First Party Property Coverage for the Oil Spill to Shoreline Owners

First party property coverage may exist under some common form property insurance policies for losses caused by the oil spill. While I have been rather pessimistic regarding the possibility of first party insurance companies sending legions of claims adjusters to help oil catastrophe policyholders, there appears to be some coverage available, and possibly, a lot more, depending on what the cause of the loss is eventually determined to be. These facts are important. Each coverage form is important as well and must be reviewed in detail.

Based on most news reports, the oil rig had an "explosion" and a "fire" and "oil" is spewing into the sea. The Insurance Service Office (ISO) has standard forms that do not provide coverage for property damage caused by release of "pollutants" unless the discharge, dispersal, migration, release, or escape is from a "specified cause of loss."

"Oil" may fall under the definition of a "pollutant," which is generally defined as:

"any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned or reclaimed."

So, what are the "specified causes of loss?" "Specified Cause of Loss" is limited to the named perils of fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles; riot or civil commotion, vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects, weight of snow, ice, or sleet; and water damage.

I can imagine a number of policyholder readers exclaiming, "Eureka!! We have explosion and a fire. And, if a hurricane drives the oil into the insured property, we have a windstorm as well. The oil damage is covered!" Whether insurers will agree that an explosion released the oil and caused the damage will probably determine whether coverage payments are promptly made.

The ISO CP 00 10 form also provides coverage of $10,000 for expenses to extract "pollutants" from land or water at the insured premises, if the discharge, dispersal, seepage, migration, release or escape was caused by a "covered cause of loss." "Oil" may be a "pollutant," although it has not touched or damaged any "insured" coastal property that I am aware. Forms should be reviewed to determine if greater amounts above the automatic $10,000 were purchased by endorsement. BP should expect subrogation from insurers paying on these claims under this form. Insurers should remind their agents of this standard language and prepare for adjustment.

A second major issue will be whether "physical damage" to "insured property" has occurred. Many policies define "property not covered" to include "roadways, other paved surfaces, land, and foundations." Direct damage to "insured" or "covered" property is generally a requirement to trigger coverage. So, even if the property policy may provide some limited coverage for the extraction of the oil, most can anticipate litigation over whether the property and economic loss is covered under the property and business income forms and whether the oil damage to property is not covered because it was uncovered "land."

I can also imagine a number of policyholders wondering how a "property" insurance policy can exclude "land" as "covered property" since most think of "land" as the ultimate form of "property." Welcome to my world.