Charles B. Anderson Skuld North America New York, NY

Current Challenges in Providing Adequate Insurance Coverage in Major Environmental Disasters:

Limitation of Liability for Oil Pollution: Does it Have A Future?

Charles B. AndersonSkuld North America

New York, NY

MARITIME LAW ASSOCIATION OF THE UNITED STATES IBEROAMERICAN INSTITUTE OF MARITIME LAW

2013 Fall Meeting

• Permits shipowners and bareboat charterers to limit liability to post-casualty value of vessel and pending freight

• Shipowner must show absence of "privity or knowledge" of fault causing the loss

• Provides for "concursus" of claims in a single federal forum and pro rata distribution of limitation fund

• Does not apply to OPA-90 claims

1851 SHIPOWNERS’ LIMITATION OF LIABILITY ACT

OIL POLLUTION LIABILITY PRIOR TO OPA-90

• The Oil Pollution Act of 1924• Fines between $500-$2500

• Imprisonment up to 1 year for gross negligence or wilful act

• Civil penalties enforceable by maritime lien

• “Unavoidable” accident exception

• Federal Water Pollution Control Act of 1948• Primary focus on state and local water pollution

• Pre-judicial abatement conferences • Clean Water Restoration Act of 1966

• Liability imposed for removal costs

• Maximum $10,000 penalty

• Wilful act or gross negligence standard

• No liability to third-parties


• TORREY CANYON – 1967

• FEDERAL WATER QUALITY IMPROVEMENT ACT OF 1970• National policy prohibiting oil discharges

• Strict liability for government removal costs

• Liability “notwithstanding any other provision of law”


• Liability limited to lesser of $100 per gt or $14 million

• Defenses: Act of God, act of war, government negligence

• Evidence of financial responsibility

• Direct action against insurer

• Revolving fund of $35 million

• State law not pre-empted

• FWPCA Amendments of 1972• Hazardous substances included


• ARGO MERCHANT - 1976

• Clean Water Act of 1977− Increased liability limits to $150 per gt

− Allowed recovery of natural resource damages

• AMOCO CADIZ – 1978


• IXTOC I – 1979

• Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA)

• Applies to “hazardous substances” other than oil

• Established “Superfund”

• Allows recovery of removal costs and natural resource damages


• Vessel liability: greater of $300 per gt or $5 million

• EXXON VALDEZ – 1989

THE OIL POLLUTION ACT OF 1990

• Major Changes:− Expanded range of recoverable damages, including economic loss

− Increased civil and criminal penalties

− Allowed recovery by third-parties

− Narrowed responsible party defenses

− Significantly increased vessel limits of liability to $1200 per gt for tankers and $600 for non-tank vessels

− Expanded grounds for breaking limitation

− Established Oil Spill Liability Trust Fund

− Established new claims procedures

− Created a single regime for financial responsibility

• OPA-90 "saving clause":

"[T]his chapter does not affect –

1) admiralty and maritime law; or

2) the jurisdiction of the district courts of the United States with respect to civil actions under admiralty and maritime jurisdiction, saving to suitors in all cases all other remedies to which they are otherwise entitled.”

• OPA-90 "non-preemption" clause:

"Nothing in this act or the Act of March 18, 1851 [the Limitation Act] shall –

1) affect, or be construed or interpreting as pre-empting, the authority of any State or political subdivision thereof from imposing any additional liability or requirements with respect to –

a) the discharge of oil or other pollution by oil within such State; or

b) any removal activities in connection with such a discharge.”

GENERAL MARITIME LAW/ STATE LAW

OPA-90 FINANCIAL RESPONSIBILITY (THE ‘TRAIN WRECK’)

• Greatly increased limits of liability

• State law not pre-empted

− Overlapping liability and financial responsibility requirements

− No procedure for concursus

− Some states impose unlimited liability

− Potential exposure to state court jurisdiction

− Bad faith claims

• Few alternatives for demonstrating financial responsibility

• Direct action and waiver of policy defences

• The solution: specialized COFR providers (Shoreline/Arvak, SigCo)

• Problem solved?

DEVELOPMENTS POST-OPA-90

• NEW CARISSA and the risk of pollution from non-tank vessels

• Higher limits of liability and the Oil Spill Liability Trust Fund

• ATHOS I

• SELENDANG AYU

• COSCO BUSAN

• DEEPWATER HORIZON

ATHOS I

Delaware River 2004

• 265,000 gallons of heavy crude oil spilled

• $200+ million response costs

• OPA-90 limit $45 million

SELENDANG AYU

• 336,000 gallons fuel and diesel oil

• $136 million response costs


Unalaska Island, Alaska 2004

COSCO BUSAN

• 53,653 gallons IFO spilled

• $200+ million response costs and damages


San Francisco Bay 2007

DEEPWATER HORIZON

• Amount spilled: 4.9 million barrels

• Response costs: $14 billion

• OPA-90 limit: all removal costs plus $75 million for damages

Gulf of Mexico 2010

LEGISLATIVE RESPONSE TO DEEPWATER HORIZON – 111th CONGRESS

• Obama Administration Proposal (May 2010)

• Eliminate cap on removal costs for vessels and offshore facilities and substitute an “X” factor for current limits for damages based on “substantial and proportional increases.”

• Raise statutory expenditure limitation by OSLTF from $1billion to $1.5 billion

• Raise cap on NRDA assessments from $500 million to $750 million

• Big Oil Bailout Prevention Liability Act

• Increase limit of liability for offshore facilities from $75 million to $10 billion

• Oil Spill Liability Trust Fund Improvement Act

• Increase tax rate for Trust Fund from 5¢ to 9¢ per barrel up to $10 billion

LEGISLATIVE RESPONSE TO DEEPWATER HORIZON – 111th CONGRESS

• Consolidated Land, Energy and Aquatic Resources (CLEAR) Act

• Remove the $75 million liability cap for offshore facilities

• Leave current OPA-90 limits for vessels intact

• Provide for periodic review of liability limits and COFRs

• Significantly expand scope of damages

• Change standard of review for NRDA claims

• Expand definition of “responsible party”

• Repeal single-hull exemption for tank vessels

• Securing Protections for the Injured from Limitations on Liability Act

• Focus on reform of general maritime liability statutes

• Completely repeal US Limitation of Liability Act

• Permitsrecovery for non-pecuniary loss under DOHSA and Jones Act

• Proposed Senate Legislation

• Overrule Baker v. Exxon to permit recovery of punitive damages without regard to compensatory damages

CONGRESSIONAL HEARINGS- JUNE 2010

• Tension between energy security and protection of the environment

• Middle ground can be achieved by government regulation

• Government is at an information disadvantage

• Oil companies need economic incentives to prevent spills

• Current liability limits are a classic “moral hazard” and create incentives for spills

• Removal or substantial increase in limits will align oil industry incentives with public interest

• Lifting caps will have little impact on gasoline prices

• Job losses will be limited to sites where spill damage is likely to be large

• Small operators will not be unfairly affected because lifting caps will increase costs for all companies, regardless of size

• Lifting the cap for shipowners will also improve safety

• Increase in caps should be accompanied by proof of financial responsibility

• Market capacity is not a problem

• Government should adopt policies to boost domestic production or lower consumption

Arguments for raising caps:

• OPA-90 limits for vessels have functioned well for over two decades and have been reviewed and updated twice

• OPA-90 vessel limits take into account vessel type and tonnage to provide financial responsibility at reasonable and insurable levels

• Where vessel limits have been exceeded, additional funding comes from Oil Spill Liability Trust Fund, financed by oil industry

• Theories of unlimited liability reflect a fundamental misunderstanding of OPA-90’s limitation provisions

• Narrow defences and broad exclusions to limitation create strong incentives for shipowners to operate their vessels safely

• Unlimited liability would exclude participants other than very large companies or undercapitalized risk takers


Arguments against raising caps:

• International insurance industry has finite resources

• Club cover is capped at $1 billion, adequate to meet maximum liabilities under OPA-90

• COFRs are provided by small number of providers who rely on market reinsurance

• “One size fits all” approach to caps would greatly magnify risk exposure of COFR providers for no logical reason

• There is a very different risk pattern for vessels compared to offshore facilities

• Congress should leave vessel limitation structure intact, subject to incremental adjustments based on inflation and risk factors


Arguments against raising caps:

Date Spill Name Location Size of Spill (Tons)

January 1991 Gulf War Oil Spill Persian Gulf 1,500,000*

April 2010 Deepwater Horizon Gulf of Mexico 580,000

June 1979 Ixtoc I oil well Gulf of Mexico 454,000

July 1979 Atlantic Empress/Aegean Captain

Caribbean Sea 287,000

March 1992 Fergana Valley Uzbekistan 285,000

February 1983 Nowruz oil field Persian Gulf 260,000

May 1991 ABT Summer Angolan coast 260,000

August 1983 Castillo de Bellver Cape Town, South Africa 252,000

March 1978 Amoco Cadiz Off the coast of Brittany, France 223,000

April 1991 The Haven Off the coast of Italy 145,000

Top 10 Worst Oil Spills: By Volume of Oil Spilled

Source: Insurance Information Institute

Date Spill Name Location Estimated Size of Loss

1989 EXXON VALDEZ Alaska Clean up: $2.5 billion.

Total costs (incl. fines, penalties and claims settlements): $3.5 billion+

1978 AMOCO CADIZ France Est. cost $282 million, of which about half for legal fees and accrued interest.

1993 BRAER UK Est. cost $83 million. Clean up costs extremely low. Some $61 million paid out in fishery-related damages.

1996 SEA EMPRESS UK Clean up: $37 million. Total costs: more than $60 million.

1997 NAKHODKA Japan Compensation settled at approx. $219 million.

1999 ERIKA France Claims still being processed. Likely to exceed the $180 million available under ’92 Civil Liability and Fund Conventions.

Sample of Most Costly Oil Tanker Spills

Source: International Tank Owners Pollution Federation

OIL SPILL LIABILITY TRUST FUND (OSLTF)

• Pays for federal response to oil pollution incidents and uncompensated

removal costs and damages

• Expenditures are recovered from responsible parties

• Principal revenue stream is 8 cent per barrel tax on foreign and domestic oil

• Other revenue sources are interest, cost recoveries and penalties

• Current balance is approximately USD 1.5 billion

• No cap on Fund balance but maximum per incident amount is USD 1 billion

(USD 500 million for NRDA claims)

• Can be accessed by Federal On-Scene Coordinators, other federal, state,

local government and Indian tribal agencies, natural resource trustees and

individual and corporate claimants

NATIONAL POLLUTION FUNDS CENTER

• Total removal costs and damages since enactment of OPA-90 amount to USD1.8 billion

• USD 1.2 billion (USD 55.3 million annually) were in excess of OPA-90 liability limits

• Overall trend is toward increasing Fund liability

• Costs for incidents exceeding liability limits have less impact than payments for appropriations, damages, removal costs and third-party claims

• Current limits for certain vessel types are not sufficient to cover cost of discharges from these vessels

• Targeted increases in liability limits will better support “polluter pays” principal

• OSLTF will be able to cover projected non-catastrophic liabilities without further increases

Number of Incidents Exceeding Limits of Liability

Number of Incidents Exceeding Limits of Liability by Vessel Type

Total Incident Costs by Vessel Type

RP vs. Fund Share of Total Incident Costs

RP vs. Fund Share of Total Incident Costs under Current Limits by Vessel Type

Fund Forecast Balance (Millions of Dollars)

Total Fund Expenditures (Thousands of Dollars)

Limits of Liability under OPA

THANK YOU

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Charles B. Anderson Skuld North America New York, NY