US legal action to limit Lloyd’s exposure for BP’s pollution

Lloyd’s chief executive officer Richard Ward say the BP oil spill in the Gulf of Mexico will push up the price of insurance on offshore drilling, Bloomberg reports.

“Rates have to go up quite significantly,” Ward said in an interview on Bloomberg Television. “Rates had fallen to quite a low level in the Gulf of Mexico for offshore energy. We’d been questioning the profitability of insurance in that region for quite some time.”

Insurers are charging 50% more for policies covering oil rigs after an explosion on the Deepwater Horizon rig. BP has spent $2bn to respond to the disaster.

Claims costs

Lloyd’s estimates its insurers will pay $300m to $600m in claims related to the Deepwater Horizon rig. Lloyd’s underwriters insured the rig, owned by Transocean and has caps on the coverage it provided for environmental damage caused by the spill.

BP didn’t buy insurance and will cover the majority of the costs, forecast to be at least $20bn by the US government.

“We should see more capital come in. With these major catastrophes, you always get a rate adjustment after the catastrophe,” Ward said in a separate interview.

US legal action

Lloyd’s underwriters have sued BP asking a judge to declare that they have no obligation to cover pollution-related liability claims resulting from the spill because contracts between BP and Transocean stipulated that the rig owner wouldn’t be responsible for contamination that originates below the surface.

“Policies are not as clear cut as you might expect, there’s always a bit of ambiguity,” Ward said of the dispute with BP. “No one, I don’t believe, has a good understanding at this point in time as to what the cause was. And until you do have a good understanding of the cause, it’s difficult to know where are the liabilities.”

Judge Melinda Harmon called a pretrial conference for 9 September in Houston.