides that an insurer will compensate its insured for the actual loss of business income sustained due to the necessary suspension of operations during the period of restoration, so long as the suspension is caused by direct physical loss at the described premises. When the policy at issue requires that an insured has suffered a "necessary suspension" of its operations, many courts have interpreted this to mean a complete cessation of all business operations.
For the fishing company that has been banned from operating in the Gulf, establishing a complete cessation of operations may not be a difficult burden to meet. However, for beachfront resorts and restaurants in Gulf towns dependent on tourism, a complete cessation of business operations may be more difficult to prove, as it is likely that their operations will not completely shut down, but may instead slow as people vacation elsewhere.
Moreover, to succeed on a business interruption claim, the suspension of operations must be caused by direct physical loss at the described premises. Numerous questions arise. Is an oil ball washing up on the beach direct physical loss? Can the Gulf be considered part of the described premises? What about businesses that are not located directly on the coastline? In addition, the direct physical loss must usually have been caused by a covered cause of loss. Most commercial property policies contain a pollution exclusion of some sort. Can unrefined oil be considered a pollutant? Depending on the cause of the explosion and ensuing spill, could the wear and tear and/or faulty design, construction or maintenance exclusions apply? Issues involving the definition of direct physical loss as well as applicability of certain exclusions will also be the cornerstones of any claim for commercial property damage as well.
The resolution of these issues will, of course, depend on the policy language at issue and the law of the jurisdiction where the claim is made. Our National Insurance Coverage practice group is monitoring all insurance-related developments to provide our clients with comprehensive analysis and advice as this crisis continues to unfold.
