Journal of. Reinsurance

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1 Winter 2011 Vol. 18 No.1 Journal of Reinsurance Feature Articles Troubled Horizon? The Insurance and Reinsurance Implications of the Deepwater Horizon Oil Spill Disaster The Once and Future New York Insurance Exchange Follow the Fortunes: Decisions and Trends in 2010 Setoffs In Insurance Receiverships: Two Decades of Change

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3 Board of the Intermediaries & Reinsurance Underwriters Association President Frank Bigley Farmers Mutual Hail Co. of Iowa Secretary/Treasurer Jessica Bongiorno Arch Reinsurance Vice President James Brost BMS Intermediaries, Inc. Immediate Past President Anthony Joseph Lloyd s America Inc. Directors Elizabeth Geary Transatlantic Reinsurance Company John Reinman Guy Carpenter & Company LLC Jodi Mann G.J. Sullivan Co Anne Marie Roberts BMS Intermediaries, Inc. Joan Martino Thomas E. Sears, Inc. Matthew Rose Axiom Intermediaries, LLC Virgil R. Maxwell American Agricultural Insurance Co. Sean Ryan Trean Corporation Robert Mezzasalma QBE Reinsurance Corp Michael Sowa Aspen Re Doug Nuehring EMC Reinsurance Company Joseph Vaughan Towers Watson Brian Quinn Odyssey Re Jeremy Wallis Mapfre Re Doug Rarig Arch Reinsurance Michael Williams Axiom Intermediaries, LLC Staff Amy Barra Executive Director Counsel Robert Calinoff Calinoff & Katz Elizabeth Marquez Admistrative Assistant

4 Intermediaries & Reinsurance Underwriters Association Mission Statement To promote professionalism and educational advancement, and to provide a forum for the useful exchange of ideas among member companies. Purposes The purposes for which IRU, Inc. (Intermediaries & Reinsurance Underwriters Association) was formed are to foster and promote the interests of those individuals, partnerships, firms, associations and corporations who are engaged in the business of treaty reinsurance. To encourage an exchange of ideas among members, and to disseminate educational information for the benefit of members and for the betterment of the reinsurance industry. To promote professionalism among members. To maintain liaison with other segments of the insurance industry, for the discussion and debate of insurance and reinsurance issues. To develop and present programs on topics germane to the fields of insurance and reinsurance. To organize and conduct meetings for the members of the association. To facilitate research into problems and issues significant to either the membership or the reinsurance industry. To disseminate, through printed matter and other appropriate means, general news and information concerning the association and its members, the proceedings of the associations meetings and programs. To promote programs designed to increase awareness and enhance positive image of the reinsurance industry.

5 Journal of Reinsurance Editorial Board Editor Paul Walther, CPCU, ARe Reinsurance Directions, Inc. Publications/Journal of Reinsurance Committee Committee Chairman Joseph Vaughan Towers Watson Committee Members Frank Bigley Farmers Mutual Hail Insurance Company of Iowa Jerry Wallis Mapfre Re General Information The Journal of Reinsurance is an official publication of the Intermediaries & Reinsurance Underwriters Association. It is published quarterly in January, April, July, and October. All opinions and views expressed in any material in the Journal of Reinsurance are those of the author(s) and do not necessarily represent the views of the editor, the editorial staff, the Intermediaries & Reinsurance Underwriters Association or its members. Copyright Intermediaries & Reinsurance Underwriters Association. All Rights Reserved. ISSN

6 TROUBLED HORIZON? The Insurance and Reinsurance Implications of the Deepwater Horizon Oil Spill Disaster 1 By Michael S. Olsan Vincent N. Barbera About the Authors: Michael S. Olsan is a partner with White and Williams LLP and Chair of the Reinsurance Practice Group. Mr. Olsan focuses his practice on the litigation and arbitration of reinsurance and complex insurance coverage disputes. Vincent N. Barbera is an associate with White and Williams in the Reinsurance and Commercial Litigation Practice Groups. The views expressed in this paper do not necessarily reflect the views of White and Williams LLP, any of its attorneys, or those of its clients. Building on a century of service to clients, the over 230 attorneys at White and Williams LLP provide strategic corporate legal counsel and litigation services from eleven offices in Pennsylvania, Delaware, Massachusetts, New Jersey and New York. Among its many practice groups, White and Williams has practice groups dedicated to insurance coverage and reinsurance. The Reinsurance Practice Group represents clients with respect to both ceded and assumed reinsurance matters. The group has litigated or arbitrated more than 100 reinsurance cases to final conclusion - resulting in awards of the hundreds of millions of dollars to our ceding company clients and very substantial savings to our reinsurer clients. The Insurance Coverage Practice Group services the insurance industry in complex and emerging coverage issues. The group's extensive experience and comprehensive understanding of coverage nuances enables our attorneys to secure the most favorable outcome for clients in the ever-changing arena of insurance coverage. Abstract It is not the intent of this article to analyze each of the possible insurance and reinsurance issues that may arise from the Deepwater Horizon drilling disaster, but rather to make the reader aware of some issues that may come to the forefront to better prepare those involved. Journal of Reinsurance/IRU

7 2 I. INTRODUCTION On the evening of April 20, 2010, a "well control event" allowed hydrocarbons to escape from the Macondo oil well onto the offshore drilling rig Deepwater Horizon owned by Transocean. 1 The hydrocarbons ignited, resulting in an explosion and fire that killed eleven crew members, injured seventeen others and caused the rig to sink into the Gulf of Mexico. 2 Crude oil began to spill into the Gulf of Mexico from the well at an alarming rate of 35,000 to 60,000 barrels per day until the well was effectively capped on July 15, Over the course of approximately three months, an estimated 4.9 million barrels of oil spilled into the Gulf of Mexico making the Deepwater Horizon oil spill the world's largest accidental spill - easily eclipsing the previous mark of 3.3 million barrels spilled by the Mexican rig Ixtoc I in It goes without saying that the effects of the largest oil spill in history were felt far and wide and by very different and diverse groups in the Gulf region - from state and local governments to resort destinations to family restaurateurs. Predictably, hundreds of lawsuits have been filed - including numerous class action suits - and many more are expected. 5 Those allegedly responsible for the oil spill will undoubtedly turn to their insurers for defense and indemnity albeit the precise nature of the coverage issues that will arise is not yet clear. As discussed in more detail below, some of the issues carriers will face include: whether naturally occurring, as opposed to refined, oil constitutes a pollutant as that term is used in the pollution exclusion; the effect of the Oil Pollution Act or Troubled Horizon?

8 3 Claims Fund on insurers' subrogation rights; and the allocation between the liability of directors and officers versus that of the company if only Side-A D&O coverage is available. As the dust settles with respect to those coverage issues, reinsurance disputes will inevitably follow. Some of the reinsurance issues that ceding companies and reinsurers may come across include: whether a reinsurer is bound by payments made by a ceding company that exceed the cap imposed by the Oil Pollution Act; how claims made coverage, particularly associated with D&O coverage, may affect cessions when the underlying policy period is not concurrent with the reinsurance period; and the extent to which clash coverage may be applicable to the various underlying claims. II. THE KEY PLAYERS AND POTENTIALLY AVAILABLE INSURANCE A. Who is Responsible? Although BP owned a majority 65% interest in the Deepwater Horizon joint venture, other less publicized entities that held ownership interests, or were otherwise involved in the ownership or operation of the Deepwater Horizon, may be subject to significant financial exposure to cover the massive costs of the spill. 6 Specifically, Texas-based Anadarko Petroleum Corporation ("Anadarko") held a 25% interest in the Deepwater Horizon. 7 MOEX Offshore 2007 LLC, a wholly owned subsidiary of MOEX USA Corporation, which is wholly owned by the Japanese company Mitsui Oil Exploration Co., Ltd. ("Mitsui") held the remaining 10% Journal of Reinsurance/IRU

9 4 interest in the joint venture. 8 The world's largest offshore drilling company, Transocean Ltd. ("Transocean"), operated the Deepwater Horizon rig and was the drilling contractor Halliburton Company ("Halliburton") was the cementing services provider retained by BP and was responsible for crafting the cement barrier that ultimately failed and contributed to the spill. 11 Cameron International ("Cameron") was the manufacturer of the blowout preventer on the well that ultimately did not seal the well following the explosions and fire on the Deepwater Horizon. 12 Although BP is the predominant media headliner of coverage regarding the oil spill and at the financial forefront of the cleanup efforts, BP, for one, has not forgotten the minority interest holders in the Deepwater Horizon. On November 2, 2010, BP sent bills to both Anadarko and Mitsui for what BP contends is their share of the cleanup costs that BP has paid to-date for the spill. 13 Both Anadarko and Mitsui have refused to pay BP's invoices, albeit citing different reasons publically. Since BP first billed Anadarko in June, the company has maintained that BP acted with "gross negligence" or "willful misconduct" and that as a result it was withholding payment. 14 In response to the most recent BP billing, Mitsui stated that it planned to withhold payment pending the conclusion of "numerous ongoing investigations to determine the facts and circumstances surrounding the Incident" and that might reveal that Mitsui has no obligation to BP. 15 Troubled Horizon?

10 5 B. The Key Players' Potentially Available Insurance Coverage 16 Each of the key players involved in the spill possesses insurance coverage in various forms and amounts. 17 Net losses to the insurance industry as a result of the spill are estimated to be in the range of $4 billion to $6 billion; however, Towers Watson has concluded that the "Deepwater Horizon spill will not be a watershed event for the property and casualty insurance industry, relative to the total economic losses from the disaster." BP BP reportedly is "self-insured" through its wholly-owned captive insurer Jupiter Insurance Limited, but its coverage is capped at a per occurrence limit of $700 million and it is not expected to cover clean-up costs or third party liability. 19 Notably, Jupiter reportedly does not have any applicable reinsurance coverage. 20 According to the Insurance Information Institute, BP Shipping purchased $1 billion of marine liability pollution coverage through mutual insurance associations. 21 In addition, BP also reportedly has $400 million in Side-A D&O liability coverage that is arranged in an "eight-layered tower" through various insurers, including ACE Bermuda International, Zurich, and Chartis. 22 Journal of Reinsurance/IRU

11 6 2. Anadarko and Mitsui Although only minority investors in the Deepwater Horizon joint venture, Anadarko and Mitsui are potentially exposed for the massive costs that continue to accumulate. Anadarko is reported to have approximately $100 million of potentially responsive insurance through an owner's extra expense policy that covers re-drilling and re-gaining control of a well. 23 Additionally, Anadarko has publically disclosed that it has $177.5 million of insurance on the Macondo well that it expects would respond. 24 Mitsui also reported that it carries insurance that would respond to cover any potential liabilities that it might incur from the Deepwater Horizon incident. 25 The Insurance Information Institute reports that Mitsui has a $45 million owner's extra expense policy Transocean Transocean, the drilling contractor for the Deepwater Horizon, maintains various types of insurance coverage through numerous different providers. Of coverage responding to Transocean's offshore risks, the lowest layer policy attaches excess $50 million, and the aggregate limits of liability under all of its policies are $700 million. 27 To date, over $400 million has been paid to Transocean by various insurers following the sinking of the Deepwater Horizon. 28 Troubled Horizon?

12 7 4. Halliburton and Cameron Halliburton and Cameron, the companies involved with the cement casing for the well and the well's blowout preventer, respectively, reportedly maintain liability insurance but it is unclear whether or to what extent those policies will be triggered. Halliburton is reported to have liability insurance in excess of $1 billion, while Cameron has a $500 million liability insurance policy. 29 III. CAUSES OF ACTION AND LIMITATIONS ON RECOVERY A. Possible Causes of Action Against the Responsible Parties Several suits have been filed against the responsible parties to date. However, investigations continue, and with new developments, other causes of action, not yet contemplated are likely. Some of the more common actions include business interruption, personal injury/wrongful death claims from the initial explosion, products liability/negligence claims because of faulty equipment, natural resource damage claims, shareholder and securities class action suits, environmental claims and health claims from those responsible for cleaning up the spill. 30 Additionally, there has been an action brought for the possible harmful effects of the chemical dispersant BP used to break up the oil. 31 Journal of Reinsurance/IRU

13 8 BP's internal investigation report of the Deepwater Horizon disaster concluded that the cement mixture produced by its contractor, Halliburton, was flawed and unstable and was at least a contributing factor that allowed hydrocarbons to enter the well. 32 These hydrocarbons eventually ignited, causing the fire and explosions that sunk the rig. 33 On October 29, 2010, Halliburton admitted that it skipped performing a critical test on the cement mixture that was used to seal the Macondo well. 34 However, according to Halliburton, it was BP who ordered a last-minute change to the cement formula, and a staff letter issued by the presidential oil spill commission concluded that both BP and Halliburton knew that the cement mixture was unstable but still used that cement to seal the ill-fated well. 35 These types of allegations, if true, might trigger additional shareholder or shareholder derivative lawsuits similar to others already filed against BP's board of directors based on allegations that the directors' failure to implement appropriate safety measures directly contributed to the April 20, 2010, incident. 36 B. Potential Limitations to Recovery While BP, Anadarko, Mitsui, Transocean, Halliburton and Cameron sit in the unenviable position of being atop the list of parties potentially on the hook for the damages and penalties tied to the Deepwater Horizon disaster, there are several important limiting factors and events that will affect who pays, and how much is paid, which in turn, may impact the applicability of insurance coverage. Troubled Horizon?

14 9 1. BP's $20 Billion Fund On June 16, 2010, at the stern urging of United States President Barack Obama, BP announced its intention to create a $20 billion claims fund (the "Claims Fund") over the course of the ensuing three years. 37 According to BP, the funds will be available "to satisfy legitimate claims including natural resource damages and state and local response costs," with payments to be made as they are adjudicated by the Independent Claims Facility, by a court, or as agreed by BP 38. BP maintains that the Claims Fund is not intended to represent a cap on BP liabilities. 39 Beginning on August 23, 2010, all claims were transferred for handling by and through the independent claims facility known as the Gulf Coast Claims Facility ("GCCF"), administered by Kenneth R. Feinberg. 40 BP has paid or approved payment of $3,291,476,749, representative of claims made by individuals and business in the Gulf region ($2,005,640,448) as well as those by Government entities ($1,285,836,301). 41 Although the presence of $20 billion for all legitimate claims appears encouraging, BP's most recent estimate of likely costs of the spill totals $40 billion Statutory Limitations Under the Oil Pollution Act of 1990 ("OPA") The OPA was enacted in 1990 in response to the 1989 Exxon Valdez oil spill, which was then the largest oil spill event in Journal of Reinsurance/IRU

15 10 United States history. 43 Pursuant to the OPA "responsible parties" are held strictly liable for removal costs and economic damages to third parties. 44 While liability for economic damages is capped at a total amount of $75 million per party, per incident, there is no cap related to removal costs The OPA's liability limitations, however, do not apply if it is determined that the spill was proximately caused by the "gross negligence or willful misconduct" of a responsible party, or if a responsible party violated Federal regulations en route to causing a spill. 47 Not surprisingly, in the wake of the Deepwater Horizon disaster, there has been considerable legislative action towards amending the OPA to raise or eliminate the liability cap. On July 30, 2010, H.R. 3534, known as the CLEAR Act, passed in the U.S. House of Representatives by a vote of Notably, the CLEAR Act would remove the $75 million liability cap presently applicable under the OPA in its entirety, rather than merely raising the liability limit. 49 The CLEAR Act, which was received in the U.S. Senate on August 3, 2010, has not come to a vote and has been placed on the Senate Legislative Calendar. 50 IV. INSURANCE AND REINSURANCE IMPLICATIONS Given the magnitude of the Deepwater Horizon incident, insurance coverage issues and disputes undoubtedly will arise, followed closely by reinsurance issues and disputes. One coverage action has already been filed. Troubled Horizon?

16 11 A. The First Coverage Action On May 14, 2010, BP, as an additional insured under Transocean's insurance policies, provided notice of a claim to numerous insurance companies (the "Insurers") providing an aggregate amount of $700 million in excess liability insurance coverage to Transocean. 51 In response to BP's notification, on May 21, 2010, the Insurers filed a Complaint for Declaratory Judgment against BP in the United States District Court for the Southern District of Texas. 52 Led by named plaintiff Certain Underwriters at Lloyd's, London, the Insurers sought a declaration that they owed no obligation to BP under Transocean's policies with respect to the numerous pollution claims against BP as a result of the Deepwater Horizon disaster. 53 The Insurers posited that BP provided notice and intended to tender claims to the Insurers because it was an additional insured under Transocean's policies, and Transocean had agreed to hold BP harmless for loss or liability for pollution or contamination "originating above the surface of the land or water from spills, leaks, or discharges." 54 The Insurers took the position that, "[b]ecause liabilities BP faces for pollution emanating from BP's well are from below the surface and from BP's well, those liabilities are not within the scope of the additional insured protection." 55 BP responded to the Insurers' complaint, denying the allegations that it was not covered under Transocean's policies and counterclaiming against the Insurers on a theory based on subrogation rights. In its counterclaim BP alleged that it is a Journal of Reinsurance/IRU

17 12 named insured under a policy issued by National Union Fire Insurance Company of Pittsburgh, PA ("National Union"), with limits of $300 million. 56 On or about June 28, 2010, National Union tendered the full $300 million policy limit to BP in connection with BP's liabilities for injuries and damages from the Deepwater Horizon incident. 57 BP stated that in addition to the $300 million payment, National Union assigned its subrogation rights to BP and argued that, therefore, BP is entitled to recover whatever amounts National Union would have been entitled to recover against Transocean (or its carriers). 58 B. Implications of the Spill to Insurance Coverage Pollution Exclusion The first line of defense for many general liability insurers may be the pollution exclusion. These exclusions typically bar coverage for claims that arise out of, or are caused by, the discharge of "pollutants" which are often broadly defined in the policy as "any solid, liquid, gaseous or thermal irritant or contaminant" including "smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste." 60 Predictably, what constitutes a "pollutant" under such a definition has been the source of substantial litigation over the years. While there is considerable case law pertaining to the question of whether processed or refined oils, such as gasoline and diesel, are "pollutants," courts have not definitively ruled on whether Troubled Horizon?

18 13 natural oil that emanates directly from the earth constitutes a "pollutant" as that phrase is used in pollution exclusion provisions Classifying oil as a pollutant should not be a disputed issue; however, experience from environmental coverage cases over the years teaches us that the issue may be more complicated than it initially appears. One possible consideration is that natural oil "seepage" is a common phenomenon - in fact, various studies indicate that as much as 560,000 to 1,400,000 barrels of oil naturally 'spill' into the Gulf of Mexico each year 63 - and therefore is not a pollutant as that term is used in the pollution exclusion. As one study analogized, each year "twice an Exxon Valdez spill worth of oil" seeps into the Gulf. 64 However, the Deepwater Horizon disaster was not the result of any naturally occurring phenomenon, but rather was caused by a man-made disaster. Thus, this should be analogous to any other case in which a court determined that the pollution exclusion barred coverage for property damage from refined oils. Nevertheless, this issue will likely be left for the courts to decide. 2. Property Damage Requirement for Business Interruption As a general rule, an insured will not be compensated for a business interruption loss unless there is damage or loss to the physical property of the insured which is caused by a covered peril. 65 Accordingly, a seafood restaurant in Boston that suffered a loss in business because of a shortage in supply of Journal of Reinsurance/IRU

19 14 shrimp from the Gulf may not be entitled to business interruption coverage because it did not suffer any concomitant damage or loss to physical property. However, there are undoubtedly businesses in the Gulf that were affected by the spill in such a way that business interruption coverage will respond. In those instances, the first party insurer that pays the claims, would be entitled to subrogation from the parties responsible for its loss - here, this could potentially mean any of the key players in the Deepwater Horizon disaster, including BP, Anadarko, Mitsui, Transocean, Halliburton and Cameron. In their endeavor to enforce their subrogation rights, however, first party insurers could face several hurdles. With regard to parties such as BP, Anadarko, Mitsui and potentially Transocean, who are all arguably "responsible parties" under the OPA, subrogation recovery may be capped or prevented if the responsible party has exhausted its $75 million liability limit under the OPA. Furthermore, with regard to BP, it is unclear whether subrogation by first party insurers should be pursued through direct actions against BP, or if subrogation demands will be accepted, handled and processed by and through the Claims Fund. 3. Issues Surrounding D&O Coverage In the immediate wake of the Deepwater Horizon disaster, certain executives, perhaps most notably former BP CEO Tony Hayward, came under fire for actions taken in response to the disaster. Unfortunately for many of BP's directors and Troubled Horizon?

20 15 officers, however, criticisms were not limited to media reports. Several shareholder derivative actions were filed against BP based generally on allegations that its directors and officers ignored critical safety concerns on offshore rigs and that this action (or inaction) culminated in the Deepwater Horizon incident BP's directors and officers might also face lawsuits from shareholders in their individual capacities for losses that BP might incur as a result of its approval of faulty cement used on the Macondo well and for its authorization of the use of an allegedly toxic dispersant following the disaster. Any or all of these types of lawsuits would trigger directors and officers insurance, which BP reportedly purchased through private insurers. Specifically, BP is said to have $400 million in Side-A D&O liability coverage that is structured in an eight-layered tower. 68 While specific policy wording will be determinative of whether and to what extent BP's D&O coverage responds, traditionally D&O coverage is triggered, and defense must be provided, until a final adjudication of the dispute is rendered. Depending on the nature of the final judgment, the insurer must either provide indemnity or can demand recoupment for defense costs should the ruling indicate that some pertinent exclusion was applicable. However, because most suits are concluded through settlement, D&O carriers often contribute notwithstanding the fact that no final adjudication was handed down. Therefore, while the global insurance industry has been largely spared from the financial costs of the Deepwater Horizon incident because BP is "self-insured," D&O carriers may not be so Journal of Reinsurance/IRU

21 16 fortunate. From all accounts, it appears that BP may have purchased Side-A D&O coverage only. This may lead to an inevitable allocation issue. To the extent shareholders file an action against the directors and officers as well as the company, the D&O coverage would not apply to payments attributable to the company's (as opposed to the directors' and officers') liability. The method of allocating settlement between the two undoubtedly will be a source of contention (and could, as set forth below, lead to similar reinsurance issues). This issue is not necessarily limited to BP, of course, and will be equally applicable to the other key players depending upon their D&O coverage. 4. Payments for Losses in Excess of OPA Mandate The dollar limitation mandated by the OPA may present an interesting coverage issue. To the extent that the responsible parties pay out damages in amounts that exceed the $75 million limits set forth in the OPA, an issue may arise as to whether they have paid amounts for which they are not liable. Under the typical general liability policy, the policyholder is entitled to receive indemnity only for those damages that it was legally obligated to pay. However, is the OPA's maximum limit, truly a limit on damages? Consider first that the OPA itself states that the limit is inapplicable for "gross negligence or willful misconduct" - of course, as set forth below there should be no coverage for such conduct in any event. 69 Second, the OPA does not preempt state law claims Troubled Horizon?

22 17 that may be brought by allegedly injured parties. 70 Accordingly, it will be critical for insurers to examine closely why amounts in excess of the current $75 million were paid. 5. Intentional Conduct Many of the actions filed to date include allegations of intentional conduct, which not only affects the applicability of insurance coverage but also impacts the viability of the now infamous liability cap provided by OPA. The OPA includes a provision that operates to remove the liability cap with regard to damages due to a responsible party's "willful misconduct" or "gross negligence." This exception to the OPA seemingly is more likely to be applicable given the swirling allegations of misconduct by the key players, including the purported improper cementing of the well by Halliburton, and the approval and use of allegedly toxic dispersants by BP To the extent these allegations (or similar state court allegations) prevail, coverage may be barred under most policies that require an element of fortuity. C. Reinsurance Implications While the insurance coverage issues are in their infancy, it is not too early for insurers and reinsurers alike to begin to think about possible implications of the Deepwater Horizon disaster. Journal of Reinsurance/IRU

23 18 1. Payments Outside Scope of Coverage Most courts have found that a ceding company has a purposefully low threshold to demonstrate entitlement to reinsurance under the follow-the-fortunes (or settlements) doctrine. 73 Once a ceding company demonstrates that the claim is "arguably" within the scope of the underlying insurance policy, the reinsurer must pay unless it can demonstrate that the ceding company acted in bad faith or the underlying policy unambiguously did not cover the dispute payments. 74 As noted above, to the extent the OPA is applicable and an insurer indemnifies a responsible party policyholder for an amount in excess of the OPA cap, an issue may arise as to whether that portion of the claim was categorically outside the scope of the underlying policy making follow-the-fortunes inapplicable. Similarly, if a Side-A D&O carrier does not allocate between the liabilities of the company and those of the directors and officers, there may be an issue as to whether a portion of the claim - payment for the company's liabilities - was unambiguously not covered by the underlying policy. 2. Issues Arising from "Claims Made" Coverage Typically, D&O coverage is written on a claims made basis; some of the other applicable coverage may apply on that basis as well. To the extent an underlying claims made policy and the reinsurance contract to which it is ceded are not coterminous, issues may arise. For example, to the extent the reinsurance contract was terminated on a cut-off basis prior to Troubled Horizon?

24 19 the time the underlying claim was made, there may be a question regarding the availability of reinsurance under the contract. This problem could be further compounded to the extent a new reinsurer began participating on a treaty program after the policy was issued but before the claim was made, but the reinsurer's participation does not apply to policies already in force. Similarly, there may be reinsurance implications if the underlying policy provides tail coverage but the Treaty termination did not expressly cover claims made during a post-treaty termination tail period. Additionally, there may be a notice issue. Given the extent to which the issues surrounding the disaster have been reported in the press, ceding companies may be deemed to have been aware of potential claims before they are made. If so, and those ceding companies do not provide timely notice to their reinsurers, a late notice issue may arise. 3. Clash cover Clash cover is defined as a "casualty excess reinsurance contract requiring two or more coverages or policies, issued by the reinsured and involved in a loss, for coverage to apply. The attachment point of the reinsurance contract is usually above the limits of any one policy." 75 Clash cover may apply in both the first party and third-party contexts. To the extent first party insurers pay claims to many insureds, they may be able to cede those losses to their clash treaty. Some insurers may have clash treaties that are similarly applicable to liability claims. If an insurer insured more than one of the Journal of Reinsurance/IRU

25 20 responsible parties (including Halliburton), those payments may be able to be accumulated, depending upon the language of the contract, for a presentation to a clash treaty. V. Conclusions Amazingly, the largest oil spill this country has seen will not "be a watershed event of the P&C industry" according to Towers Watson. 76 One major reason for this is BP's choice to be self insured. Nevertheless, there still are significant insurance and reinsurance issues that will arise from this disaster. Insurers and reinsurers are best advised to keep up with the events as they unfold and continuously reassess their possible exposure. Whether the insurance and reinsurance issues will signal a "troubled horizon" for the insurance industry is, as yet, an unfinished chapter in an ongoing insurance coverage saga. Troubled Horizon?

26 21 Endnotes: 1 See BP, Executive Summary, Deepwater Horizon Accident Investigation Report, at 9, Sept. 8, 2010, bp_internet/globalbp/globalbp_uk_english/incident_response/staging/l ocal_assets/downloads_pdfs/deepwater_horizon_accident_investigation _Report.pdf. 2 See id. 3 See Cambell Robertson and Clifford Krauss, Gulf Spill Is The Largest of Its Kind, Scientists Say, THE NEW YORK TIMES, Aug. 2, 2010, 4 See id. 5 See Jef Feeley and Margaret Cronin Fisk, BP Gulf-Spill Lawsuits Consolidated in New Orleans, BLOOMBERG, Aug. 10, 2010, 6 See Robert P. Hartwig, Ph.D., CPCU, The Deepwater Horizon Disaster: Insurance Market Impacts, INSURANCE INFORMATION INSTITUTE, Sept. 1, 2010, at 29, 7 See id. 8 See MOECO News, The fire incident of a drilling rig in the Gulf of Mexico, May 10, 2010, 9 See Robert P. Hartwig, Ph.D, CPCU, supra note 6, at 29. Journal of Reinsurance/IRU

27 22 10 See Transocean, Corporate Overview, /fw/main/our-company-2.html (last visited November 15, 2010). 11 See Deepwater Horizon Accident Investigation Report, supra note 1, at See Robert P. Hartwig, Ph.D., CPCU, supra note See Tsuyoshi Inajima and Yuji Okada, BP Sends $4.5 Billion Bill to Partners for Mexico Gulf Cleanup, BLOOMSBERG BUSINESSWEEK, Nov. 2, 2010, billion-bill-to-partners-for-mexico-gulf-cleanup.html. 14 See id. 15 See MOECO News, Receipt of BP's invoice regarding the oil spill incident in the Gulf of Mexico, Nov. 2, 2010, en/news/2010/11/receipt-of-bps-invoice-regarding-the-oil-spill-incidentin-the-gulf-of-mexico-1.html. 16 In addition to coverage for the key players' liabilities, affected property and business owners will turn to their insurers to recover under first party policies. 17 See Robert P. Hartwig, Ph.D, CPCU, supra note 6, at 3. According to the Insurance Information Institute, as of September 1, 2010, Lloyd's reported estimated losses of $300 to $600 million across all syndicates, which was the greatest estimated losses amount among any one insurance or reinsurance provider. In total, twenty-three global insurers or reinsurers announced estimated insured losses due to the Deepwater Horizon disaster. Id. 18 Stephen Lowe, Joseph Lebens and Michael Pummell, Deepwater Horizon Disaster: Insurance Industry Implications, EMPHASIS (2010). Troubled Horizon?

28 23 19 See Robert P. Hartwig, Ph.D., CPCU, supra note 6, at See id. 21 See id. It is unclear what BP Shipping's role was, if any, in the Deepwater Horizon incident. 22 See Edwards Angell Palmer & Dodge, D&O Insurers Face Potential Exposure on Deepwater Horizon Claims, Aug. 13, 2010, See Robert P. Hartwig, Ph.D, CPCU, supra note 6, at See Edward Klump, Anadarko May Take Biggest Hit From Gulf Oil Spill, BLOOMBERG, May 13, 2010, /anadarko-may-take-biggest-hit-from-gulf-oil-spill-as-bp-ssilent-partner.html. 25 See MOECO News, The fire incident of a drilling rig in the Gulf of Mexico, supra note See Robert P. Hartwig, Ph.D., CPCU, supra note 6, at See Complaint for Declaratory Judgment at 6, Certain Underwriters at Lloyd's, London et al. v. BP plc, et al., No. 4:10-cv (S.D. Texas May 21, 2010). 28 See Robert P. Hartwig, Ph.D., CPCU, supra note 6, at See id. 30 See generally, Marcia Coyle, The Gulf Spill Scorecard: Lawyers, Cases, Locales, THE NATIONAL LAW JOURNAL, Vol.32, No.27, (May 24, 2010). Journal of Reinsurance/IRU

29 24 31 See Environmental Protection, Law Firm Sues BP for Use of Chemical Dispersant" June 23, 2010, 32 See Deepwater Horizon Accident Investigation Report, supra note 1, at See id. at p See MSNBC, Halliburton admits skipping test on Gulf well cement, Oct. 29, 2010, 35 See id. 36 See e.g., Complaint, Firpo v. Hayward, et al., No. 2:10-cv (E.D. La. May 7, 2010). 37 See BP, BP Establishes $20 Billion Claims Fund for Deepwater Horizon Spill and Outlines Dividend Decisions, June 16, 2010, BP scheduled payments into the fund equal to $3 billion in Q3 of 2010, $2 billion in Q4, and expects to subsequently pay $1.25 billion per quarter until $20 billion is paid into the fund. Id. 38 See id. It remains unclear whether insurers, particularly first party carriers, must file their subrogation or contribution claims with the Claims Fund. 39 See id. 40 See Gulf Coast Claims Facility Welcome page, (last visited November 2, 2010). Troubled Horizon?

30 25 41 See BP, Claims and Government Payments, Gulf of Mexico Oil Spill Public Report - 10/28/2010, globalbp/globalbp_uk_english/incident_response/staging/local_assets/ downloads_pdfs/public_report_10_28_10.pdf. Figures include payments made by BP and those later made by the GCCF, current as of October 28, Id. 42 See Reuters, BP lifts cost for spill, denting quarterly profit, Nov. 2, 2010, 43 See Subcommittee on Coast Guard and Maritime Transportation Staff and Subcommittee on Water Resources Staff, Hearing on 'Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and Related Statutes', at 7 (June 8, 2010). 44 Id., at 9. Under the OPA, "responsible parties" include owners and operators of vessels or facilities that discharge oil into or upon navigable waters of the United States or adjoining shorelines. Id. at 8; See also 33 U.S.C. 2701(32) (2004). 45 See Hearing on 'Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and Related Statutes', supra note 43, at 7. "Damages" include "injury to, destruction of, loss of, or loss of use of natural resources; injury to or economic losses resulting from destruction of real or personal property (including the loss of taxes, royalties, rents, or fees recoverable by the United States, a State, or a political subdivision and the loss of earning capacity recoverable by any claimant); loss of the subsistence use of natural resources, which is recoverable by any claimant who uses the natural resources without regard to ownership or management; and damages for the net costs of providing increased or additional public services." Id. 46 Of additional note is that the OPA does not apply to damages claims for personal injury or wrongful death, and does not authorize the Journal of Reinsurance/IRU

31 26 collection of punitive damages from a responsible party. See id.; and H.R. REP. No (I), at 5 (2010). 47 See H.R. REP. No (I), at 5 (2010). Similarly, the cap will not apply if damages were proximately caused by the gross negligence or willful misconduct of "an agent or employee" of the responsible party or by "a person acting pursuant to a contractual relationship" with the responsible party. Id. 48 See Library of Congress, Thomas Bill Summary & Status, H.R. 3534, (last visited November 2, 2010). 49 See Website of Speaker Nancy Pelosi, The CLEAR Act, (last visited November 2, 2010). 50 See Library of Congress, Thomas Bill Summary & Status, H.R. 3534, supra note See generally Complaint for Declaratory Judgment, supra note See id. 53 See id. at See id. at See id. at See Defendants' Answer and Counterclaim at 25, Certain Underwriters at Lloyd's London, et al. v. BP plc, et al., No. 4:10-cv (S.D. Tex. Aug. 6, 2010). Troubled Horizon?

32 27 57 See id. at See id. at BP argues that the Insurers are obligated to compensate National Union, as the contractual or equitable subrogee of BP, and that by virtue of the assignment of its rights, National Union transferred that right of recovery to BP. Id. at It remains unclear whether National Union had any subrogation rights to assign. To the extent the "made-whole" doctrine - which prevents an insurer from asserting its subrogation rights unless and until its insured has been fully compensated for its injuries - applies, National Union's subrogation rights may have been impaired which could similarly impact the rights BP is now attempting to assert against Transocean's carriers. 59 The authors did not have access to any implicated policies or reinsurance contracts. Accordingly, this section is, of necessity, general in nature A.L.R. 5th 193, at See generally id. at 12, 21, See e.g., Plants and Goodwin, Inc. v. St. Paul Surplus Lines Ins. Co., 99 F.Supp.2d 293 (W.D. N.Y. 2000) (concluding that crude oil that leaked from a containment tank was "pollutant" such that pollution exclusion was applicable); Nascimento v. Preferred Mut. Ins. Co., 513 F.3d 273 (1st Cir. 2008) (interpreting Massachusetts law and holding that once oil leaked from underground storage tank it was a pollutant and total pollution exclusion applied). 63 See Dr. Cutler J. Cleveland, Natural Oil Seeps and the Deepwater Horizon Disaster: A Comparison of Magnitudes, THE OIL DRUM, June 3, 2010, 64 Science Daily, Scientists Find That Tons Of Oil Seep Into The Gulf Of Mexico Each Year, Jan. 27, 2000, Journal of Reinsurance/IRU

33 28 es/2000/01/ htm. 65 See generally 37 A.L.R.5th 41, Phil Gusman, Odds Against BP In Derivative Actions, Says Expert, P&C NATIONAL UNDERWRITER, May 11, 2010, 67 Tom Fowler, BP shareholder suits consolidated in Texas state court, FUELFIX, Sept. 22, 2010, 68 See Edwards Angell Palmer & Dodge, supra note See 33 U.S.C.A. 2704(c)(1)(A),(B)(2006). 70 See Hearing on 'Liability and Financial Responsibility for Oil Spills Under the Oil Pollution Act of 1990 and Related Statutes', supra note 43, at See MSBC, Halliburton admits skipping test on Gulf well cement, Oct. 29, 2010, 72 See Environmental Protection, supra note See, e.g., International Surplus Lines Ins. Co. v. Certain Underwriters & Underwriting Syndicates at Lloyd's of London, 868 F. Supp. 917, (S.D. Ohio 1994). 74 Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 2d 49, (D. Mass. 1998), aff'd, 217 F.3d 33 (1st Cir. 2000); North River Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194, 1207 (3d Cir. 1995). Troubled Horizon?

34 29 75 See REINSURANCE, Glossary, 648 (Robert W. Strain, CLU, CPCU, ed., 1980). 76 See Stephen Lowe, supra note 18. Journal of Reinsurance/IRU

35 Information for Contributors The IRU encourages and welcomes articles from industry professionals on topical issues of potential interest to the Journal's readership. Interested authors should contact the editor at the following address to discuss their potential contributions: Paul Walther Editor, Journal of Reinsurance c/o Reinsurance Directions, Inc Foxtail Court Lake Mary, FL Tel Fax Journal guidelines dictate that first priority will be given to those items which have not been previously published, although consideration will be given to important articles which might not have otherwise been brought to the attention of the Journal's readers. Under normal circumstances, the Journal's schedule will be as follows: Frequency: Quarterly Winter (January) Spring (April) Summer (July) Fall (October) Closing dates for submissions: Winter November 15 Spring February 15 Summer May 15 Fall August 15

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37 Journal of Reinsurance Advertising Information The Intermediaries & Reinsurance Underwriters Association is pleased to announce the sale of advertisements in the Journal of Reinsurance, please respond promptly if you have an interest in reserving the front inside or back inside covers. About the Journal of Reinsurance The Journal of Reinsurance is an official publication of the Intermediaries & Reinsurance Underwriters Association. It is published quarterly in January, April and July, and October. Focused on issues confronting the reinsurance community in today's complex environment, the Journal of Reinsurance applies the best research and practices to the strategic challenges and operating problems of today's environment. The Journal of Reinsurance is designed to keep reinsurance and insurance underwriters, insurance company executives, brokers, regulators, academicians and those interested in reinsurance abreast of developments which will impact on reinsurers and the reinsurance market. Advertising Deadlines (Volume 18) Volume 18, No. 1, Winter 2011: December 15, 2010 Volume 18, No. 2, Spring 2011: March 15, 2011 Volume 18, No. 3, Summer 2011: June 15, 2011 Volume 18, No. 4, Fall 2011: September 15, 2011 Ad Placement Requirements All ads must accompany an advertising agreement by specific Journal deadline date and final payment no later than 14 days after Journal deadline. For additional information, incuding ad rates please call the IRU Member Service Center at (908) or by

38 The Intermediaries & Reinsurance Underwriters Association In 1967, executives from seven midwestern insurance companies met in Milwaukee to discuss reinsurance concerns. From that first meeting, the IRU has grown to become an organization comprised of more than 60 member companies and firms engaged in the assumption, placement or purchase of property/casualty treaty reinsurance. In October of 1993, the IRU expanded its membership to include reinsurance intermediaries in addition to its broad spectrum of professional reinsurers and assumed reinsurance departments of multiple line carriers. Approximately 25% of the IRU s current membership is comprised of intermediaries. In September 2002, the IRU further expanded its membership to include reinsurance ceded operations of primary insurance companies. While all IRU members operate principally in the U.S. reinsurance market, some are active in international reinsurance markets as well. The IRU is a not-for-profit corporation, organized for the purposes of reinsurance education and research, and the dissemination of information relevant to the reinsurance industry. The IRU does not speak on behalf of its membership on industry issues nor does it engage in lobbying. To learn more about IRU visit our internet site at

39 Commentary or Corrections? The IRU welcomes your comments and suggestions, as well as information regarding errors or omissions that call for correction. Please send your electronic message to or by telephone at To correspond with Paul Walther, Editor of the Journal of Reinsurance, directly please send your s to