1

National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling

LIABILITY AND COMPENSATION REQUIREMENTS UNDER THE OIL POLLUTION ACT

Staff Working Paper No. 10

Staff working papers are written by the staff of the National Commission on the BP Deepwater 

Horizon Oil Spill and Offshore Drilling for the use of members of the Commission. They do not 

necessarily reflect the views of the Commission or of any of its members. In addition, they may 

be based in part on confidential interviews with government and non-government personnel.

I. ISSUE

In November 2010, BP estimated that its total costs from the Deepwater Horizon spill, 

including the clean-up, penalties and damages, will total nearly forty billion dollars.1 BP has the 

resources to pay this enormous sum. Those who have suffered individual damages from the spill 

and those who wish to see the Gulf’s natural resources restored are fortunate that BP, rather than 

a smaller oil and gas company, was responsible for the spill. However, the fact that BP is able to 

provide full monetary compensation for damages that it causes is no more than a fortuity, not a 

product of regulatory design. If a company with less financial means had caused the spill,2 the 

company would likely have declared bankruptcy long before paying anything close to the 

damages caused.3

As discussed below, the current law limits the amount of liability for damages caused by 

oil spills. As a result, it provides little incentive for improving safety practices to decrease the 

likelihood of major spills, and it limits the ability of those of who suffer damages to receive full 

compensation. In the immediate aftermath of the BP spill, several legislative proposals were 

introduced to change the applicable liability caps and the financial responsibility provisions of 

the Oil Pollution Act of 1990, as a way to address both of these problems. 

The purpose of this paper is to provide background information to the Commission in support 

of the Commission’s consideration of policy options related to liability caps and financial 

responsibility applicable to oil spills from offshore facilities. To that end, the paper briefly

summarizes existing law and identifies some of the more significant policy issues raised 

 1 Graeme Wearden, “BP oil spill costs to hit $40bn,” The Guardian, November 2, 2010. 2 In the Gulf, the oil exploration and production industry is composed of two main groups of operators: (a) 

international and major integrated companies (the “majors”), and (b) independent exploration and production 

companies (the “independents”), who themselves are often large companies. See Rawle King, Deepwater Horizon 

Oil Spill Disaster: Risk, Recovery, and Insurance Implications, (Washington, D.C.: Congressional Research Service, 

July 12, 2010), 5; IHS Global Insight (USA), Inc., The Economic Impact of the Gulf of Mexico Offshore Oil and 

Natural Gas Industry and the Role of Independents (July 21, 2010), 4. 3 See, e.g., Mark Cohen et al., Deepwater Drilling: Law, Policy and Economics of Firm Organization and Safety, 

(Resources for the Future, January 2011), 33.
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concerning possible amendment of current law. The paper discusses each of these issues, 

highlighting some of the competing concerns implicated by different policy outcomes.4

II. EXISTING LAW

A. The Oil Pollution Act of 1990

Under the Oil Pollution Act of 1990 “responsible parties,” including lessees of offshore 

facilities,5 are strictly liable for removal costs and certain damages resulting from a spill, subject 

to caps on liability.6

Lessees are required to demonstrate financial responsibility in an amount between $35 

million and $150 million.

Responsible parties are not liable for the costs of removal or damages if 

violations are caused solely by an act of God, act of war, or act or omission of a third party.

7

 The Bureau of Ocean Energy Management, Regulation and 

Enforcement (“BOEMRE,” formerly the Minerals Management Service) defines “Oil Spill 

Financial Responsibility” as “the capability and means by which a responsible party for a 

covered offshore facility will meet removal costs and damages for which it is liable” under the 

Oil Pollution Act.

8

 BOEMRE’s regulations establish guidelines for the level of financial 

responsibility necessary, based on the estimated worst-case discharge from offshore facilities. 

“Worst case discharge” for a well is defined as four times the estimated uncontrolled flow 

volume for the first 24 hours of a spill, as set forth in the responsible party’s response plan.

9

 

BOEMRE has authority to increase the required amount based on relevant operational, 

environmental, human health or other risks posed by the operation,10 but as discussed below, the 

total amount required to be demonstrated may not exceed $150 million.11 Firms may 

demonstrate financial responsibility in various ways, including surety bonds, guarantees, letters 

of credit, and self-insurance; the most common method is through an insurance certificate.12

Finally, certain claims for natural resource damages and “uncompensated damages” can 

be made to, and paid out of, the Oil Spill Liability Trust Fund (Trust Fund or Fund). The Trust 

Fund is currently funded by an 8 cent per barrel tax on domestic production and imported oil.

 

13

 4 For further discussion of the issues addressed herein, please refer to: Cohen et al., Deepwater Drilling: Law, Policy 

and Economics of Firm Organization and Safety and Thomas Merrill, Insurance and Safety Incentives (2010). 

These papers are posted on the Commission’s website, www.oilspillcommission.gov. 5 This discussion is limited to the liability cap for offshore facilities, although OPA covers liability for vessels and 

other sources as well. 

6 33 U.S.C. § 2702. Compensable damages are damages for: natural resources; real or personal property; 

subsistence use; revenues; profits and earning capacity; and public services. 

7 33 U.S.C. § 2716(c). 

8 30 C.F.R. § 253.3.

9 30 C.F.R. § 253.14(a)(1). 1030 C.F.R. § 253.13. 11 Id. 12 30 C.F.R. § 253.20-32; King, Deepwater Horizon Oil Spill Disaster: Risk, Recovery, and Insurance Implications, 

7. For a more detailed discussion of how firms currently demonstrate financial responsibility see id., Merrill, 

Insurance and Safety Incentives, 7-9. 13 33 U.S.C. § 2712 (a)(4). In October 2008, Congress raised the tax per barrel from $0.05 to $0.08 until January 1, 

2017, and to $0.09 from January 1, 2017 to December 31, 2017. Congress also removed the $2.7 billion cap on the 

Fund. Emergency Economic Stabilization Act of 2008, P.L. 110-343, 122 Stat. 3860; compare 26 U.S.C. § 4611 

(2007) with 26 U.S.C. § 4611 (2010).
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B. Current Limitations on Liability and Compensation

The Oil Pollution Act currently limits liability and compensation for damages caused by 

a spill from on offshore facility in three ways. First, it caps liability for damages from a spill 

from an offshore facility at $75 million per incident.14 This limit does not apply if the incident 

was proximately caused by a responsible party’s gross negligence, willful misconduct, or 

violation of applicable Federal safety, construction, or operation regulation.15 The limitation on 

liability also does not apply to civil and criminal penalties under federal and state law, oil spill 

removal costs under federal law, or claims for damages brought under state law.16

Second, under the Oil Pollution Act, the highest level of financial responsibility a 

covered facility must demonstrate is $150 million, the amount required for facilities whose 

worst-case discharge volume exceeds 105,000 barrels.17

Third, if the responsible party is not able to compensate all of the damages caused by the 

spill, the Trust Fund is available to cover certain damages.

Thus, even though an offshore facility 

is potentially liable for damages that exceed $75 million (for example, in the event that the 

responsible party acted with gross negligence), it is not required to demonstrate actual capacity 

to pay damages beyond $150 million. 

18 However, the amount authorized 

per incident is limited to $1 billion19 and, until recently, the overall limit on the Fund was $2.7 

billion.20 As of June 2010, the Fund’s balance was approximately $1.5 billion.21

Thus, in the case of a large spill, there is no certainty under current law that a company 

would have the financial means to fully compensate victims of the spill. Moreover, the Trust 

Fund would likely not provide sufficient backup, and a significant portion of the injuries caused 

to individuals and natural resources as well as government response costs could go 

uncompensated. 

 14 33 U.S.C. § 2714(a)(3). 15 Id. § 2704(c)(1). 16 Id. § 2718. See Cohen et al, Deepwater Drilling: Law, Policy and Economics of Firm Organization and Safety, 

30-31. 17 33 C.F.R § 253.14. 18 33 U.S.C. § 2712. 

19 26 U.S.C. § 9509(c)(2). 20 Even where the Fund gets reimbursement from the responsible party, the amounts the Fund initially paid out are 

counted against the $1 billion limit. Thus, in the BP/Deepwater Horizon case, even though BP has reimbursed the 

Fund for over $500 million spent on government response activities, the fact that the Fund was used for those 

response activities means that less than $500 million is available to compensate damages going forward. 

Government Accountability Office, GAO-11-90R Deepwater Horizon Oil Spill: Preliminary Assessment of Federal 

Financial Risks and Cost Reimbursement and Notification Policies and Procedures (November 12, 2010). This 

issue could be addressed in legislation. 

21 Hearing on Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and Related 

Statutes, Before H. Comm. on Transportation and Infrastructure, 111th Cong. (2010) (statement of Craig Bennett, 

Director, National Pollution Funds Center), 3.
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III. AMENDING EXISTING LAW

A. Legislative Proposals

During the 111th Congress, members introduced bills that would have addressed, in different 

ways, the unfavorable impacts of limitations on the liability cap and financial responsibility 

requirements. The bills contain provisions that would do some or all of the following:

• Eliminate the liability cap for offshore facilities22

• Change the financial responsibility requirements by raising limits or requiring the 

Secretary of the Interior to review requirements

 

23

• Require participation in a mutual liability pool24

• Increase the amount of available per incident funding in the Trust Fund25

Congress, however, was unable during the 111th Congress to reach the compromise necessary to 

secure passage of any relevant legislation. 

B. Relevant Considerations in Developing Policy Options

Raising or eliminating the liability cap and increasing financial responsibility serve two 

distinct, important policy goals. First, changing existing law in this manner could create stronger 

incentives for firms to internalize risk and operate more safely offshore. And second, such steps 

would provide greater assurances that, in the event of a major spill, there would be adequate 

funds available to compensate for damages and costs caused by such spills, without requiring the 

taxpayer to bear the burden of compensation. 

There are a variety of ways that existing law could be modified to further these overall 

objectives: 

• Raising the liability cap, using a phased in approach

 22 Consolidated Land, Energy, and Aquatic Resources Act, H.R. 3534, 111th Cong. (“CLEAR Act”).

§ 702 (2010) (as passed by House); S. 3663, 111th Cong. §102 (2010)(“Reid Clean Energy bill”); Restoring 

Ecosystem Sustainability and Protection on the Delta Act, S. 3763, 111th Cong. (2010) S. 3763, 111th Cong. § 6 

(2010) (“RESPOND Act” or “Landrieu bill”) (liability between $250 million and $10 billion is borne by mutual 

liability pool; liability over $10 billion is borne by responsible party). 

23 CLEAR Act, § 703 (raises financial responsibility for offshore facilities to $300 million; may be less based on 

certain criteria); Reid Clean Energy bill, S. 3663, § 306 (every five years, the Secretary of the Interior will review 

minimum financial responsibility requirements, make adjustments for inflation, and make recommendations to 

Congress on financial responsibility requirements.)

24 RESPOND Act, § 7 (pool provides insurance for costs between $250 million and $10 billion; premiums are based 

on amounts set by the Secretary of the Interior). 25 Reid Clean Energy bill, S. 3663, § 5001 (Increases amount available per incident to $5 billion; increases per barrel 

tax to 45 cents). See also Hearing on Liability and Financial Responsibility for Oil Spills under the Oil Pollution 

Act of 1990 and Related Statutes, Before the Comm. on Transportation and Infrastructure, 111th Cong. (2010) 

(statement of Thomas Perrelli, Associate Attorney General) (describing Obama Administration proposal that 

increases per incident limit).
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• Raising financial responsibility requirements, using a phased in approach

• Ensuring an evaluation of risk by the regulator in setting criteria for financial 

responsibility levels, and/or by insurance companies in determining premiums 

• Increasing the per-incident limits on payout from the Oil Spill Liability Trust Fund 

Relationship of liability caps and financial responsibility limits. At the outset, it is important to 

note that it is unlikely that raising or eliminating the liability cap will have the desired effect of 

providing incentives for safe practices or ensuring full compensation for victims, unless 

demonstrated financial responsibility is required at levels commensurate with the cap.26 The 

debate over the Oil Pollution Act liability cap has focused primarily on increasing or eliminating 

the liability cap itself; discussion of financial responsibility requirements has been secondary. 

However, if the liability cap is increased without a corresponding increase in financial 

responsibility requirements, then a firm could meet its financial responsibility requirements and 

still go bankrupt before paying even a small fraction of the damage associated with a spill. The 

liability limit would, in effect, be irrelevant.27 Some have argued that the financial responsibility 

requirement should be higher than the relevant liability cap, in order to ensure that the 

responsible party is capable of paying the full range of damages, costs and penalties applicable 

under federal and state law.28

1. General policy reasons for raising the cap and increasing financial responsibility 

requirements for offshore facilities

Incentives

One argument frequently advanced for raising liability caps is that significant potential 

monetary liability increases a company’s incentive to improve its safety practices.

29 To the 

extent that a liability scheme provides incentives to internalize costs, the comparatively low $75 

million cap distorts companies’ incentives to engage in practices that prevent spills.30 This point 

has been made by numerous economists who have reviewed the Oil Pollution Act liability cap. 

Under basic economic theory, companies that have the potential to cause significant harm should 

pay for the costs they inflict; economists have thus opined that the best way to ensure 

internalization of risk is to require strict, unlimited liability for all damages inflicted on the 

public by an accident.31

[T]he $75 million cap on liabilities for economic damages means that oil 

companies do not bear full responsibility for oil spills. This misalignment of 

incentives is a classic case of moral hazard. Firms and people behave differently 

 For example, in testimony before Congress, MIT economist Michael 

Greenstone stated, 

 26 See Cohen et al., Deepwater Drilling: Law, Policy and Economics of Firm Organization and Safety, 45. 27 Id. 28 Id. 29 Id., 40; Merrill, Insurance and Safety Incentives, 6. 30 Merrill, Insurance and Safety Incentives, 6. 31 See Ishan Nath, Economists’ Perspectives on Liability Caps and Insurance for the Offshore Oil and Gas Industry 

in the Wake of the Macondo Blowout (2010), 5-8, posted on www.oilspillcommission.gov(quoting numerous 

academic economists who stated that the best way to ensure internalization and mitigation of risk is through removal 

of Oil Pollution Act liability caps). 
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when they are protected from the consequences of their actions... Market forces 

require [oil companies] to make decisions about where to drill and which safety 

equipment to use, based on benefit-cost analyses of the impact on their bottom 

line. . . If the expected cost benefits exceed the expected costs, the decision to 

move forward will appear sound.32

Therefore, according to Professor Greenstone, the offshore drilling liability cap 

“inevitably distorts” the way companies make decisions to drill.33

The incentive argument is somewhat diminished, however, by the fact that there 

are significant limitations on the scope of the liability cap’s applicability. As noted 

above, caps do not apply to removal costs, damage claims under state law, and penalty 

actions, and they do not apply where there has been gross negligence, willful misconduct, 

or violation of applicable Federal safety, construction, or operation regulation. Thus, in 

the case of the Deepwater Horizon spill, for example, BP and/or other responsible parties 

may be liable for removal costs, the potential billions of dollars in civil and criminal 

penalties, unlimited liability for damages in some states and potentially, civil and/or 

criminal penalties under state law. 34 In any event, to the extent that a liability cap is not 

waived, the aggregate expected damages from a spill are lower than they otherwise would 

be, and this fact may have an effect on a company’s incentive to adopt more stringent 

safety practices.35

Compensation

In addition, increased liability and financial responsibility will help insure that 

individuals, property owners and natural resources trustees who suffer damages but have no role 

in causing a spill are fully compensated. As of December 2, 2010, BP had already pledged or 

paid billions of dollars in damages, including through the establishment of a $20 billion fund for 

private claimants and through natural resource damage assessment payments to states.

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2. Potential impact on the insurance industry 

 As 

noted above, if BP had not agreed to waive the liability cap, and the cap was not subject to one of 

the exceptions enumerated in Oil Pollution Act, then innocent victims would have been out of 

luck, or the taxpayer would have borne the burden of compensating those victims. 

In testimony before Congress, insurance officials and others have warned of unintended 

consequences of an increase in, or elimination of, the liability cap. With respect to the short term, 

 32 Hearing on Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and Related 

Statutes, Before House Comm. on Transportation and Infrastructure, 111th Cong. (2010) (Statement of Michael 

Greenstone, MIT), 3. 

33 Id. 34 See Cohen et al., Deepwater Drilling: Law, Policy and Economics of Firm Organization and Safety, 29-31. See

The Big Oil Bailout Prevention Liability Act of 2010: Hearing on S. 3305 before the S. Comm. on Environment and 

Public Works, 111th Cong. (2010) (statement of Ken Murchison, Louisiana State University), 7-8. 35 Cohen et al., Deepwater Drilling: Law, Policy and Economics of Firm Organization and Safety, 31. See also

Greenstone, 4 (“We cannot know whether the result would have been different without the cap, but what is clear is 

that there were economic incentives for companies to cut corners. Those incentives will remain as long as the cap is 

set at such a low level relative to the risk”). 36 BP, Claims and Government Payments Gulf of Mexico Oil Spill Public Report (December 2, 2010).
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industry sources have testified that the offshore energy insurance market currently has a finite 

amount of liability insurance capacity -- in the range of $1 billion to $1.5 billion per company.37 

One insurance industry representative described a range of obstacles for insurers and purchasers 

of insurance, including but not limited to: 1) that the entire global energy market is limited to $3 

billion in premiums; 2) that higher liability limits would increase the demand for coverage, 

exhausting available capacity; and 3) that underwriting for low probability, high severity events 

is challenging for insurers and reinsurers.38 Similarly, the Congressional Research Service, 

based upon a review and study of the offshore drilling insurance business, outlined potential 

consequences for the insurance market that would result from increase or removal of liability 

limits. These include: 1) the emergence of a “hard” market –high prices and limited coverage –

in contrast to the “soft” insurance market for offshore liability prior to the spill;39 2) higher costs 

of insurance based upon higher strict liability limits, resulting in some operators choosing to selfinsure;40 and 3) reluctance of private insurers to commit capital to undefined risks, based on 

unknown legislative changes and litigation risk.41

It is also possible that the market will eventually adjust to the new liability regimes.

According to the extensive Congressional Research Service analysis, the insurance market would 

likely support the use of alternative sources of insurance capacity, such as “reinsurance 

sidecars,” catastrophe bonds or energy insurance financial futures and options, to spread risk and 

increase available capital in the insurance market.

 

42 Another commentator has suggested that 

insurance capacity may also increase if there is a shift towards writing insurance policies for 

facilities, rather than for companies.43 In short, the potential impact on the insurance industry is 

uncertain; for this reason, an approach that phases in changes to the liability cap and financial 

responsibility requirements may be desirable.

3. Potential impact on the structure of the offshore drilling industry 

Representatives of the offshore drilling and insurance industries have predicted that, in 

light of the current lack of availability of insurance described above, an increase in the liability 

cap, and certainly elimination of the liability cap, will result in an exodus of smaller, independent 

companies from offshore drilling operations because they would not be able to obtain the 

 37 See, e.g., Hearing on Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and 

Related Statutes, Before the H. Comm. on Transportation and Infrastructure, 111th Cong. (2010)(statement of Dr. 

Robert Hartwig, President and Economist, Insurance Information Institute), 13; see King, Deepwater Horizon Oil 

Spill Disaster: Risk, Recovery, and Insurance Implications, 2. 38 Hearing on Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and Related 

Statutes, Before the H. Comm. on Transportation and Infrastructure, 111th Cong. (2010)(statement of Dr. Robert 

Hartwig, President and Economist, Insurance Information Institute), 13. 39 King, Deepwater Horizon Oil Spill Disaster: Risk, Recovery, and Insurance Implications, 17. 40 Id., 16 (“Operators may find themselves assuming or retaining higher levels of self-insurance, which might affect 

the BOEMRE’s offshore oil and gas leasing bidding and ultimately the royalties earned for the U.S. Treasury.”) 41 Id., 15-18. 42 Id., 17-18. 43 Merrill, Insurance and Safety Incentives, 12 (suggesting that if insurance companies focus more on risk, they may 

offer policies designed for specific facilities; in turn, greater diversification of risk would induce greater insurance 

capacity).
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insurance necessary to operate.

44

First, the independents develop many smaller and end of life fields that the larger firms 

find uneconomic or inefficient

They advance several arguments for ensuring that legislation 

does not lead to such a result.

45; thus, excluding the independents would probably result in 

reduced production. Second, the exit of some businesses would decrease the competition for 

lease sales, most likely resulting in a decrease in the amount of money the government receives 

for lease sales.46 Third, excluding the independents from drilling and production would have 

significant negative impacts on employment and economic activity in the Gulf oil states.47

Finally, if the elimination of or increase in the cap were applied retroactively it could cause 

operators to relinquish leases, which would in turn result in a decline in production in some 

areas.48

There are also counterarguments to the proposition that policy reform should be aimed at 

ensuring the ability of small companies to remain in the offshore drilling business. Economists 

have argued that the market should drive which businesses engage in the drilling business, and if 

small companies cannot afford to drill safely, they should not do so.

 These points underscored the sensitivity of the liability cap issue in early congressional 

debates; and were at least one reason that the Senate rejected the Reid Clean Energy legislation.

49 There is also some 

evidence that the effect on employment would not actually be substantial because there would 

simply be a shift in the companies that engage in drilling operations and provide jobs.

50

4. Possible ways to mitigate adverse impact on smaller, independent companies of 

raising the liability cap and increasing financial responsibility requirements 

The impact on smaller, independent companies could potentially be mitigated in several 

ways. Options include: 

• Raising but not eliminating the liability cap. 

• Requiring pooling of risk in a mutual fund, as proposed in the Landrieu bill, which 

requires participation in a mutual fund. One downside to the mutual liability pool is that 

 44 Hearing on Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and Related 

Statutes, Before the H. Comm. on Transportation and Infrastructure, 111th Cong. (2010)(statement of Charles 

Anderson, SKULD North America); Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act 

of 1990 and Related Statutes: Hearing Before the H. Comm. on Transp. & Infrastructure, 111th Cong. (June 9, 

2010) (Statement of Jack Gerard, President and CEO, American Petroleum Institute). 45 Scott Gutterman (President and CEO, LLOG Exploration Co, LLC), interview with Commission staff, November 

19, 2010. 46 Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and Related Statutes: 

Hearing Before the H. Comm. on Transp. & Infrastructure, 111th Cong. (June 9, 2010) (Statement of the Honorable 

James L. Oberstar), 3; Cohen et al, Deepwater Drilling: Law, Policy and Economics of Firm Organization and 

Safety, 42. 47IHS Global Insight (USA), Inc., The Economic Impact of the Gulf of Mexico Offshore Oil and Natural Gas 

Industry and the Role of Independents, 5-6. 48 See King, Deepwater Horizon Oil Spill Disaster: Risk, Recovery, and Insurance Implications, 19. 

49 Hearing on Liability and Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and Related 

Statutes, Before House Comm. on Transportation and Infrastructure, 111th Cong. (2010) (Statement of Michael 

Greenstone, MIT), 5; Nath, Economists’ Perspectives on Liability Caps and Insurance for the Offshore Oil and Gas 

Industry in the Wake of the Macondo Blowout, 18 (quoting economists Kenneth Arrow and Don Fullerton) 50 Nath, Economists’ Perspectives on Liability Caps and Insurance for the Offshore Oil and Gas Industry, 19-21

(quoting numerous economists who reject the theory that the impact of unlimited liability on small firms would lead 

to job loss).
9

it decreases incentives for individual firms to improve safety practices. This problem 

could potentially be addressed by tying premium levels to financial and safety risk posed 

by an individual company’s activities. The Landrieu bill directs the Secretary of the 

Interior to determine how to set premiums.51

• Phasing in of financial responsibility requirements until the insurance industry adjusts to 

the demand for insurance and/or new financial products are created.52

Adverse effects on small companies could also be offset by partnering with firms with deeper 

pockets. “Joint ventures” between larger and smaller companies already exist, and a policy 

change is probably not necessary to encourage such arrangements. 

5. Risk evaluation: how and who

Taking Risk into Account 

BOEMRE currently determines level of financial responsibility based upon potential 

worst case discharge, as required by the Oil Pollution Act. Although this analysis to some 

degree accounts for risk associated with individual drilling activities, it does not fully account for 

the range of factors that could affect the cost of a spill. Accordingly, in the regulatory context, 

staff has advised that the Commission may wish to recommend that BOEMRE require more 

stringent management of geological, environmental and operational risk, to ensure that the 

regulatory scheme better responds to potential consequences of spills, particularly in high-risk 

and frontier areas. Similarly, the Commission may decide to recommend that BOEMRE 

consider specific criteria relevant to a determination of risk, when establishing financial 

responsibility limits applicable to a particular company or facility. Risk criteria could include, at 

the least: geological and environmental considerations, the applicant’s experience and expertise, 

and applicable risk management plans. This increased scrutiny would provide an additional 

safeguard against unqualified companies entering the offshore drilling market.53

Congress has recently considered a variety of related reforms. The CLEAR Act, for 

example, raised the Oil Pollution Act’s maximum financial responsibility to $300 million. But it 

allowed the regulator to prescribe a lower amount, for a responsible party, based on the 

following criteria: (i) the market capacity of the insurance industry to issue such instruments; (ii) 

the operational risk of a discharge and the effects of that discharge on the environment and the 

region; (iii) the quantity and location of the oil and gas that is explored for, drilled for, produced, 

or transported by the responsible party; (iv) the asset value of the owner of the offshore facility, 

including the combined asset value of all partners that own the facility; (v) the cost of all 

removal costs and damages for which the owner may be liable under this Act based on a worstcase-scenario; (vi) the safety history of the owner of the offshore facility; (vii) any other factors 

that the President considers appropriate.54

 51 The Landrieu proposal applies to all companies; one potential modification, which would be favored by the 

majors, would be to allow the largest companies to opt out and self insure. 

52 See Merrill, Insurance and Safety Incentives, 6. 53 Greater regulatory focus on risk management would also likely result in increased insurance capacity, since 

presumably insurance companies will be more willing to provide insurance where risks are lower. Merrill, Insurance 

and Safety Incentives, 15. 54 CLEAR Act, § 703.
10

Similarly, a bill introduced in the Senate would require the regulator to determine liability 

limits for offshore facilities, based upon: (i) the water depth of the lease; (ii) the minimum 

projected well depth of the lease; (iii) the proximity of the lease to oil and gas emergency 

response equipment and infrastructure; (iv) the likelihood of the offshore facility covered by the 

lease to encounter broken sea ice; (v) the record and historical number of regulatory violations of 

the leaseholder under the Outer Continental Shelf Lands Act (43 U.S.C. 1331 et seq.) or the 

Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.) (or the absence of such a record or 

violations);(vi) the estimated hydrocarbon reserves of the lease; (vii) the estimated well pressure, 

expressed in pounds per square inch, of the reservoir associated with the lease; (viii) the 

availability and projected availability of funds in the Oil Spill Liability Trust Fund established by 

section 9509 of the Internal Revenue Code of 1986;( ix) other available remedies under law;(x) 

the estimated economic value of nonenergy coastal resources that may be impacted by a spill of 

national significance involving the offshore facility covered by the lease;(xi) whether the 

offshore facility covered by the lease employs a subsea or surface blowout preventer stack; and 

(xii) the availability of industry payments.55

Roles of Government and Private Entities 

There are clear benefits to having an external party evaluate risk and monitor individual 

firms’ safety compliance. As noted above, it is appropriate for the government (BOEMRE) to 

play this role, to promote enhanced risk management in offshore operations and to discourage 

unqualified companies from performing offshore drilling operations. There is also a role for 

private insurance companies in evaluating risk. Unlike the government, insurance companies 

have both the financial incentives and the resources to monitor risk-taking and lower their own 

exposure.

56 If liabilities are borne by insurance carriers, carriers will also have a strong incentive 

to promote new safety techniques and methods by encouraging other institutions (including 

insured firms) to engage in such research. They may also require certification from private firms 

specializing in risk management.57

6. Providing for full victim compensation

If liability and financial responsibility limits are not set at a level that will ensure 

payment of damages for all spills, then another source of funding will be required to fully 

compensate victims of a spill. The federal government could pay additional compensation costs, 

but this approach requires the taxpayer to foot the bill, essentially subsidizing the drilling 

activity.

If the Oil Spill Liability Trust Fund per-incident limit is raised, then the costs are 

essentially borne by those who benefit from oil production activities. Reliance on the Trust Fund 

to fully compensate victims would not necessarily provide an incentive to offshore facilities to 

mitigate risks because risks are pooled. Such a reduction in incentives counsels against having 

the Trust Fund be the sole source of compensation for damages in the event of a big spill. 

However, raising the per-incident payout limit would help ensure that victims have access to 

 55Oil Spill Compensation Act of 2010, S. 3542, 111th Cong. (2010), §301(e). 56 See Cohen et al, Deepwater Drilling: Law, Policy and Economics of Firm Organization and Safety, 36-37. 57 See Merrill, Insurance and Safety Incentives, 15-16.
11

compensation without the need to seek further specific funding from Congress or otherwise 

burden the taxpayer. 

Note that currently, there is no overall cap on the Trust Fund. From 2005 – 2008, there 

was a $2.7 billion cap on the Fund, but it was removed as part of the Stimulus package in 2008. 

If the per-incident limits are raised, it will be important 1) that the Fund be allowed to continue 

to grow, and 2) that if a cap is again imposed on the Fund, the cap is significantly higher than the

established per-incident limit on payouts.