Post-Deepwater Horizon: the changing landscape of liability for oil pollution in the United States.

• Author: Foley, Vincent J.

1. INTRODUCTION

   Following the Deepwater Horizon incident, the framework of liability for oil pollution and victim compensation in the United States is undergoing significant changes. In the event of a marine casualty or oil spill, the owner or operator of a vessel has planned for liability in accordance with the current federal scheme established under the Oil Pollution Act of 1990 ("OPA"), (1) and numerous other federal and state environmental statutes. The reaction from Congress to the enormous public outrage and unprecedented scope of the oil spill from the Deepwater Horizon, was to push legislative proposals through committee hearings, and bring bills to the floor for a vote that would repeal established limits of liability, both under the OPA and other statutes, such as the Shipowner's Limitation of Liability Act of 1851. (2) This knee-jerk reaction to remove limits of liability is short-sighted and serves only to quench public thirst for punishment by showing that the politicians can act swiftly and forcefully. The proposed legislation would not increase the funds available for compensation to injured claimants, nor would it result in claimants being compensated in greater numbers or more promptly.

   As part of the present liability scheme, participants in the industry are required to submit evidence of financial responsibility sufficient to pay claims up to the OPA limits. (3) As a practical matter, this requirement is usually met by provision of a certificate from a qualified insurance company agreeing to act as a guarantor of the OPA liability limit for a vessel or facility. (4) The guarantor must agree to direct action lawsuits from claimants. (5) The financial responsibility requirement ensures that compensation funds are immediately available from the responsible party to pay claims for damages and removal costs.

   Because the OPA's financial responsibility requirements are set by reference to OPA limits, legislation which repeals those limits would, in effect, dismantle the proven and effective system established by the OPA, which has been relied upon by the vessel and offshore industries over the last twenty years. The removal of the OPA's statutory limits of liability would also put the U.S. shipping and offshore industries at a distinct disadvantage in a global economy governed by international limitation regimes, which (by the way) impose lower limits and provide less compensation than the robust system already in place under the OPA.

   Moreover, the OPA already has provisions which call for unlimited liability in the event the responsible party acts with gross negligence, willful misconduct, or violates an applicable federal safety, construction, or operating regulation. (6) A responsible party will also lose its limits if, after an oil spill, the responsible party fails to report or cooperate with authorities or, without sufficient cause, fails to follow a governmental order. (7) State law may also provide unlimited liability for an oil spill. (8) The OPA expressly provides that individual states may legislate to create supplemental liability for oil pollution damages. (9) For this reason, removing limits of liability will not provide additional motivation for potential responsible parties, but instead will likely make it impracticable to set financial responsibility requirements.

   A dramatic increase in the OPA limits of liability, or removal of current limits of liability entirely, would seriously disrupt the existing compensation and liability scheme for oil spills. Such an increase may also jeopardize the ability of most companies to provide evidence of financial responsibility as required by the statute, which could place the maritime industry in the U.S. at a competitive disadvantage in the global marketplace. Careful consideration should be given to study the effects of modifications to the OPA limits of liability, including comparison to other prominent jurisdictions worldwide, which would balance the interests of industry participants with protecting the environment and providing adequate compensation to victims of an oil spill.

   With legislation and reform packages either approved or pending approval, and the imminent enactment of some type of reform measure by both the U.S. Senate and House of Representatives, the legal liability of an owner or operator of an offshore drilling unit responsible for oil pollution is in a state of flux, and should be closely monitored by those involved in exploration, development, or transportation of oil and gas in the U.S. This article will describe the existing oil spill compensation and liability scheme in the U.S., with a focus on the critical role of limits of liability in setting a minimum baseline for strict liability of the responsible party, and a guaranteed source of immediately-available compensation funds to pay oil spill victims.

2. THE INCIDENT AND OIL SPILL

   On April 20, 2010, the Mobile Offshore Drilling Unit ("MODU") Deepwater Horizon suffered an explosion, apparently from a blowout in the well it was drilling at the Macondo exploration site, in an area of the Gulf of Mexico known as Mississippi Canyon Block 252. (10) The Deepwater Horizon was owned by Transocean Ltd., (11) was registered under the Marshall Islands' flag, (12) and its classification society was the American Bureau of Shipping. (13) The Deepwater Horizon had been leased to BP for the drilling operation. (14)

   As a result of the incident, eleven workers were killed, the entire remaining crew of more than one hundred workers was evacuated into lifeboats and rescue vessels, and the rig subsequently sank into the Gulf of Mexico. (15) The oil spill continued with an uncontrolled release of crude oil and natural gas from the wellhead for a total of eighty-six days. (16) Initial reports of 1000 to 5000 barrels per day of hydrocarbons being released increased to 12,000 to 19,000 barrels per day, and eventually were reported to be as much as 60,000 barrels per day. (17) On July 15, a temporary cap was installed on the wellhead to control the flow of oil into the Gulf of Mexico until a permanent relief well was completed (as of September 19). (18) Estimates of the total oil released from the wellhead range from 1.8 million barrels up to 5.1 million barrels, but by either estimate, the size of the spill far exceeded any oil spill on navigable waters in U.S. history. (19)

3. THE CLEAN WATER ACT AND OTHER FEDERAL STATUTES

   In addition to the above-mentioned statutes, the federal statutory scheme for oil pollution includes the Federal Water Pollution Control Act (also known as the "Clean Water Act" or "CWA"). (20) The CWA provides for both mandatory and discretionary civil and criminal penalties against the owner, operator, or person in charge of a vessel that discharges a prohibited amount of oil or hazardous substances into navigable waters. (21) The criminal penalties are in the form of fines and sentencing guidelines; the civil penalties are determined by a per-day or per-barrel fine without limitation. (22)

   The CWA civil and administrative penalties can be assessed by either the U.S. Coast Guard or the Environmental Protection Agency. (23) The following criteria are applicable to determine the amount of civil and administrative penalties to be assessed: (1) "the seriousness of the violation"; (2) "the economic benefit to the violator, if any, resulting from the violation"; (3) "the degree of culpability involved"; (4) "any other penalty for the same incident"; (5) "any history of prior violations"; (6) "the nature, extent, and degree of success of any efforts of the violator to minimize or mitigate the effects of the discharge"; (7) "the economic impact of the penalty on the violator"; and (8) "any other matters as justice may require." (24)

   In addition to the CWA, several other federal statutes are used by prosecutors to pursue criminal penalties against a responsible party for an oil spill including, for example, the Act to Prevent Pollution from Ships ("APPS"), (25) the Refuse Act, (26) and the Migratory Bird Treaty. (27) As amended by the OPA, the CWA imposes strict liability with a mandatory civil penalty on the owner, operator, or person in charge of any vessel or facility from which oil is discharged, in an amount up to $37,500 per day of violation, or an amount of up to $1100 per barrel of oil discharged. (28) Where the violation is the result of gross negligence or willful misconduct, the owner, operator, or person in charge is subject to a civil penalty of not less than $140,000, and not more than $4300 per barrel of oil discharged. (29) In effect, the penalty for gross negligence could result in treble damages for fines and penalties incurred by the responsible party. Assuming the estimate of 5.1 million barrels released, the maximum CWA penalties for the Deepwater Horizon oil spill range from $5.6 billion for ordinary negligence, with a potential of up to $21.9 billion if there is a finding of gross negligence or willful misconduct.

4. THE OIL POLLUTION ACT: OIL SPILL LIABILITY AND COMPENSATION SCHEME

   The primary objective of the OPA is to provide compensation to claimants from oil spills in...