Subrogating The Spill: What Are An Insurer’s Options For Recovering Claims Paid As A Result Of The Gulf Oil Spill?
August, 2010
by Dean S. Rauchwerger and W. Gregory Aimonette and Michael S. Errera and Kenneth R. Wysocki and Virginia M. Markovich and Allison K. Ferrini
The recent Gulf Oil Spill has prompted significant discussions about the effect of this disaster on the insurance industry. The immense size and scope of this loss will likely result in thousands upon thousands of insurance claims.
As discussed elsewhere, the primary concern for insurers will be the many property and coverage issues arising out of the spill. Even if viable defenses to coverage present themselves, however, the sheer number of claims may well result in the payment of hundreds if not thousands of individual claims.
Prudent insurers must prepare for the worst, and always be aware of the subrogation potential for any claims that are eventually paid. This article presents three possible avenues of subrogation recovery: 1) recovery from tortfeasors (both direct and indirect); 2) recovery from the government; and 3) recovery from special funds.
I. Recovery From Tortfeasors (Direct & Indirect)
A. Direct Tortfeasors
Media attention has focused on BP as the wrongdoer, but in any large loss like this, multiple mistakes are often responsible for the disaster. And in the case of the Gulf Oil Spill, BP is not the only entity that might ultimately incur liability. To date, hundreds of lawsuits have been filed in various state and federal courts naming some or all of the following parties:
BP, PLC; BP America, Inc.; BP Corporation North America, Inc.; BP Company North America, Inc.; BP Products North America, Inc.; BP Exploration & Production, Inc.; Anadarko Petroleum Corp.; Moex Offshore 2007, LLC (co-owner of well site lease); Transocean, Ltd.; Transocean, Inc.; Transocean Offshore Deepwater Drilling, Inc.; Transocean Deepwater, Inc.; Halliburton Energy Services, Inc.; Cameron International Corporation f/k/a Cooper Cameron Corporation; M-I, LLC, (supplier of drilling fluids ); and Triton Asset Leasing.
B. Indirect Tortfeasors
While the primary targets in any subrogation suit would likely include the entities listed above, other potential targets could emerge as cleanup efforts continue. Sometimes the cure is worse than the disease. For example, cleanup workers may suffer injury from the environmental conditions inherent in the cleanup of a major oil spill. From a property damage standpoint, the remediation efforts could, in some cases, cause as much damage as the oil itself.
Just as in any other remediation or restoration circumstance, oil spill remediators could potentially face litigation seeking to impose liability for improper or dangerous remediation and mitigation. For example, after the DEEPWATER HORIZON blowout, BP began using an oil dispersant chemical. Chemical dispersants work by breaking oil into small globules, allowing it to disperse more quickly into the water or air before currents can wash it ashore.
As of mid-May, more than 700,000 gallons of dispersant had been released into the Gulf - the most extensive use of chemical dispersants in the history of oil spill cleanups. It is impossible to predict the full effect these dispersants will have when used on this scale. Much of the available toxicity data on dispersants and dispersed oil is limited in scope and addresses acute and short-term effects derived from laboratory toxicity tests - not real life use. There is far less data available on the potential sublethal or delayed effects of exposure, which could be much more detrimental to a population over time.
Environmentalists and scientists have expressed concern that pumping this immense amount of chemical into the water and air could be dangerous to both humans and wildlife. Preliminary EPA data indicates that the level of toxic chemicals already airborne poses a serious risk to human health.
Given the scope of the DEEPWATER HORIZON oil spill and the continuing clean-up efforts, litigation against BP, the dispersant manufacturers, the EPA, and the U.S. Coast Guard, among others, is highly likely, with claims ranging from improper emergency response and negligent disaster response preparation to product liability, toxic tort, chemical injury, negligence and nuisance claims for the selection and use of chemical dispersants.
II. Suing Uncle Sam - The Ultimate Deep Pocket
A. Potential Negligence of the MMS
Another potential avenue of subrogation recovery is against the United States, for example, for the wrongful conduct of the Minerals Management Service ("MMS"), EPA, and other government agencies. For example, an insurer could consider pursuing the MMS. The MMS is the federal agency charged with overseeing oil and gas exploration of the Outer Continental Shelf ("OCS"). MMS issued the lease to, and approved the exploration plan of, BP for the oil well that caused the spill. This means that MMS was also the lead agency for environmental reviews and safety inspections. Allegations have been made about ethical lapses at the MMS. Some have argued that MMS was too close to the companies it was supposed to regulate, accepting gifts from the oil industry, and even allowing its employees to negotiate for jobs in the oil industry while they were still employed by MMS.
While lax oversight, in general, might not be enough to give rise to a suit against the federal government for MMS' shortcomings, a claim could arise when those shortcomings result in specific acts of negligence. For example, it has been alleged that the MMS failed to conduct required inspections of the DEEPWATER HORIZON, and that the MMS was aware of technical problems with the use of blowout preventers but did nothing to act.
The allegations against the MMS have lead to a major shakeup at the agency, and even its name has changed. In fact, the MMS received a new leader and a new name on the same day. The newly-named Bureau of Ocean Energy Management, Regulation and Enforcement, headed by former environmental lawyer Michael Bromwich, is in the process of being transformed. According to the Secretary of the Interior Ken Salazar, the goal is to separate the MMS' investigation, inspection, and enforcement operations, and to make them independent from the agency's leasing, revenue collection, and permitting operations.
From a subrogation perspective, to recover against the federal government for negligent mistakes of the MMS -- or any federal agency -- the claim would be premised under the Federal Tort Claims Act ("FTCA").
B. Suing Under The Federal Tort Claims Act
Historically, the sovereign was immune from tort liability, irrespective of wrongdoing, under the principle that "the King can do no wrong." This traditional principle remained steadfast until 1946 when Congress enacted the FTCA. The FTCA permits claims against the United States, thereby waiving sovereign immunity:
for money damages ... for injury or loss of property, or personal injury or death caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.
28 U.S.C. §1346(b) (2006). Six elements must be pled to state a viable claim:
1. Claim must be for money damages;
2. Damage claim must be for injury/loss of property and/or death;
3. Damages must have been caused by a negligent or wrongful act/omission;
4. Wrongful actor must have been a federal employee;
5. Federal employee must have been acting within the scope of employment; and
6. Circumstances must be such that if U.S. were a private person, liability would be imposed under the law of the place where the wrongful act/omission occurred.
This erosion of traditional sovereign immunity reflects the overarching concept of fairness - that when the government actively operates/manages buildings, public lands/structures, dams, hospitals, airports, vehicles, etc., it should be subject to the same standards and duties of care that are required of a private citizen. This concept of fairness, however, has its limits. In order to avoid paralysis, the government must be able to perform its essential functions, i.e., enact legislation, create governmental policies, maintain public order, and protect national security, without fear of being sued in tort. Courts have wrestled with numerous FTCA immunity exceptions, including the most heavily litigated "due care" and "discretionary function" exceptions.
The "due care" exception immunizes the government from suit for claims based on the execution of a statute or regulation and requires "for its application that the actor have exercised due care." Lively v. United States, 870 F.2d 296, 297 (5th Cir. 1989); see also Buchanan v. United States, 915 F.2d 969 (5th Cir. 1990). To determine whether the due care exception bars a particular claim requires a two-part analysis: 1) whether the statute or regulation in question specifically proscribes a course of action for a government employee to follow; and 2) if a specific action is mandated, whether the government employee exercised due care in following the dictates of that statute or regulation. Welch v. United States, 409 F.3d 646, 652 (4th Cir. 2005), citing Crampon v. Stone, 59 F.3d 1400, 1403 (D.C. Cir. 1995); see also Kwai Fun Wong v. Beebe, No. CV-01-718-ST, 2006 U.S. Dist. LEXIS 23653 at *21 (D. Or. Feb. 14, 2006). If due care was exercised, sovereign immunity is not waived. Welch, 409 F.3d at 652.
Similar to the "due care" exception, the "discretionary function" exception involves a two-step analysis. The government's actions are immune from tort liability under the "discretionary function exception" if: 1) it involves an element of choice; and 2) the choice involves applying judgment independent of any mandate and is essentially the type of decision making, grounded in social, economic, and public policy, that is meant to be afforded protection from tort suits. Judgments involving matters of policy, balancing of competing interests, or that have been delegated to a given official by statute are often afforded protection. In a nutshell, "[w]here there is room for policy judgment and decision there is discretion." Dalehite v. United States, 346 U.S. 15, 36 (1953).
Although the discretionary function exception is broad, it is not an absolute bar to recovery. If a government agency violated an established statute, regulation, or policy, the discretionary function does not apply, and the federal government will have to defend its conduct, on other grounds. Accordingly, if the investigation uncovers mandatory guidelines, directives, project statements, manuals, checklists, written requirements with language like "shall" and "must" that define what the agency is supposed to do, then discretionary function will not apply.
C. Procedural "Nitty-gritty"
1. What Must Be Filed?
A claimant must file a written demand on a Standard Form 95 or in a written communication that includes all necessary information. The form requires that the claimant state a claim for money damages, providing a "sum certain." The claimant must also provide sufficient facts and documentation to permit the government to properly investigate.
2. Where Must A Claimant File?
A potential claimant must file his or her claim with the "appropriate agency." 28 U.S.C. §§ 2401(b), 2675(c). With the ever-changing structure of the U.S. federal government, it is important to pinpoint the agency responsible for a particular claim. The relevant FTCA statute of limitations is tolled only by the appropriate administrative agency's receipt of a valid claim, not by the date of mailing. Given the many hurdles that can arise in providing a valid claim to the appropriate agency, it is advisable to avoid waiting until a claim is near expiration under the FTCA before filing an administrative claim.
3. When Must A Claimant File?
To initiate an FTCA claim, a claimant must file his or her administrative claim with the appropriate agency within two years of claim accrual. Accrual begins at the moment the government violated an individual's or entity's rights and the individual or entity was damaged. Courts have interpreted claim accrual as the time that plaintiff is injured. But, if an injured party is not aware of the injury at the time the injury occurs, the claim accrues when the person knew or should have known of the existence of the wrongful act. United States v. Kubrick, 44 U.S. 111 (1979).
Upon receipt, the administrative agency will send an acknowledgment of filing date in letter form to the claimant. That administrative acknowledgement date determines when the six month period for administrative consideration expires, and begins the time period for filing a lawsuit. After the expiration of the six-month administrative consideration period, the claimant has a right to pursue his or her lawsuit in federal court. Claimants may either file a lawsuit after the six-month administrative consideration period has expired under 28 U.S.C. § 2675(a) or claimants may wait to file a lawsuit until receiving a "final decision" from the agency.
After a "final decision," the claimant must file his or her lawsuit within six months of the date the denial was issued or face a time-bar of his or her lawsuit.
An insurer should consider retaining counsel familiar with the FTCA and its intricate procedural requirements.
III. Recovery From Special Funds
Two separate funds, the OPA Fund and the BP Fund, have the possibility of providing funds for a subrogation recovery. However, each fund presents unique recovery challenges.
A. The OPA Fund
1. Background
In 1990, Congress passed the Oil Pollution Act of 1990 ("OPA"), 33 U.S.C. 2701-2720. The greatest impetus for passage of the OPA was the 1989 EXXON VALDEZ oil spill in Prince William Sound, Alaska. The OPA is the most comprehensive act dealing with oil spill liability and compensation. Under the OPA, a vessel or facility discharging oil (or even threatening to discharge oil) onto navigable waters or adjoining shorelines is liable for damages. "Discharge" means any emission of oil and includes both intentional and unintentional oil spills.
Under the OPA, an oil spiller is liable for direct and indirect damages resulting from the spill and the costs of cleaning up the spill. These costs and damages include oil removal costs, losses resulting from natural resource damages and destruction, and the costs of assessing oil spill damages. Damages also include injuries to real or personal property and economic losses resulting from property damage caused by a spill. The OPA also allows private parties to recover damages for lost revenues, profits, and earning capacity due to injury, destruction, or loss of real and personal property and natural resources caused by an oil spill. At this point it is unclear whether the OPA assists or hinders parties bringing common law damage claims against an oil spiller.
2. OPA Limitation of Liability
The OPA limits the liability of parties responsible for oil spills to the greater of (1) $1,200 per gross ton, (2) $10 million for vessels greater than 3,000 gross tons, or (3) $2 million for vessels 3,000 tons or less. In the BP case, the applicable limit would be the total of all removal costs plus $75 million per responsible party. However, the OPA does provide for instances when the limitation of liability will not apply. For instance, the OPA provides that the limitation of liability does not apply if the incident was proximately caused by gross negligence, willful misconduct, or violation of federal laws.
3. Defenses To An Oil Spiller's Liability
The OPA sets forth several possible defenses to an oil spiller's liability. Defenses to liability for spills include (1) acts of God or war, (2) acts or omissions of a third party not associated with the spiller, and (3) gross negligence or willful misconduct of a damaged claimant. Even if the spiller has a valid defense, it may not escape liability if it fails to report the spill or fails to provide cooperation and assistance in cleaning up the spill.
The OPA limitation of liability will obviously play a major role in the scope of BP's liability for the DEEPWATER HORIZON disaster. But will that limitation of liability apply in this case? Only time will tell. Attorneys, judges, and juries may ultimately be forced to decide whether the $75 million limitation applies.
B. The BP Fund
1. Background
The most intriguing - but also most uncertain - avenue for subrogation recovery would be to attempt to recover from the $20 billion fund being set up by BP at the White House's urging. Since the June 16 meeting between the White House and BP there has been optimistic discussion regarding the establishment of a $20 billion claims fund to support the losses associated with the DEEPWATER HORIZON spill. This fund is similar to, but separate from, the OPA Fund discussed above.
The agreement to create the BP Fund with the White House did not entail an immediate transfer of $20 billion in funds; instead, BP will initially make payments of $3 billion in the third quarter of 2010 and $2 billion in the fourth quarter of 2010. These payments will be followed each year by a payment of $1.25 billion per quarter until a total of $20 billion is paid in. BP's commitments will be assured by setting aside the U.S. assets of their stock. The intention is that the level of assets placed in the fund will decline as cash contributions are made to the fund. (BP.com, July 7, 2010)
This fund is not intended for blanket claims to be made against it. The fund is available to satisfy legitimate claims, including natural resource damage claims and state and local response costs. All claims made against the fund are for the purposes of fulfilling responsibilities as outlined by the Oil Pollution Act of 1990, and independent tort claims, excluding all federal and state claims.
2. Insurance Aspects of the BP Fund
Of special interest to high limit insurance carriers and self-insureds, section 1015 of OPA states that any person, including the fund, who pays compensation pursuant to this Act to any claim for removal costs or damages shall be subrogated to all rights, claims and causes of action the claimant has under any other law. 33 U.S.C. 2701, section 1015(a)(2000), Subrogation.
As the oil spill fund shall administer claims to BP based upon the fund, it does not serve to expand the rights, duties and responsibilities as created by OPA. Arguably, however, it expands the liability cap of $75 million created by OPA, 33 U.S.C. 2701, section 1004(a)(3)(2000), to the agreed upon $20 billion as tentatively agreed to with the White House. No congressional acts or signed decrees are known to exist at this time which will conclusively hold BP to the $20 billion agreement. The BP website currently makes available claims process documents for governmental entities, commercial fishermen, crabbers, oyster lease owners, commercial shrimpers and commercial claims in general. The BP website also includes an attorney representation form.
IV. Conclusion
Prudent insurers should always be aware of the subrogation potential of any large loss, and should consider retaining subrogation counsel to address the underlying claims and evaluate recovery opportunities. Given the immense magnitude of the BP oil spill disaster and complexity of the related legal issues to arise, creative lawyering is a must to maximize potential recovery opportunities.
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