Andrew Symons and Richard Tosh look at the Exxon Valdez catastrophe and litigation

When the Exxon Valdez ran aground in March 1989, it caused what remains today as one of the world's worst ecological disasters. There is no better example of human error causing catastrophic loss and damage.

The spill also triggered a wave of litigation in various jurisdictions across the world.

At 9.12pm on 23 March 1989 the Exxon Valdez left Valdez, Alaska, carrying over one million barrels of North Slope crude oil. The master of the Exxon Valdez was Captain Joseph Hazlewood. About 11.30pm, Captain Hazlewood informed the Coast Guard that he was altering course to avoid ice in a part of Prince William Sound known as the Valdez Arm. He ordered the ship to make a course change that took the vessel out of the shipping lanes.

Unfortunately, contrary to the internal procedures, Captain Hazlewood went to his cabin at approximately 11.52pm, leaving third mate Gregory Cousins as the officer on the bridge. Mr Cousins was not qualified to navigate the vessel unsupervised.

When Captain Hazlewood went to his cabin the Exxon Valdez was on automatic pilot. Before leaving the bridge, the captain instructed Mr Cousins to begin turning back into the traffic lanes when the ship was abeam Busby Island Light. Mr Cousins took the vessel off autopilot upon Captain Hazlewood's departure from the bridge, but inexplicably began to turn back into the traffic lanes six and a half minutes late. As a result, the ship struck Bligh Reef and came to a complete stop. The impact ruptured a number of the ship's tanks and approximately 258,000 barrels of crude oil - 11 million gallons - roughly 20% of the ship's cargo - spilled into Prince William Sound. To make matters worse, a storm dispersed the slick over hundreds of square miles.

Wave of claims

The oil spill sparked a wave of diverse claims. These ranged from claims for loss of earnings and business interruption from the salmon fishing industry, to claims by native Alaskans for loss of rental value of the Alaskan shorelines caused by the presence of the oil. In fact the making and handling of the claims became almost an industry in itself.

In addition, large amounts were incurred in cleaning up the spill. Immediately after the oil made contact with the water, it turned into sludge and the residual debris of the oil contaminated hundreds of miles of Prince William Sound. At the height of the clean-up operation in the summer of 1989, 11,000 people were employed in cleaning up the sea and the seashore. Much of the clean-up had to be done manually which made it more labour intensive.

Exxon Shipping Company (ESC) - the owner of the Exxon Valdez - spent over $850m to clean up the spilled oil from Prince William Sound and the Alaskan shoreline (not to mention from many hundreds of seals, otters and other wildlife that are native to Alaska). After ESC became insolvent, Exxon Corp - the cargo owner - took over the clean up and spent a further $1.2bn.

Exxon settled civil claims made by the US government and the State of Alaska for about $1bn. There were over 30,000 private party claimants and Exxon also settled many of these claims. The remaining private party actions were consolidated for trial in Alaska. A jury in the trial awarded the private party claimants just under $300m in compensatory damages and $5bn in punitive damages. The amount of punitive damages has been appealed and the issue of the quantum of punitives is likely to go all the way to the US Supreme Court.

At the time of the loss, the Exxon Valdez was insured under a Global Corporate Excess Policy (the 'GCE Policy'). The judgments and settlements set out above led to Exxon making claims under the GCE Policy. Section I covered, amongst other things, removal of debris costs, Section IIIA covered marine liability and Section IIIB covered third party liability.

Following the oil spill, Exxon asserted claims on all three sections of the GCE Policy (which provided coverage of over $800m). Exxon's Section IIIA claims were brought in proceedings in Harris County, Texas and the Section IIIB claim was brought in arbitration in New York. The GCE Policy primary insurers settled the Section I claim with Exxon for $300m. There then followed a jury verdict in the Section IIIA trial in which final judgment was entered against the GCE Policy primary insurers for $410m.

Finally, there was a further settlement between Exxon and the GCE Policy primary insurers in relation to Section IIIA and Section IIIB for $480m.

ESC was a member of the International Tanker Indemnity Association (ITIA), a mutual P&I Club, and obtained a pay-out of $400m in partial satisfaction of its expenditure in cleaning up the oil spill.

Once the claims had settled on the primary GCE Policy, some of the primary insurers sought to recover from their reinsurers. Some of the reinsurers questioned whether they were liable under the reinsurances. This led to the 1997 Commercial Union v NRG Victory proceedings in which some of the primary insurers sued their reinsurers for their share of the settlement.

The case concerned reinsurances on the XL market standard form (the 'JELC').

Clause 1.3 of the JELC Clauses states that it is a condition precedent to liability under the contract that settlement by the reinsured shall be in accordance with the terms and conditions of the original policies or contracts. The reinsurers argued that the insurers were not liable to Exxon under the primary policy and deployed some of the defences that insurers had raised in the Texas proceedings against Exxon. The insurers sought to argue that the settlements were reasonable and businesslike and therefore reinsurers were liable under the follow the settlements clause. However, as we have seen above, this clause also required the reinsurer to prove that the settlement fell within the terms of the underlying direct policy as well as the reinsurance.

The Court of Appeal determined that this provision required the reinsured to prove that they were under a legal liability under the primary policy.

The insurers put forward evidence from the Texan lawyers saying, in effect, that although there were arguable coverage issues under the primary policy, the fact that the case was to be heard by a Texas jury, which is often unfavourable to insurers and biased against them when insurers are arguing for a limitation of cover, meant that underwriters would lose. The lawyers had therefore recommended settlement.

The Court of Appeal did not accept that this was sufficient to show that the insurers were legally liable under the policy, as the recommendation to settle appeared to be based on the lawyers' prediction of human behaviour (i.e. the Texas jury) rather than any legal ground. As a result, the court refused permission for summary judgment and directed that the matter had to go to a full trial where, in effect, the issues relating to the construction and coverage under the policy would effectively be re-argued in order to show that the insurers were under a legal liability to the insured.

Although the insurers settled with Exxon, the dispute switched to being one between the insurers and their reinsurers.

Halt in retrocession

Following the Court of Appeal's decision in Commercial Union v NRG Victory, a significant body of reinsurers contested whether the GCE policy primary insurers were under a legal liability to Exxon under the terms of the GCE policy for the costs and expenses of cleaning up the oil spill. The effect of this was that the retrocession market stopped processing Exxon claims collections. This was despite the fact that the GCE policy primary insurers had settled Exxon's claims under the GCE policy and that in the case of Section IIIA, there had been a judgment. Some of the reinsurance market has brought proceedings to resolve this issue, and the judgment was recently handed down by the London Commercial Court (Colman J) in David George King v Brandywine Re.

In the proceedings, Brandywine Re admitted that the costs incurred by Exxon in cleaning up the oil spill were covered under Section IIIA of the GCE Policy. However, it disputed that there was also coverage under Sections I and IIIB.

The first issue that the Court decided was that English law governed the GCE Policy. This was surprising because it goes against the finding made by the court in Commercial Union v NRG Victory that New York law governed the policy. It was also ironic that whilst Brandywine Re sought to use against the claimants the defences which the original insurers, including the London market, advanced against Exxon's claims under the GCE policy, they did not adopt the insurer's assertion in the Texas courts of the application to the policy of New York law. Applying English law, the court held that:

(a) there was no coverage under Section I of the GCE Policy for the expenditure incurred by Exxon in removing the remains of the cargo of crude oil from the Alaskan sea and shoreline because:

(i) this could not be classified as expenditure for the "removal of debris" of cargo within the meaning of Section I; and

(ii) there was cover for the expenditure incurred by Exxon under Section IIIA, and therefore cover was precluded under Section I by so-called "notwithstanding clauses" in Section I.

(b) there was no coverage under Section IIIB for the liabilities incurred by Exxon to third parties for damage to their property as a result of the oil spill.

(c) there was no coverage for ESC under Section I because at the date of the Section I settlement, March 1996, as a matter of English law, ESC's claim was time barred.

(d) recovery under the retrocession contracts was precluded by a seepage and pollution exclusion applicable to all of its sections, and which excluded any loss arising from "seepage, pollution or contamination on land unless such risks are insured solely on a sudden or accidental basis". Again this was contrary to the finding made by the Court in Commercial Union v NRG Victory that the exclusion did not bite.

Although the Court decided that the GCE Policy was governed by English law, it also made alternative findings, should it be decided on appeal that New York is the governing law. The Court decided that as a matter of New York law:

(a) the expenditure incurred by Exxon could be classified as expenditure for the "removal of debris" of cargo within the meaning of Section I.

(b) there was coverage under Section IIIB for the liabilities incurred by Exxon to third parties for damage to their property as result of the oil spill.

The Court's decision in David George King v Brandywine Re has been appealed.

Little could it have been imagined by Captain Joseph Hazlewood and/or Gregory Cousins that the errors they made on 24 March 1989 would lead to the world's worst ecological disaster, necessitating the expenditure of $1.2bn in clean-up costs alone, and litigation in various jurisdictions across the world. Fifteen years on, some of the disputes arising from the spill may still be some way off being resolved. To date, the spill has cost the insurance industry alone $1.2bn in direct claims. If the experience of the Piper Alpha loss is anything to go by (where the LMX spiral increased the magnitude of the loss by ten or so times) then losses to the retrocession market could be magnified by a similar amount.

- Andrew Symons is a partner and Richard Tosh is a lawyer in the insurance and reinsurance group of London law firm CMS Cameron McKenna.