Oil Spill and Pollution Damage Compensation
Transport & Insurance Focus
A Philippine oil tanker, named MT Princess Empress, capsized in rough seas on 28 February 2023 while carrying 800,000 liters of industrial oil known in the energy sector as “black oil,” a deadly and highly toxic fuel oil to the environment.
Law Update: Issue 366 - Transport & Insurance Focus
Anand SinghSenior Counsel,Transport & Insurance
Melody HuangAssociate,Transport & Insurance
A Philippine oil tanker, named MT Princess Empress, capsized in rough seas on 28 February 2023 while carrying 800,000 liters of industrial oil known in the energy sector as “black oil,” a deadly and highly toxic fuel oil to the environment. The ill-fated oil tanker sank off the Oriental Mindoro coast, south of capital Manila, and caused a major oil spill in nearby areas recongised for their marine biodiversity. This spillage incident covered 262 villages, affecting 200,244 people including 27,513 fishermen who were ordered to stay on shore until they can fish safely.
The sunken Philippine oil tanker is owned by RDC Reield Marine Services (RDC) and is covered by protection and indemnity insurance by the Shipowners’ Club, a member of the International Group of P&I Clubs which insures over 90% of the world’s ocean-going tonnage. Whilst RDC is resolving the insurance coverage issues with the Shipowners’ P&I Club, there are parallel discussions with the International Oil Pollution Compensation (IOPC) Fund.
This article will outline IOPC framework and how it could assist in an oil pollution incident such as the MT Princess Empress and compare it to how BP handled the 2010 Deepwater Horizon oil spill disaster in the Gulf of Mexico as an example of what occurs when the IOPC is not in play.
In the maritime and shipping sector, there are several conventions in effect. These include treaties on piracy, shipping routes, pollution and many more. One such convention is the IOPC Fund which is an international regime of liability and compensation for oil pollution damage caused by oil spills from tankers. It was established by United Nations' International Maritime Organization (IMO) as a reaction to the very serious oil pollution incidents that have occurred since the 1960s. The IOPC Funds are financed by levies on certain types of oil carried by sea and paid by entities which receive oil after sea transport.
Legal framework overview The 1969 International Convention on Civil Liability for Oil Pollution Damage (1969 Civil Liability Convention) was the landmark step towards holding shipowners liable for oi spill-related damage, and the 1971 International Convention on the Establishment of an International Fund for Compensation for Oil Pollution (1971 Fund Convention) was established.
Today, it has been replaced by two instruments. The 1992 Civil Liability Convention (1992 CLC) and the 1992 Fund Convention, and the Protocol to the 1992 Fund Convention which was established in 2005 (Supplementary Fund). The 2005 Supplementary Fund raised the maximum compensation to almost 750 million Special Drawing Rights (SDR), to ensure that the money is sufficient to cover the expenses of larger pollution damage. SDR are the foreign exchange reserve assets maintained by the International Monetary Fund. It provides a unit of accounting between different currencies of member countries.
Insurance requirement and compensation Under the relevant Civil Liability Convention (CLC), the owner of a tanker is liable to pay compensation up to a certain limit for oil pollution damage following an escape of persistent oil from his ship.
Ships carrying more than 2,000 tons of oil are required to provide a certificate of insurance confirming that they can cover liability in case of an oil spill. If the shipowner is found to be at fault, there is no liability limit under the CLC. On the other hand, if the shipowner is found to not be directly at fault, the liability is capped. For up to 5,000 deadweight tonnage (DWT) ships, liability is capped at 4.51 million SDR. Between 5,000 and 140,000 DWT, liability is 631 SDR for every ton over 5,000 DWT. For ships over 140,000 DWT, liability is capped at 89.77 million SDR.
If the limit of indemnity under shipowner’s insurance does not cover all the admissible claims, further compensation from the 1992 Fund and/or the Supplementary Fund may be available. The Funds are aimed at relieving shipowners from liabilities that were beyond their control and due to unforeseeable circumstance. The Fund is not obliged to indemnify if damage is caused by willful misconduct or if the ship did not comply with certain international conventions.
In practice, the Funds, in co-operation with the shipowner’s insurer, often appoint experts to monitor clean-up operations, to investigate the merits of claims and to independently assess losses.
Types of claimsAn oil pollution incident can generally give rise to claims for five types of pollution damage:
Property damage;
Costs of clean-up operations at sea and on shore;
Economic losses in the fishing industry or those engaged in mariculture;
Economic losses in the tourism industry; and
Costs for reinstatement of the environment
Claimants may be individuals, partnerships, companies, private organisations or public bodies, including states and local authorities.
Limitation period Under the regime, the claimants lose their right to compensation from the shipowner and their insurer under the 1992 CLC and the right to bring court action against the 1992 Fund within three years from the date when the damage occurred. Although damage may occur some time after an incident takes place, in both cases court action must in any event be brought within six years of the date of the incident.
Membership There are currently 121 states parties to the 1992 Fund Convention and 32 states parties to the Supplementary Fund Protocol. Of note, Saudi Arabia is a party to the 1992 CLC and has an observer status with the 1992 Fund and the Supplementary Fund. The observer status gives the Saudi Government the opportunity to attend and participate in IOPC Funds meetings as an observer before deciding to accede to the Funds.
MT Princess EmpressThe Philippines is a party to both the 1992 CLC and the 1992 Fund Convention. According to IOPC Funds’ indications, claims relating to the 28 February 2023 incident are likely to exceed the limit of liability of the insurer and the 1992 Fund will be called upon to pay compensation. The shipowners’ Club and the IOPC Funds have established several joint claims offices in the region.
Despite this, there is fear that the $284 million (Peso 15.7 billion) in insurance and 1992 Fund will likely not be enough for the cleanup and rehabilitation operations related to the oil spill. The Philippines is not yet a member of the Supplementary Fund.
By June, the Philippines government has spent almost Peso 1 billion to cushion the effects and fix the damages caused by the oil spill, including over Peso 600 million to the affected communities and 300 million in operating expenses. It’s still uncertain how big the environmental damage is.
The 2010 BP oil spill attracted considerable contention around the world and is an example of how big offshore energy exploration and production companies deal with oil spills and pollutions.
On April 20, 2010, the oil drilling rig Deepwater Horizon, operating in the Gulf of Mexico, exploded and sank resulting in the death of 11 workers and the largest spill of oil in the history of marine oil drilling operations. Transocean owned the drilling rig, which was hired by BP to drill the Macondo well off the Louisiana coast. 3 million barrels of oil flowed from the damaged well. For three months, BP struggled to contain the runaway well, which it finally capped and permanently sealed in mid-September. By that time, oil coated more than 1,000 miles of coastline in six states and covered over 40,000 square miles of the Gulf of Mexico.
The governing law in the U.S. is the Oil Pollution Act of 1990 (OPA 1990) which established a prevention, response, liability and compensation regime to deal with oil pollution caused by vessels and offshore energy exploration and production facilities within U.S. navigable waters. The Oil Spill Liability Trust Fund is the mechanism for compensating oil spill victims. It is worth noting that USA is not a party to the IOPC Conventions and Funds.
Like most larger oil companies and given the high level of risk associated with oil and gas exploration and limited insurance and reinsurance capacity for these risks, BP is almost completely self-insured. Following the catastrophic oil spill, it tapped its own captive insurance subsidiary — Jupiter Insurance Ltd., located on the U.K. Island of Guernsey to help offset cleanup costs.
In its simplest form, a captive is a wholly owned subsidiary created to provide insurance or reinsurance to its non-insurance parent company. Captives are essentially a form of self-insurance whereby the insurer or reinsurer is owned wholly by the insured. They are typically established to meet the unique risk-management needs of the owners. Approximately 90% of Fortune 500 companies have captive subsidiaries. Once established, the captive operates like any commercial insurance company and is subject to state regulatory requirements including reporting, capital, and reserve requirements.
Over the past 13 years, BP endured costly litigation and end up paying more than US$60 billion in criminal and civil penalties, natural resource damages, economic claims and cleanup costs. Major categories of these claims and litigations include:
Subrogated recovery claims from insurers of policyholders whose property was damaged;
Third-party claims against major Deepwater players, including BP and Transocean;
Claims by the major Deepwater players for defense and indemnity costs in claim litigation;
Director and officer policy claims for any directors or officers sued for breach of fiduciary duty;
Lawsuits from families of workers injured or killed by the blast; and
Statutory liability and criminal charges against the major Deepwater players including BP.
Transocean, on the other hand, like most major petroleum players have sophisticated systems in place to help manage their risks associated with offshore energy exploration and production operations, with the insured losses spread across a broad spectrum of global insurers and reinsurers. They had in place a $50 million primary policy and $700 million in excess coverage from Lloyd’s of London and other underwriters.
Oil spills have devastating consequences for the affected region, in terms of economy, flora, fauna, and livelihoods of local communities that depend on our resource-rich water. It can cause irreversible damage to the environment and may take years to completely clean up.
Thankfully largescale oil spills have become rarer over time, but it requires continuous effort and cooperation from everyone to eliminate the next incident however low the risks are. Big corporates must recognise corporate social responsibilities and be adequately insured. National government bodies who set regulation in place in the interest of the health and safety of their citizen, such as the OPA 1990 in the U.S., must continue to have a tight control. International frameworks such as the IOPC must continue to boost membership participation rate to both the 1992 Fund and the 2005 Supplementary Fund. And lastly, we must not underestimate the importance of our environmental advocates and the wider communities who continue to hold the responsible parties responsible.
For further information,please contact Omar N. Omar, Anand Singh and Melody Huang.
Published in March 2024
