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New BP Oil-Spill Fund to Have Little Impact on Insurers

Source: Dow Jones

Posted on 17 Jun 2010

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There are plenty of questions surrounding the new fund that BP PLC (BP.LN) agreed to establish on Wednesday, but those who track insurance companies are speculating that the $20 billion pool will have little impact on insurers' obligations tied to the oil spill.

Ken Feinberg, the administrator of the new fund, has handled a job like this before: He oversaw the compensation program for victims of the Sept. 11 terrorist attacks. If the BP fund operates like that earlier program, people and businesses affected by the spill will likely be paid less if they have insurance that covers some of their losses, said Richard Bieder, president of Trial Lawyers Care, which represented families of Sept. 11 victims pro bono.

That coverage may not amount to much compared to their actual costs. Estimates are that insurers will pay $2.5 billion to $3.5 billion in claims--just a fraction of the $20 billion that BP has agreed to put into the fund.

Howard Mills, a former insurance superintendent for New York, said companies with so-called business interruption coverage wouldn't carry nearly enough protection to reimburse them if they face years of reduced revenue. That would leave the new BP fund on the hook for a substantial proportion of the losses.

Companies like American International Group Inc. (AIG), Travelers Cos. (TRV) and Hartford Financial Services Group Inc. (HIG) sell business interruption coverage to commercial clients.

"There's no business interruption that would cover an entire industry being wiped out, which could be a possibility if you're, say, a shrimper in the Gulf of Mexico," said Mills, now director and chief adviser for the insurance group at Deloitte Touche Tohmatsu.

Still, the existence of the fund may be cited by insurers as a reason not to pay some claims, said John Nevius, the head of the environmental law practice at Anderson Kill & Olick, which typically represents clients seeking to collect from insurers. Some policies may contain language that says other means of recouping costs take precedence over the insurance policy, and insurers may argue that the BP fund should pay out instead of the private coverage, he said.

"That would defeat the purpose of insurance, but it's a possibility," he said. "Nearly everything surrounding this is unclear, though. This Gulf spill is unprecedented."