Living in limbo

On a raw winter morning last December, the serenity of sleepy Hemel Hempstead was shattered by an explosion which measured 2.6 on the Richter Scale. A column of smoke began to rise that soon engulfed most of west London and dispersed over south east England, its path caught on camera by Nasa's satellite imagery.

What sparked that fateful event at the Buncefield oil storage depot is now known, but who is liable remains a mystery. On 9 May this year, the third report from the Health and Safety Commission's (HSC) Buncefield investigation confirmed that the overfilling of the depot's tank 912 led to an escape of fuel (now known to be unleaded petrol), which "in turn led to the formation of a cloud of flammable vapour that subsequently ignited" ( www.buncefieldinvestigation.gov.uk ).

However, the depot employed myriad sub-contractors and maintenance companies to supply certain sections of the site and, as yet, no one has admitted liability or apportioned blame.

"Since day one we have been pressing for liability from the owners Hertfordshire Oil Storage Ltd (HOSL)," says Norwich Union property claims manager Paul Redington. "The HSC's reports have been helpful but they don't tell the full story. There was a significant failure at the plant, so who is responsible and why did it occur?

"Many claims can't be fully settled until we know who is liable," he adds.

When talking to those involved in this claim, and many wanted to remain anonymous, there is one recurring theme. The unique nature of this claim has involved virtually every major insurer, broker and loss adjuster in the market, and has brought the market together to work as one. But consequently everyone's involvement and the sheer magnitude of the loss has led to major conflicts of interest creating a political nightmare for many behind the scenes.

The positive side is that various insurers learned from the Carlisle flooding incident in 2004 that the public interest must be served quickly to sustain the reputation of the industry as a whole. Within the first few days of the explosion, insurers had caravans parked in and around the devastated site helping residents and local business with their claims.

AXA claims manager Graham Plumb says that the co-ordination between the insurers began once the scale of the claim started to sink in. "We all began to do our thing until it became apparent the real scale of the damage.

Once we looked at the some of the buildings we knew they would have to come down. Every insurer had their own panel of adjusters and lawyers working for clients but the cost and time of treading on each other's toes, we knew, would not be good for clients.

"So it was decided that a group committee should be formed and one preferred law firm represent all claims," he says.

The group committee is the Buncefield Neighbouring Property Insurers Group (Bunpig), co-chaired by Redington and Steve Parry of AIG property claims. The law firm it chose was Kennedys (see page 11 for the history of Bunpig and its members). The collaboration between the insurers has allowed a large amount of claims to be paid. In fact, around 80% of the residential household and property claims have been settled.

Other than major headaches caused by subrogation issues surrounding insurers and loss adjusters, the frustration of many insurers has been a decision on a protocol for quantum.

"We want a decision to be made on the liability issue so we can resolve the quantum problem. My feeling is that we look at a sample of losses on all the other insureds to assess the quantum. On household claims this is not too bad as many have been paid, but on the major commercial claims there could a major fight," says Plumb.

Eyewitness accounts of the explosion talk of a fireball that leapt directly from 912 tank, which could have left horrific scenes had it not been by sheer luck that the blast was in the early hours of a Sunday morning.

"The timing was incredibly lucky," says AMG director of technical services and Buncefield co-ordinator Andrew Dear. "If it had been Monday morning, hundreds of people would have been working in the vicinity.

"I handled the Fuji film factory claim where the blast shredded the building with shards of glass and wood. I saw a tearful worker standing by a pile of wood and he said: 'that was my desk'.

If it hadn't been 6am on a Sunday, he knew he would have killed."

The strength of the blast caused a percussion effect, creating a sonic wave where air pressure builds up in enclosed spaces. "Basically the building on the outside seems structurally intact and then you walk into the building and find the whole inside has imploded," says Redington.

Arepa complex and technical loss director Bernard Connelly says: "The damage was extreme to say the least, the percussion effect was like the aftermath of terrorist bomb blasts I have seen."

Allianz Cornhill technical claims manager David Watkins adds: "When you looked at the depot, particularly from the press pictures, it looked burnt out and devastated but buildings survived. However, when you first saw the broken windows, it needed closer inspection to see the massive cracks in the building walls."

Property damage had many hidden problems discovered after the initial damage from the explosion. Buildings were not flattened but 'disassembled' - the slab and frame were intact but need to be reclad.

Many of the buildings suffered concrete burn. According to some loss adjusters, there will be certain amount of uplift around 15% - 20% on normal reinstatement costs.

Estimates of the overall costs of the Buncefield claim are described by one source as "finger in the air economics", but the range is £650m - £2.5bn. The reason for such a wide speculation is the business interruption (BI) exposure, that may reach record levels.

"At one stage we thought we had a handle on the case but the business interruption claims keep coming in," says Plumb.

He said that AXA had a retailer that needed its claim dealt with quickly because it was about to sign off a six-month contract. "We got the company back on its feet, but the client still walked away because of the Buncefield factor. So we are facing another claim," he added.

The BI exposure is very high. It was the build-up to the Christmas shopping spree so the seasonality aspect will have an impact on retailer and SME claims. The blast set off sprinklers in many buildings so when adjusters entered the premises, they were knee-deep in water.

Teceris partner Alastair Whiteside says: "One of the main factors that will dictate the handling of a serious commercial or industrial claim is the level of cover arranged for business interruption losses.

"If there is adequate BI coverage in place joint decisions can be taken at an early stage that are to the mutual advantage of the insured and insurers, for example to relocate the business, either on a temporary or permanent basis."

But blight is a problem given that some companies are finding staff reluctant to reoccupy premises that were damaged in the blast - in particular the Fuji factory, which may never be rebuilt. HOSL may face claims from employees and local residents for post-traumatic stress, according to sources.

Local hotels in the area have suffered from a loss of attraction. Smaller BI claims are coming from the local SMEs, such as the small retailers in vans who came on to the site to feed the workers.

Uncertain future

Relocation of premises has also left many unhappy staff. They do not want to travel long distances. Many of the commercial properties were multi-tenanted and the problems surround whether the building should be rebuilt or not. Questions arose on cover on rent assessment - when does the rent stop/start being repaid at reconstruction stage or refit stage?

Boundary Way is still unresolved and no decision has been made on the rebuild. The decision to rebuild on the Buncefield site was in the hands of the Office of the Deputy Prime Minister, but since John Prescott's alleged indiscretions and the subsequent dismantling of his department no clear deadline exists. A spokesman for the government's local authorities unit would only say: "We hope for some kind of resolution by the end of the year."

The depot needs to be rebuilt because of the number of pipelines that were in place - Buncefield's oil storage fed much of the Heathrow fuel consumption.

"The biggest problem is the 200m exclusion zone," says Plumb. "The Fuji factory was within this zone. Any rebuilds in this area are going to find it difficult to get planning permission.

"We are living in limbo."

Buncefield facts

- HSE expects to issue its final report end of 2006.

- Overall estimate for the Buncefield loss is between £650m and £2.5bn.

- Around 40 people were injured, but no one was killed in the blast.

- The Buncefield depot occupies over 100 acres (approx 50 hectares), of which HOSL East and HOSL West take up 22 acres (9 hectares).

- The Buncefield complex has three cross-country supply pipelines. There is a fourth pipeline, the West London Pipeline system, which services Heathrow and Gatwick with aviation fuel.

Conflicts and collaborations

Behind the smoke of the Buncefield claims

From the moment the Buncefield depot exploded on 11 December, the insurance industry was thrown into action.

So how did the claims progress and what issues arose from that fateful winter morning?

The Hertfordshire oil storage terminal or HOSL, on the outskirts of Hemel Hempstead, forms part of an oil terminal complex known locally as the Buncefield complex. HOSL is a joint venture between oil conglomerate Total (60%) and Texaco (40%). Other companies at the complex include BP, Shell and the British Pipeline Agency (BPA). The terminal receives, stores and distributes finished petroleum products through the Fina-Line pipeline, which pumps the products from the Total Lindsey oil refinery into HOSL.

On Sunday 11 December, as soon as the extent of the loss began to be realised, a claims helpline was set up by HOSL and advertised on its website.

Loss adjusters also began to receive claims from the mid-morning on that day. Conflict of interest issues for the market and their retained adjusters became apparent and these needed to be managed proactively. Given the unprecedented nature of the incident, these issues took time to evolve and get resolved. But insurers and adjusters immediately made sure that the priority was to service policyholders' needs.

HOSL formed a joint claims committee in the immediate aftermath of the incident to deal with the claims made against them. This committee appointed a panel of adjusters, including Crawford & Company, to investigate quantum of the third party claims; liability issues being dealt with by HOSL's lawyer, Davies Arnold Cooper. The Joint Claims Committee is chaired by loss adjuster Bateman Chapman.

At the same time the first party market, including insurers such as NUI, AXA and AIG formed a committee under the aegis of the ABI, initially called the property claims forum (PCF) and subsequently renamed the Buncefield Neighbouring Property Insurers Group (Bunpig). This was formed in an effort to streamline the market response. This worked effectively because Bunpig could contact HOSL collectively and try to coordinate claims investigation protocols. However, this took some time.

Bunpig members are: Churchill; AIG; Allianz Cornhill; Royal & SunAlliance; Norwich Union; AXA; Syndicate 3210/Mitsui; Allianz Global Risks; Lexington; Legal & General; NFU Mutual;. Sterling Insurance Group; CIS; Wellington; Tokio Marine; Zurich; Fortis Services; Mitsui; St Paul Travelers; Hertfordshire County Council; and the Post Office.

At the beginning of 2006, one of the lawyers representing a number of the Buncefield residents, Des Collins, made an application for a group litigation order (GLO) to attempt to control management of the claims being made by Buncefield residents, businesses and other affected parties.

This complicated matters when insurers and HOSL were trying to negotiate a sensible route for managing the claims investigation process but was understandable given the miasma of information about what would or would not happen. More fundamentally, what HOSL intended to do regarding the thousands of claims that were likely to be made as a result of the incident.

The application for a GLO was heard before Master Turner in the High Court on 17 March 2006, but was adjourned until early October 2006 as the Master felt that the request for a GLO was premature, and that time wasneeded for the parties to work through the claims investigation process.

At this stage, the loss adjusters involved in the dispute contacted Cila, as the industry's representative body, for guidance, particularly on how certain loss adjusters stood ethically on the conflicts of interests involved in the claim.

Frustratingly for those involved, Cila made it clear it could not get directly involved but offered names of independent adjusters outside the companies that did not create conflicts on the claims.

Bunpig (among others) has been immensely effective in ensuring minimal distress and disruption to policyholders.