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A Pyramid of Claims

Date: July 7, 2010

The Gulf Oil Spill is the most complex insurance event in history, and the establishment of a $20 billion White House-brokered fund to cover income losses will not make it easier to handle. The nature of the potential claims requires the skills of more than just claims adjusters; plans call for the establishment of an independent third party administration operation and an army of independent adjusters, accountants, business valuation experts and attorneys who will assess the validity and veracity of liability claims.

As oil continues to gush from the floor of the Gulf, the number and complexity of claims will continue to grow. To get a full picture of this disaster, look at these claims as a pyramid. At the base of the pyramid are the property claims, such as oil-damaged boats and docks. This is where we expect to see the greatest number of claims, but also the least complex. Above those are the claims of business interruption by the independent businesspeople who make their living on the water. Next on the pyramid are the claims from corporate entities, like hotels and tourist spots, that will claim a loss of business due to the spill. Above those are more complex cases, like real estate developments that may be halted or restaurant chains or businesses throughout the U.S. that depend on Gulf-supplied seafood. At the top of the pyramid are potential health and complex environmental claims.

The Mighty Servant 3 works in tandem with Vessels of Opportunity to recover thousands of barrels of crude oil from the surface of the Gulf of Mexico, thirty miles off the coast of Florida. © BP p.l.c.

Loss of Income
The fishermen who rely on the Gulf for their livelihood could lose as much as $2.5 billion, according to estimates by Bernstein Research. After property damage, the claims of business loss will be the second most numerous of all the claims that are filed during this disaster. They include shrimpers who can't use the waters, oystermen who can't harvest their catch and fishing guides who can't take out their fares.

Challenges already exist with the current flood of fishing operators' claims. One major problem is the lack of, or poor quality of, business and tax records to validate damages. Many fishermen claim they've been going through a recession the last two years, so their profits aren't showing what they "could have earned" this year.
Up the Food Chain
There are more complex claims looming, with the potential for large-scale business failures of hotels, marinas, gas stations and just about any business that is within proximity to the shoreline. Businesses far removed from the Gulf shores, such as restaurants that counted on the Gulf's bounty, may also claim lost business as the shrimp and other seafood their customers enjoyed is no longer available. The fishermen were just the front end of transactions that may have sent their catches far north into the Midwest.

Many of these types of claims, especially those involving hotels and other seasonal businesses, could easily top $1 million. This is where hundreds—likely thousands—of forensic accountants, business valuation experts and lawyers will be needed to sort through and deliberate each claim with accuracy and speedy resolution.

In the tier above these small-business claims will be real estate developers or investors looking to recoup investment losses because of the spill. Imagine a multistory condominium complex along a Gulf beach. The recent recession may have put the project on the brink of disaster, leaving the investors believing that the spill was the final deathblow. These potential types of claims could take months, if not years, to evaluate and bring to resolution.

Looming Health Claims
As oil reaches the shore, thousands of volunteers—some, just concerned property owners—are taking to the beaches with trash bags and whatever they have available to try to rescue wildlife or clean a patch of sand. Some have been trained and hired by BP to assist, but there are questions about the quality of the training and adequacy of the personal protective equipment they use. Concerns over the effects of dispersants are also arising. Additionally, fishermen have been hired not just to help with the cleanup, but to take journalists and scientists into the spill to report on and monitor what's happening.

The exposure of all these people to hazardous materials and pollutants opens the door for potential health claims. It is conceivable that entire communities will stake claims regarding the effect the spill has had on their health. Their claims will involve not only the diagnosis and treatment of their illnesses, but long-term care and disabilities. Sorting through these claims will require a decade of heavy claim work followed, no doubt, by years of litigation.

The Wild Cards
The claims themselves are complex enough, but there are other factors that will exacerbate the problem. Wild card number one is when the well will stop gushing and what the ultimate damage to coastal properties will be. Once a home or business gets paid on a claim for environmental cleanup, lost rentals or other losses, demands for payouts will spread like wildfire throughout the community. If the oil slick is taken by the current around Florida then up the East Coast and contaminates properties along the way, the mountain of lawsuits that BP and the other parties will face will be astronomical, requiring more manpower and talent for managing these claims.
The second wild card involves oversight. The federal government's efforts to get its arms around this disaster will bring it deeper into the claims process, and there will be plenty to oversee. Analyzing a single business interruption claim takes time. Handling many claims raises the likelihood of denying legitimate claims while paying on ones that are fraudulent. This event is already rife with the potential for fraud. The appointment of Kenneth Feinberg as independent overseer of the $20 billion BP-sponsored claims fund is a step in the right direction for the pyramid of claims. He is an independent, seasoned party who can skillfully address these issues.

The final wild card is the hurricane season. Recent predictions from Colorado State University's Tropical Meteorology Projects call for a more active than normal 2010 Atlantic hurricane season. If these projections prove true, claims filings could explode, especially if a storm surge pushes the environmental damage further inland than would be the case without the cyclonic influence.

Comparisons to the Exxon Valdez spill fall short of this disaster's potential impact. The industry must ramp up now to meet the impending needs of clients and the probable demands of regulators.