Current Challenges in Providing Adequate Insurance Coverage in
Major Environmental Disasters: Limitation of Liability for Oil
Pollution: Does it Have A Future? Charles B. Anderson Skuld North
America New York, NY MARITIME LAW ASSOCIATION OF THE UNITED STATES
IBEROAMERICAN INSTITUTE OF MARITIME LAW 2013 Fall Meeting Slide 2
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 Slide 3 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 Slide 4 OIL POLLUTION LIABILITY PRIOR TO OPA-90
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 No liability to third-parties 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 Slide 5 OIL POLLUTION LIABILITY PRIOR TO OPA-90 ARGO
MERCHANT - 1976 Clean Water Act of 1977 Increased liability limits
to $150 per gt Allowed recovery of natural resource damages AMOCO
CADIZ 1978 Slide 6 OIL POLLUTION LIABILITY PRIOR TO OPA-90 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 No liability to third-parties
Vessel liability: greater of $300 per gt or $5 million EXXON VALDEZ
1989 Slide 7 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
Slide 8 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 Slide 9 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? Slide 10 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 Slide 11 Slide 12 Slide 13 ATHOS
I Delaware River 2004 265,000 gallons of heavy crude oil spilled
$200+ million response costs OPA-90 limit $45 million Slide 14
Slide 15 SELENDANG AYU 336,000 gallons fuel and diesel oil $136
million response costs OPA-90 limit $24 million Unalaska Island,
Alaska 2004 Slide 16 Slide 17 COSCO BUSAN 53,653 gallons IFO
spilled $200+ million response costs and damages OPA-90 limit $62
million San Francisco Bay 2007 Slide 18 Slide 19 Slide 20 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 Slide 21 LEGISLATIVE RESPONSE TO
DEEPWATER HORIZON 111 th 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 Slide 22
LEGISLATIVE RESPONSE TO DEEPWATER HORIZON 111 th 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 Slide 23
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: Slide
24 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-90s 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
CONGRESSIONAL HEARINGS- JUNE 2010 Arguments against raising caps:
Slide 25 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 CONGRESSIONAL HEARINGS- JUNE 2010
Arguments against raising caps: Slide 26 Date Spill
NameLocationSize of Spill (Tons) January 1991Gulf War Oil
SpillPersian Gulf1,500,000* April 2010Deepwater HorizonGulf of
Mexico580,000 June 1979Ixtoc I oil wellGulf of Mexico454,000 July
1979Atlantic Empress/Aegean Captain Caribbean Sea287,000 March
1992Fergana ValleyUzbekistan285,000 February 1983Nowruz oil
fieldPersian Gulf260,000 May 1991ABT SummerAngolan coast260,000
August 1983Castillo de BellverCape Town, South Africa252,000 March
1978Amoco CadizOff the coast of Brittany, France223,000 April
1991The HavenOff the coast of Italy145,000 Top 10 Worst Oil Spills:
By Volume of Oil Spilled Source: Insurance Information Institute
Slide 27 Date Spill NameLocationEstimated Size of Loss 1989EXXON
VALDEZAlaskaClean up: $2.5 billion. Total costs (incl. fines,
penalties and claims settlements): $3.5 billion+ 1978AMOCO
CADIZFranceEst. cost $282 million, of which about half for legal
fees and accrued interest. 1993BRAERUKEst. cost $83 million. Clean
up costs extremely low. Some $61 million paid out in fishery-
related damages. 1996SEA EMPRESSUKClean up: $37 million. Total
costs: more than $60 million. 1997NAKHODKAJapanCompensation settled
at approx. $219 million. 1999ERIKAFranceClaims 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 Slide 28 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 Slide 29 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
Slide 30 Number of Incidents Exceeding Limits of Liability Slide 31
Number of Incidents Exceeding Limits of Liability by Vessel Type
Slide 32 Total Incident Costs by Vessel Type Slide 33 RP vs. Fund
Share of Total Incident Costs Slide 34 RP vs. Fund Share of Total
Incident Costs under Current Limits by Vessel Type Slide 35 Fund
Forecast Balance (Millions of Dollars) Slide 36 Total Fund
Expenditures (Thousands of Dollars) Slide 37 Limits of Liability
under OPA Slide 38 THANK YOU
