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« January 2011 Table of Contents

Point of View: Insurance an option with BP losses

The Gulf of Mexico is a major source of seafood for the United States, producing around 40 percent of the 
seafood that is harvested in the Lower 48. Unfortunately, the BP Deepwater Horizon disaster released millions 
of gallons of oil into the Gulf's waters and the federal government and affected states closed significant portions of fishing waters and oyster beds.

The state and federal closures significantly lowered the seafood supply, hurting seafood processors, distributors and buyers who rely on Gulf seafood for their livelihoods. Compounding the problem since the oil well was capped is the perception that seafood from the Gulf has been contaminated by oil. Although testing indicates that the seafood is safe, demand for Gulf seafood 
has decreased.

It is unclear how long it will take the industry to fully recover, but it is reported that Alaska's seafood industry took more than five years to begin to rebound from the 1989 Exxon Valdez oil spill. As seafood processors, distributors and buyers respond to the changed market for Gulf seafood, there are at least two sources that may potentially provide financial support for business-income losses caused by the Gulf oil spill - Gulf Coast Claims Facility (the Claims Fund) and private insurance.

The Claims Fund, set up by the federal government and BP, evaluates and pays claims for costs and damages incurred due to the oil spill. As of November, more than 5,000 claims from individuals and businesses in the seafood processing and distribution sector had been paid by the Claims Fund, for a total of more than $121 million. While this represents a significant amount of recovery, uncertainty abounds regarding whether businesses will be able to recover full compensation from the Claims Fund for both past and anticipated future losses.

Thus, even if businesses are pursuing recovery from the Claims Fund, they also should carefully consider whether they purchased private insurance that could help compensate for losses due to the oil spill. If businesses have such insurance, it may be prudent to pursue recovery from both the Claims Fund and private insurance concurrently. If a business obtains a recovery from a private insurer first, the final recovery it may later obtain from the Claims Fund would be reduced by the amount recovered from the private insurer.

Several types of insurance might respond to pay for losses stemming from the oil spill, including first-party property insurance policies. In addition to covering property damage (such as damage to oyster beds), many 
property policies also provide business interruption coverage that reimburses the insured business for the profits that the business would have earned but for the 
interruption. Business interruption coverage generally requires that a business "interruption" result from damage to the insured business' property. Businesses should not assume, however, that they do not have an insurance claim if their business has not sustained direct property damage. For example, many property insurance policies provide "time element" coverage that may pay a claim even when the insured 
business has not sustained direct property damage. This may include:

• Contingent business interruption coverage, which protects against income losses or increased expenses suffered as a result of damage by an insured peril to the property of another business or individual upon which the insured depends. This coverage could potentially apply, for example, if seafood buyers or processors have lost income or incurred increased costs due to the significantly reduced supply of Gulf seafood; and

• Civil authority coverage, which typically protects an insured business from losses it suffers due to an order of civil authority that prohibits access to the premises because of covered damage to, or destruction of, property belonging to third parties. This coverage could respond to losses caused by the closures of fishing waters and oyster beds by federal and state governments.

To ensure the availability of private insurance recovery, businesses should carefully review their insurance policies and make sure that they comply with any applicable notice requirements. Such notice requirements typically require the policyholder to provide notice of a loss insured under the policy "as soon as possible" or "as soon as practicable" after a loss occurs.

Both the Claims Fund and private insurers will require businesses to prove the amount of losses. Businesses should put in place accounting procedures to track lost earnings or profits, and develop documentation to support the claim. Businesses should take care to avoid errors in the measurement of losses, and not commit to firm numbers until a comprehensive investigation of losses is completed. Also, to obtain final payment from the Claims Fund, a business must sign a release waiving its rights to pursue further legal action to obtain recovery for its oil spill-related losses. Signing such a release may impact private insurance recovery. Given the legal and financial complexity of these claims, it is often necessary to consult with legal counsel and expert consultants.

By presenting a timely and well-documented claim, seafood businesses will better protect their interests and maximize their potential recovery from both the Claims Fund and private insurance.