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The risk of oil spills.

Risk managers may be surprised to learn that when the Exxon Valdez spilled 258,000 barrels of oil into Alaska's Prince William Sound, it was only 20 percent of the cargo that was discharged from the supertanker. Tragic incidents like these that wreak havoc on the environment and cost millions of dollars to clean up have brought about new legislation designed to avert future catastrophic spills.

Since the U.S. Oil Pollution Act of 1990 (OPA '90) imposed unlimited liability on owners and operators of vessels and shore facilities who discharge oil into surrounding waters, there has been a considerable debate about its stringent requirements and effect on the oil and international shipping communities. The cost of compliance is said to be $1.3 billion over the next 24 years, but some say the figure will be closer to $7 million by2015.

According to Raymond Burke Jr., of the New York law firm of Burke and Parsons, OPA '90 was enacted in the hope of decreasing the likelihood of accidents and mishaps in the ocean transport of oil. The act applies to ships intending to transport oil 200 nautical miles from the shoreline of the continental United States, and it imposes unlimited liability if the spillage is considered gross negligence - which can spell financial ruin for a shipowner. "The owner, operator or bare boat charterer of any vessel that discharges oil into the surrounding waters is, at least initially, considered the responsible party and the target of stringent liability and compensation provisions," said Mr. Burke. In addition to removal costs, he said, the responsible party becomes liable for consequential damages: harm to natural resources, economic loss to real or personal property, losses suffered by one who earns subsistence from natural resources, losses in tax revenues, loss to profit or earning capacity, and increased expense of public services.

Yet there are three general defenses to OPA '90, Mr. Burke said: act of God, act of war, and act or omission by third party. However, general defenses are lost if the responsible party falls to report an oil spill or cooperate with the authorities investigating a spill.

If they own or operate more than one vessel, they must demonstrate financial responsibility for their largest vessel through insurance or a letter of credit, or qualify as a self-insurer. Penalties for not complying with the financial guarantee include: denied entry to U.S. ports or waters, fines of $25,000 per day, or the authorities may detain the vessel.

Tanker Response Plan

Under OPA '90, tankers and oil facilities are required to give response plans for discharge of the vessel's entire cargo in bad weather; in other words, they must address the "worst case" oil spill in terms of personnel and equipment. The ship will not be able to transport oil in U.S. waters unless the plan is submitted to the U.S. Coast Guard. The spill mitigation plan should contain shipboard training, salvage and fire fighting resources, Mr. Burke said.

The mandatory loss control steps imposed by OPA '90 are: the use of double hull ships and mandatory decommission of single hull ships by 2010. The double hull design is intended to lessen oil spills, and Mr. Burke noted that shipowners will incur higher costs of 15 percent to 20 percent more to build and repair the tankers with the new double hull construction.

However, the shipowner's liability doesn't end with OPA '90 since a number of states have enacted their own spill liability and compensation laws, Mr. Burke said. The shipowner's liability as well as the financial requirements can vary considerably from state to state. To date, 30 states have enacted laws on financial responsibility and liability for oil spills, which are imposed in addition to federal requirements. Most states have a strict liability requirement for damages, and 16 states have gone beyond the standard set by OPA '90.

While OPA '90 limits those persons subject to liability to vessel owners and operators, 20 states have gone so far as to impose liability upon "any person who causes" an oil spill or discharges oil. OPA '90 shouldn't change trade around the world; however, Mr. Burke advised vessel owners to put an added emphasis on quality when building tankers and to train crews for a better understanding of the liabilities involved.
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Title Annotation:Third Asia-Pacific Risk Management Conference
Author:Oshins, Alice H.
Publication:Risk Management
Date:Dec 1, 1992
Previous Article:Changes in the Chinese insurance industry.
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