This article is written to analyze the potential economic fallout of the Gulf of Mexico oil rig explosion that occurred on April 20, 2010. I maintain that this incident could be the trigger of the American economic collapse. My expertise is in the insurance risk management and claims field. So, let’s look at what is going to happen as this disaster unfolds over time.
The oil drilling platform that burned and sank was drilling a well about 50 miles off the Louisiana coast. The derrick, the Deepwater Horizon, is owned by Transocean Ltd., and was leased to British Petroleum (BP). It was connected to the ocean floor by a “riser”…a 5,000 foot pipe that is now kinked like a garden hose. But the leaks are at the sea floor, not in the pipe. If BP, the lessee, cannot close the valve at the mile-deep wellhead, they may have to drill another well to relieve pressure. Some experts estimate that it could take two months to cap the well at the mile-deep ocean floor. And every day, somewhere between 1,000 and 5,000 BARRELS (200,000 to 1 million gallons) of crude oil float to the surface of the Gulf of Mexico.
The leading edge of the oil slick is about to make landfall at the Louisiana, Alabama and Mississippi coasts. But there exists the possibility that the oil spill may be caught by the Gulf Stream…the powerful, warm, and swift Atlantic Ocean current that originates in the Gulf of Mexico, exits through the Strait of Florida, and follows the eastern coastlines of the United States and Newfoundland before crossing the Atlantic Ocean.
And, we are just about to enter the Hurricane season, which extends from June 1st to November 30th. Any hurricane that enters the Gulf of Mexico will disperse the surface oil to parts unknown. There is no predicting which coastlines could be coated with crude oil. Any Gulf hurricane will impede and stall cleanup efforts as well as vastly expanding the geographic footprint of the spill. Cleanup cost could multiply exponentially.
So, we may be witnessing the humble beginnings of a disaster that could potentially affect the American coastline from Texas to Newfoundland.
Insurance Claims Issues
First Party Claims
There will be a flood of first-party claims, which are claims for direct loss or damage to covered property. But most Commercial Property insurance policies exclude pollution-related losses unless the loss was caused by a “specified cause of loss,” usually named in the policy…and usually confined to occurring on the insured premises.
Tens of thousands of claims will be filed under the Business Income and Extra Expense sections of commercial insurance policies. Untold number of businesses will be adversely affected by the oil spill, such as resort owners, commercial fishermen and shrimpers, coastal rental property owners, seafood wholesalers, most tourist-related business at the seashore, and charter fishermen.
But once again, BI and EE coverage requires direct physical loss to covered property. So, many businesses will be shocked to discover that even though they have Business Interruption insurance, it does not mean that they have a legitimate BI claim.
Even those policyholders that do have acceptable and covered BI claims may be limited in their monetary recovery by the policy language. The period of restoration usually does not include any increased period of time due to the enforcement of any ordinance or law that may require a policyholder to mitigate the effects of, or clean up the pollutants.
So most policyholders will be out of luck by filing claims with their own insurance companies. More on this later.
This denial of coverage will spell the bankruptcy and end of tens of thousands of coastal businesses. The ripple effect from those businesses to their customers and suppliers, as well as the families employed by all parties, will be catastrophic.
Another huge consideration is the certainty of third-party claims. First-party insurers that pay claims related to the oil spill will subrogate (seek recovery) against those parties responsible and liable for the damages. Then consider all of the business that will file third-party claims directly against the parties responsible and liable for the damages. The list will continue to mount over the coming decade or longer. Timing will be crucial in this matter, since many of the responsible parties may have already exhausted their liability coverage and their corporate assets. Lawyers may find that many responsible parties will close their doors, effectively barring recovery.
Post-Katrina Insurance Industry Reality
In the wake of Hurricane Katrina, scores of insurance companies paid claims that they had originally denied. Sympathetic courts ordered them to pay claims that were arguably not covered. The same kinds of pressures will be brought to bear on ALL insurance companies in the aftermath of this oil spill disaster. In these kinds of widespread catastrophes, insurers will be required to pay claims that they may not owe simply because they CAN PAY. That takes some of the political pressure off of states and Washington.
Monstrous insurance loss payments can bankrupt insurance companies. But even worse are these politically-motivated claims for which the insurance company had not collected a premium. Do not be surprised to see many insurance companies fold in the wake of this ecological disaster if they are required to settle claims politically. And all insurance companies are backed up by reinsurance companies. The reinsurers will be hit with losses also, adding more ripples throughout the worldwide economy.
In war, there is an old saying; “Kill them all…let God sort ‘em out.” That is kind of the philosophy of trial lawyers. In giant commercial enterprises such as BP, there will be dozens of entities that are involved…the parent company, subsidiary companies, contractors and suppliers. Trial lawyers customarily target the entities with the deepest pockets…plus everyone else. The lawsuits have already begun, and will name every business entity even remotely connected to the operation of the Deepwater Horizon oil platform. Every entity named in the lawsuits will be forced to defend itself.
And here’s where it gets even more complicated.
Many contracts between businesses and contractors contain a Hold Harmless clause that forces the contractor or vendor to absolve the business from liability, or at least to provide legal defense for the business. Common sense will tell you that subcontractors or vendors will have lower liability limits than the controlling entity, like BP. So lower liability limits will max out quickly.
The lawsuits will continue to be filed, and it will take years of legal wrangling to begin seeing damage awards meted out by all the various courts that will be involved.
Gigantic lawsuits and gigantic jury awards have the very real possibility of bankrupting the companies responsible for this oil spill.
Your Washington politicians have already passed legislation that protects their oil company buddies while exposing Americans to immense cleanup costs and business losses. A law passed in response to the 1989 Exxon Valdez spill in Alaska makes BP responsible for cleanup costs. But the law sets a $75 million limit on other kinds of non-cleanup damages. So, Federal law limits how much BP has to pay for damages such as lost wages and economic suffering in the Gulf Coast oil spill, despite President Barack Obama’s assurances that taxpayers will not be on the hook.
But the hue and cry from the Gulf Coast will be so great that Washington will feel entirely compelled to swoop in and start writing checks. The Hurricane Katrina/Rita debacle of 2005 is a scab on Washington’s skin that they don’t want torn off. And no Congressman is going to take a position against helping the poor Gulf fishermen and the rest of the populace that makes their living from Gulf and gulf-shore businesses. And despite Obama’s assurances, there is no way that he would refuse to sign a disaster relief law.
All of that means that the Federal Government will print more paper money and go deeper in debt. But printing paper money will hasten hyperinflation. And in order for Washington to go deeper in debt, foreign nations must by American debt securities. Eventually, foreign nations will cease cutting their own throats and say no to Washington.
Tens of thousands of Gulf Coast businesses will cease operations in the months to come. Banks that hold loans and mortgages on those businesses…as well as the loans and mortgages of the employees now thrown out of work…will suffer financial losses. Hundreds of thousands of coastal residences will be unemployed. Cars will be repossessed. Home foreclosures will escalate. Credit card companies will hold uncollectible accounts. Even the local Dairy Queen could suffer economic losses when the surrounding coastal community’s economy collapses.
And we haven’t even left the Gulf of Mexico yet. If the Gulf Stream moves the oil up the Eastern Seaboard, multiply all these predictions by an X factor.
As you see, the economic impact of the oil spill will reach around the world. Companies in the UK will be affected. Likely some insurers at Lloyd’s of London are involved. Reinsurance companies will take hits, which might affect companies in Germany, Switzerland, France and Bermuda. Domestic insurers will likely pay claims due to political pressure. Banks will suffer losses. Businesses will close. Unemployment will spike. Most importantly, it will place crushing pressure on Washington to fix the problem with money…and Washington withstands pressure like a Dixie cup under an elephant’s foot.
Therefore, I submit to you that the April 20th Gulf of Mexico oil disaster could very likely be the trigger of the collapse of the American economy.
© Copyright 2010, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.