The size of the Gulf of Mexico oil spill is hard to conceive. Just one reported oil slick is 10 miles long and four miles wide. That single oil slick is bigger than many Caribbean islands. It now has been reported that a million gallons of oil have been released each day for the past several weeks. Fishing areas off the Louisiana coast already have been affected. Louisiana's shrimp industry already is shut down. As of May 18, fishing has been banned in 19% of the Gulf of Mexico due to the oil spill. The whitest sand beaches in the world already are lined with oil balls. Some predict that the oil slick will make its way into the Gulf Stream and then impact the East Coast. The initial explosion itself caused a massive loss with the loss of numerous lives, dozens injured, and the total loss of a major oil drilling platform.

Swiss Re Insurance Company has estimated insurance coverage for the loss to exceed $3.6 billion. J.P. Morgan estimated a $1.6 billion insurance loss but noted that its estimate does not include the impact of the oil coming ashore. The owner of the oil rig that blew up already has received over $481 million in insurance recoveries.

The massive losses are covered by a variety of insurance policies already purchased by those being harmed. First party property and business interruption (BI) insurance certainly will provide coverage for certain losses. Liability insurance, both general liability and pollution liability policies, will provide defense and indemnity for lawsuits. Directors and officers insurance also will provide coverage for derivative lawsuits against directors and officers.

What Types of Losses Are Covered?

Liability Insurance

As of May 10, 2010, over 70 lawsuits related to the oil spill already had been filed in courts. Companies facing liabilities due to property damage from spoiled beaches or closed fishing areas or due to bodily injury from deaths and injuries on the oil platform itself can look for defense and indemnity from their liability insurance coverage. Both general liability insurance policies and pollution liability insurance policies will come into play.

Companies facing lawsuits should give notice to all liability insurance companies in their insurance program (including any captive insurance companies) all the way up to the top of their coverage charts despite a present $75 million cap on liability. Legislation has been proposed eliminating caps on liability. A prudent policyholder facing oil spill liability claims ought to provide notice now rather than waiting to see what happens with such legislative initiatives.

Directors & Officers Insurance

Derivative actions already have been filed in court against directors and officers of companies involved in the Gulf of Mexico oil spill. Dozens of such lawsuits are sure to follow. D&O insurance should be tapped to provide defense and indemnity of directors and officers facing such claims.

First Property and Business Interruption Insurance

The massive Gulf Coast oil spill will cause extensive property damage and business interruption losses to businesses all along the Gulf Coast from fisheries in Louisiana to beachfront hotels in Florida and all kinds of business around the Gulf. There are also businesses away from the coastline, such as shipping lanes on the Mississippi River, whose property is safe, but that might suffer business income losses anyway. While such businesses are looking first at responsible parties to cover their losses, over 70 lawsuits already have been filed and hundreds more will likely ensue, they also should start thinking now about their own insurance coverage.

In addition to coverage for damage to tangible property such as ports, marine equipment or beachfronts, affected business owners should look to the business interruption coverage included in most business property policies. BI coverage is designed to protect businesses from losses stemming from unavoidable interruptions in their daily operations. BI coverage may apply in a variety of circumstances, such as a forced shutdown, a downturn in business due to the damage from the oil spill, or a substantial impairment in access to products, services, a business? physical plant or premises.

Because the economic effects of the spill likely are to extend well beyond the Gulf region, businesses nationwide may be eligible to file contingent business interruption claims -- a standard coverage grant in many property insurance policies, though many small businesses are not aware of it. Contingent BI covers policyholders that did not suffer physical damage but still lost revenue after a property loss crippled a major supplier or customer. For example, a manufacturer in St. Louis will be safe from the oil slick, but nevertheless may suffer losses because of problems shipping its product down the Mississippi River or receiving material from suppliers shipped via the Mississippi.

Steps to Take

If you are facing any of these types of losses, consider taking the following steps:

• Locate all of your insurance policies

• Look to liability, D&O or first-party property insurance 

• Remember that property damage, business income, contingent business income and extra expense coverage may be available

• Remember that coverage may be available even without direct physical loss or damage 

• Give notice to all levels of coverage

• Secure tolling agreements with your insurance company to protect your rights

• Understand thorough emergency responses and preservation of property

• Consider help in submitting your claim, including your broker, public adjuster and attorney

• Consider whether insurance coverage may be available under other insurance policies

Taking these steps now will help prudent policyholders secure the insurance coverage for which they paid precious premium dollars and to which they are due for this enormous and tragic loss.

Written by:

Robert M. Horkovich is a shareholder in the New York office of Anderson Kill & Olick, P.C. He is a trial lawyer with substantial experience in trying complex insurance coverage actions on behalf of corporate policyholders, has obtained over $5 billion in settlements and judgments from insurance companies for his clients over the past decade.

Marshall Gilinsky is shareholder in the New York office of Anderson Kill & Olick, P.C. His practice is focused on property insurance, commercial general liability insurance, directors and officers insurance, captive insurance and reinsurance issues.

John G. Nevius is a shareholder in the New York office of Anderson Kill & Olick, P.C. He is also a registerered professional engineer, has successfully resolved and litigated a variety of legal and technical matters, most of which involve insurance coverage. He provides advice and scientific expertise to clients on a wide range of engineering issues and has represented numerous Fortune 500 companies.

The above article is reprinted from the June 2010 edition of Risk Management Magazine.