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Marsh: Gulf of Mexico Oil Release May Affect Property, Machinery

Source: Marsh

Posted on 02 Jun 2010

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The millions of gallons of crude oil that have been released in the Gulf of Mexico may have potential property and machinery risk implications, according to Marsh.

Property Implications Companies considering their coverage options may have questions about the civil authority or ingress and egress clause(s) under the business interruption (BI) sections of most property policies.

"Most policies providing such coverage will only be triggered if access to the insured's premises is prohibited or denied as a result of damage to property by an insured peril," explained Duncan Ellis, Marsh U.S. Property Practice Leader. "Since the prohibition of access will likely be due to pollution or contamination — a commonly excluded peril — it is likely that coverage will not be available for the resulting business interruption loss that may ensue."

The same would apply for contingent business interruption (CBI), where an insured may suffer losses due to the inability to ship or receive from a non-owned location (upon which the insured’s business is contingent) where damage to property must have occurred by an insured peril.

"Despite the absence of an insured peril, the possible denial of access to ports and waterways by civil authorities may result in supply chain disruptions, production delays, and uninsured losses," added Ellis. "While solutions for these disruptions are still developing, a supply chain product — which, unlike a traditional property policy, does not require property damage by an insured peril to be triggered — may provide coverage for unpredictable catastrophic events such as these."

Although most property policies contain exclusions for pollution and contamination, some extensions of coverage may provide limited coverage — depending on the circumstances of the event affecting the insured’s business.

Machinery Implications

The current situation in the Gulf of Mexico may also pose potential risk to ships, boats, and shore-based facilities with machinery and equipment that rely on seawater for cooling or desalinated seawater. In addition, municipal water utilities processing seawater into drinking water for distribution to consumers could be at risk. There are also challenges for maritime transportation: oil-coated hulls, as well as contaminated seawater used onboard for various processes, could mix with fresh water as ships and barges enter ports and then traverse the Mississippi.

"At-risk organizations should review and update contingency plans for responding to a possible seawater supply contamination — and should be ready to implement those plans in the event of contamination," said Jamie Markos, senior consultant, Marsh Risk Consulting.

"Processes such as evaporation, desalination, or reverse osmosis could be adversely impacted by the presence of petroleum in intake water. The reported levels of contamination, although seemingly isolated to 'pockets,' are likely above the equipment's operating tolerances and outside equipment-design parameters. These conditions could subject the equipment to increased risk of failure."

Although the U.S. federal government is continuously monitoring and reporting on the dispersal of oil, weather and current changes make anticipating the impacts on facilities and operations that require seawater supplies difficult.

Dwight Hyche, senior consultant, Marsh Risk Consulting noted, "For facilities, ships, or boats of any type that use seawater for cooling, the addition of oil or waste materials in the supply water could exacerbate blockages of any intake screens or filters, causing equipment to overheat. Oil that enters a cooling system can reduce the heat transfer performance of heat transfer surfaces. The oil could also foul any water quality monitoring devices."