July 2011 –

TO:PIA National & Affiliate Leaders for PIA Members, FYI

FROM:PIA National Business Issues Committee (BIC)

RE:MontanaYellowstoneRiver Oil Spill - MORE COMPLETE BACKGROUND:

The Event

In the very early morning hours on Saturday, July 2, monitoring equipment and staff at the ExxonMobil Pipeline Company detected a discharge and leak of crude oil coming from their pipeline that runs from Silver Tip to Billings, Montana. The pipe was subsequently shut down and state and federal authorities were alerted, the company said. Government officials then evacuated nearby residents in Laurel, Montana, who were able to return to their homes by 6 a.m., said a spokesman for Laurel City Fire and Ambulance.

The 12-inch pipeline spilled up to 42,000 gallons of crude oil. Company officials are still trying to determine the cause of the leak, although tough weather conditions over the past year are suspected to have caused a pipeline seal to fail. Company and federal officials said they have seen oil only about 25 miles downstream from the site of the break near Laurel, but Gov. Brian Schweitzer said he thinks some has traveled hundreds of miles to North Dakota.

It has since been discovered that the spill has also directly flowed into the YellowstoneRiver, a major tributary of the Missouri River. It flows through Montana, Wyoming, Colorado, North Dakota and moves into the Missouri River.

Federal officials will continue to test air and water quality to measure the true extend of the damage. According to government officials, thus far local drinking water does not seem affected, but there are questions with respect to whether local ranchers’ livestock should be redirected away from possibly affected grazing areas contiguous to the affected waterways.

Potential Impact

Compared to the Gulf Event of 2010, the Montana oil spill is a smaller and less complicated. The monitoring efforts of the oil company picked up the leak, and the company was able to quickly shut off the flow of any further crude oil through the defective portion of the pipeline – unlike the BP leak in the Gulf, which continued unabated for weeks. Nonetheless, the possible loss that residents may face is still to be determined.

What Laws Apply?

While Montana state and federal officials continue to work with the ExxonMobil people to facilitate a clean-up, two federal laws may be applied toward damages claimed from the spill. However, it has yet to be determined by officials at this writing.

  • Oil Pollution Act (OPA) signed into law in August 1990, was a response to the Exxon Valdez event in Alaska. The OPA improved the nation’s ability to prevent and respond to oil spills by establishing provisions that expand the federal government’ ability – and provide the money and resources necessary – to respond to oil spills. It is available whether the oil spill is from a vessel or a facility.

The OPA also created the national Oil Spill Liability Trust Fund which The Energy Policy Act of 2005 increased the maximum size of the Fund to $2.7 billion. In addition to authorizing use of the Trust Fund, OPA also consolidated the liability and compensation requirement of several certain prior federal oil pollution laws and their supporting funds. Most applicable to the Montana event would be the Federal Water Pollution Control Act (FWPCA) (others include: Deepwater Port Act, Trans-Alaska Pipeline System (TAPS) Authorization Act, and Outer Continental Shelf Lands Act).

  • The Federal Oil Spill Liability Trust Fund - Fund uses were delineated by OPA to include:
  1. Removal costs incurred by the Coast Guard and EPA
  2. State access for removal activities;
  3. Payments to federal, state, and Indian tribe trustees to conduct natural resource damage assessments and restorations;
  4. Payment of claims for uncompensated removal costs and damages;
  5. Research and development; and
  6. Other specific appropriations.

Insurance & Claims: - Despite what immediate or ensuing government laws and recovery options for this event might be possible; there are several key insurance points that arise first, complicated by the fact that pollution is generally an excluded risk in the body of P&C policies, and additional purchased coverage options for it are limited:

  1. As a general rule, property and/or liability insurance for direct and/or consequential ensuing damages from pollution-caused events are written and insured as “additional” insurance coverage provisions.
  2. Every individual and business will have different types and scales of potential exposure toloss due to these types of events. This is why there is a variety of additional insurance coverages (to be added to their existing insurance coverage package) available that may provide some form of coverage for more direct losses due to certain kinds of pollution events.
  3. Also, as in this event, public officials may order area-wide evacuations. Such orders may require businesses to shutdown for some time, people be evacuated from their properties.
  4. These additional individual or business expenses directly due to such civil orders are generally provided as additional insurance coverages. Individuals and businesses should always consult with their professional insurance agent to determine what the status of their current coverage is for these types of incidents. This should include knowing what the time and monetary limits are on any coverage that is available.
  5. When available, businesses may wish to weigh the value of Business Interruption/Expense, as well as Business Income/Earnings/Profits insurance coverage protection (and their insured limits), together with a possible rider to cover in the event the claims are due (in part or whole) to a civil order to leave.

These are the kinds of additional insurance exposures and coverage areas that people should be discussing with their PIA agencies in advance. Having in place the right kind of insurance coverages will increase a person’s claim recovery and timeliness. Less certain is solely relying upon the hope that state or federal assistance will be made available, at a reasonable level of recovery with payments being issued to you on a rational timetable.

What It Means to Consumers, Agents & Insurers: When insurance customers have needs and questions, they come to their agents for answers, and agents must respond.

PIA members know that their primary reference sources for questions about insurance claims and coverage assessments are defined by the specific policy language in question, along with the past claims practices of the insurer. Secondary sources for information regarding claims include FC&S, PF&M, CPCU, ISO, AAIS and NCCI – but in the end, whether a particular insurance policy will or will not respond, and if so how, is the sole responsibility of the insurer.

Particularly pollution-related coverage and/or claims questions are challenging, because pollution-related losses are generally not per se covered in P&C policies. However, even in the case of pollution-triggered loss, the detailed nature of how a particular claim arises is subject to per insurer per policy assessment. Having had to sharpen their claims and coverage responses from 2010 Gulf event, PIA believes that insurance carriers will be better prepared to provide more responsive guidance to PIA members’ questions. PIA members know there is a critical difference between discussing the nature of insured risk that the consumer has purchased under their policy vs. the specific circumstances of the claim they’re making and the claims settlement decision to be made.

Detailed Coverage Questions: Beyond the overriding consumer question, “Am I covered?” PIA National believes that the industry needs to prepare to answer more detailed coverage questions that are starting to be asked of PIA members. These may include:

  • Wind driven oil affecting homes, vehicles and other property.
  • Health effects on those working in the recovery efforts.
  • Fish deemed not fit for human consumption due to oil, and the resulting losses to individual fishermen and vacation resorts that depend upon offering quality fishing opportunities.
  • Effect of a “pollution event” on the function of business interruption and/or loss earnings coverage for direct loss claims.
  • Will EXON/MOBILE franchised station owners who suffer economic losses from consumer boycotts.
  • P/L vs. C/L perspectives.
  • If locals are hired as contractors to assist with the clean-up, if it’s by Exxon/Mobil or government efforts, how would private sector insurance policy coverage comply with the corporate and/or government insurance requirements for such contracted jobs?
  • Workers comp distinctions among independent contractors working for government entities or in the private sector.
  • PIA members to be very clear with their insurers exactly if, how and to whom Certificates of Insurance or additional interests/insureds endorsements or any other form will be issued and completed in response to any 3rd-party’s request.
  • If a PIA member customer is the 3rd-party, to be sure how you request what type of insurance information or insurance policy form do you need the other’s response.
  • Coverage of potential damage from the possible longer-term effects of the recovery methods used, including chemical retardants.
  • How may the long-tail nature of this event affect requirements concerning timelines for claims filings?
  • If any loss is paid, will carriers make clear that losses will be:
  • Paid as a condition of the terms of the policy.
  • Paid as a business decision of the insurer under a reservation of rights.
  • Paid under a right of subrogation by the carrier back to BP.

Summary: Losses either as a direct or indirect result of this event are manmade pollution losses, not losses from natural disasters to which insurance generally respond. It is yet to be determined (as of this writing) if and how the federal government may hold ExxonMobil responsible beyond the efforts it is already exercising in manning the clean-up for all the claims arising from this man-made pollution event. Ultimately, what’s covered and what is not covered under private sector insurance will be determined by each carrier’s individual decision on each claim.

A closing observation

The oil spill in Montanadue to an underground pipe failure was most likely due to either erosion or corrosion due to weather conditions. All across the United States, individuals and businesses are experiencing loss events due to these kinds of infrastructure failures.

The insurance generally available to individuals and businesses for these kinds of events does not fully provide coverage for the conditions, scope or scale of the claims arising from these incidents. The insurance industry will continue, where and how it can, to make available the opportunity to secure additional insurance coverages to better provide for such extraordinary claims events. However, the industry cannot rationally or financially provide the scale and amount of insurance that would be entirely responsive to the scope of all future such events and their ensuing losses.

Given the aging of our national infrastructure systems, it is in the best interest of the insurance industry, along with government officials, citizens and businesses to press for a real investment plan to deliberately and strategically update all U.S. systems.

Such a commitment to rebuild our nation’s crumbling infrastructure is needed to ensure U.S. economic prosperity, strategic safety, growth and stability. The well-being of our citizens and the success of our business operations demand no less. In turn, the improvements we make will allow the United States to be a better global partner to other countries and a more successful business competitor in the world economy.

YOUR COMMENTS WELCOME! - The members of the PIA National Business Issues Committee (BIC) are committed to fulfilling their part in this process and look forward toyour input to , which will be shared with the BIC Technical Working Group. Thanks!