BP Faces Challenges Self-Managing Oil Spill Claims Process

The BP oil spill, caused by an explosion at the company's Deepwater Horizon oil rig on April 20, has released more than 170 million gallons of oil into the Gulf of Mexico, damaging the property and livelihood of many individuals and businesses and causing an environmental catastrophe greater than the Exxon Valdez spill of 1989. The man-made nature of the event, and the fact that BP was self-insured, mean that most claims will be fielded by BP itself rather than the insurance companies of parties harmed by the spill. BP has set aside a $20 billion fund to cover claims and has engaged ESIS, a Philadelphia-based claims processing and risk management company, to handle the claims as they are received.

London-based BP has pledged to pay all "legitimate" claims related to the spill. What remains uncertain, however, is how the company will collect, process and evaluate the veracity of claims against it. One thing is for sure, says Mark Bunim, an attorney who serves as chairman and managing director at mediation firm Case Closure (New York): This process will not fit into the standard catastrophe claims model.

In the vast majority of claims resulting from the BP spill, "We're not talking about direct property damage - we're talking about loss of business as a result of a certain type of occurrence," Bunim explains. "They don't do business assuming they're going to have a disaster like this."

BP's has self-insured retention reserves of $6 billion handled by a captive insurer subsidiary, Jupiter Insurance. That subsidiary has no reinsurance protection, according to Newark, Calif.-based risk management modeler RMS.

This type of arrangement is similar to the model airlines follow to protect themselves in the event of a crash, Bunim explains. "You pay less in premiums depending how high your self-insured retention is," he notes. "Otherwise, the premiums would be off the charts."

BP has set up a claims submission form on its website, which collects vital information to be evaluated by ESIS adjusters. As of July 24, BP said it had made at least one payment on 35,300 out of 127,400 claims for a total of $242,956,458.

Jupiter's per-occurrence limit on physical damage and business interruption is $700 million and is unlikely to cover environmental and third-party liability, RMS notes. Other parties, including Transocean (Geneva), which rented the doomed rig to BP; Halliburton (Houston), the well cementer; and Cameron International (Houston), which manufactured the blowout prevention mechanism, have various levels of insurance as well, should they be found liable.

Staking a Claim

But since the U.S. government ordered BP to set up a $20 billion escrow fund, administered by Kenneth Feinberg, who was appointed by the government, it is unclear whether BP's existing processes - themselves very new - will be replaced. Now that the damage has been done, however, parties are working through exactly how those dollars will be paid out.

"The Feinberg process has preempted everything else," Case Closure's Bunim says. "Everyone agreed that he is going to run the process. Claimants can bring their claims to him, file them through his process and get the money quickly."

What makes this situation so different from other catastrophes is that it is man-made. In an "act-of-God" catastrophe, such as a hurricane or earthquake, individual insurance companies handle the claims of their policyholders based on the terms of their agreements. But in this case, it's likely that personal policies don't cover oil damage to property or loss of income due to oily waters, according to Bunim. And even if personal policies covered oil spills, he adds, going straight to BP could be claimants' best bet.

"Assuming it's covered by their insurance company, someone could file a claim against their insurer and [the insurer] could go to BP," Bunim explains. "But the Feinberg process isn't set up for that kind of situation. They don't intend to sit there listening to subrogors."

The looming threat of a hurricane hitting the Gulf and whipping up the oil presents a different set of risks to BP, insurers and policyholders. RMS notes in its study of the claims implications of the spill that oil damage as a result of a hurricane also is not likely to be covered under standard homeowners insurance, even in areas subject to both, such as the Gulf. Making that even more of a nightmare scenario, RMS continues, is the fact that "raw, natural crude oil spilling into the ocean may not qualify as a pollutant."

"National Flood Insurance Program (NFIP) policies for residential and residential condominium associations do not contain pollution exclusions for property damage due to floodwaters, although there is no coverage for costs of testing or monitoring pollution unless required by law or ordinance," RMS says. "There is typically a $10,000 limit on pollution damage for non-residential policies.

"NFIP policies cover removal of debris, although debris is assumed to be building materials damaged due to floodwaters, rather than any residual tar deposit. Property owners could separately sue, or file a class action lawsuit, against BP for land contamination," the company continues. "For commercial flood policies, the removal of oil debris would be an additional element in clean-up costs after a storm surge flood, as was the case in Hurricane Katrina."

Insurance & Technology contacted the BP claims press office for comment through a phone number on ESIS' site, and followed up with an e-mail. BP did not respond by press time.

BP CEO Tony Hayward will step down in the wake of criticism over his handling of the oil spill, effective October 1, the company announced in late July. Hayward will be replaced by Robert Dudley, a Mississippi native who currently runs the spill response unit. Dudley will work out of London when he assumes the CEO role, handing over his current duties to Lamar McKay, chairman and president of BP America.

The same day, BP also reported a net loss of $17 billion for the second quarter of 2010. The loss was spurred by $32.2 billion set aside to deal with the aftermath of the spill, including the $20 billion escrow fund. In the same period in 2009, BP earned a $4.4 billion profit.

Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio