Faculty Q&A: Kenneth S. Abraham on How BP Oil Spill Revealed Insurance Gaps

December 15, 2011

Faculty Q&A

The Deepwater Horizon oil spill in 2010 cast a spotlight on the conduct of BP and the fund it created to compensate the victims of the environmental disaster.

Kenneth Abraham

Kenneth S. Abraham, a University of Virginia School of Law professor, believes that attention should also focus on the nature and scope of insurance covering losses caused by such major oil spills. Abraham examined the topic in an article recently published in the Vanderbilt Law Review, "Catastrophic Oil Spills and the Problem of Insurance."

What is the central point of your article?

It's about what I call "mismatches." There is a lot of property insurance, a lot of insurance against business interruption, and a lot of liability insurance, but most of it doesn't cover the losses caused by oil spills, or the liabilities that companies incur as a result of oil spills. Losses and liabilities on the one side, and insurance on the other side, are mismatched.

You note that insurance protecting against environmental disasters, such as last year's BP oil spill, is generally not offered. Why is that?

Since the mid-1980s the insurance industry has been reluctant to insure for property and economic losses caused by pollution, and terrified of insuring against liability for pollution. These concerns originated with the Federal "Superfund" Act (CERCLA), which imposed potentially enormous liability for pollution cleanup on U.S. businesses. The businesses turned to their liability insurers for coverage, and often — to the insurers' surprise — the courts held that there was coverage. So the insurance industry has had a wide-ranging phobia about pollution insurance since then.

What sort of reforms would you suggest to overhaul the structure of insurance and liability related to catastrophic oil spills?

Short of forcing the insurance industry to insure against pollution-related losses and liability — something that is unlikely — the possibilities for reform that would make insurance available aren't very good. One alternative would be to "tax" drillers in advance to create a fund that would be available for compensation in the event of a spill. But that probably isn't needed. The big drillers have the money to pay for losses, whether they are insured or not. The difficulty is that, when tens of thousands of people suffer losses from an oil spill, and some of those losses are indirect, it becomes an administrative nightmare to try to figure whom to compensate and how to do it.

In the case of the BP oil spill, the company created the Gulf Coast Claims Facility to compensate victims of the disaster. You suggest that the creation of this facility probably dampened awareness of the gaps in insurance available to protect against these sorts of disasters. Can you elaborate?

Ordinary people and businesses didn't need to turn to their own insurance or to the courts for compensation. These were not their sole possible sources of compensation. They could file a claim against the facility. Claimants have complained a lot about how the facility has handled their claims, but not so much about their own insurers. So problems like those that Gulf homeowners encountered after Hurricane Katrina — that their insurers often took the position that their claims weren't covered — didn't occur to the same degree here.

Do you think new laws are needed to address the problems you highlight?

The problem isn't that we need new laws. It is that we had good regulations and laws that weren't always effectively enforced. The best way to deal with the problems caused by oil spills is to prevent the spills.

How did you become interested in this topic and how does this article fit into your larger body of scholarship?

I have always been interested in the ways in which the insurance market limits or does not provide coverage, and in the explanations for these gaps. When Vanderbilt Law School invited me to do a paper for a conference it was going to hold on the BP oil spill, this seemed like a natural subject for me to investigate.

What will you be working on next?

I'm working on an article titled "Four Conceptions of Insurance," in which I examine four different analogies, or metaphors, that scholars and policymakers employ to argue about insurance and insurance law: insurance as contract, insurance as a public utility, insurance as product and insurance as governance.

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