One issue arising out of the Gulf oil spill is liability for the secondary costs that stem from offshore oil and gas accidents. The liable party is responsible for cleanup costs, and that law should remain. Although BP has agreed to cover all legitimate claims, the current system does not sufficiently align risk and liability with individual behavior. It socializes risk by spreading the costs across the entire industry and does not inherently promote safe operations. Raising the cap without more comprehensive reform would fail to fix these problems and could effectively shut down offshore drilling entirely if activities are made unreasonably and artificially burdensome.

The Heritage Foundation’s solution accurately assigns risk, holds oil and gas companies fully liable, promotes safety, and guards against frivolous lawsuits. To achieve this, Congress must:

Remove the $75 million liability cap and replace with a tiered system that relies on private insurance to cover liability for normal operations up to $1 billion;

Replace the Oil Spill Liability Trust fund with an industry funded, private, voluntary pooled insurance fund for claims over $1 billion. The claims process will ensure that legitimate claims are fully and efficiently paid while protecting responsible parties from frivolous lawsuits;

Task private risk assessors to determine liability coverage requirements for specific off shore oil and gas operations (exploration, extraction, transportation, etc). Professional risk assessors are better prepared to make objective, informed calculations of risk than government bureaucrats and politicians; and

Require companies to demonstrate an ability to insure against the liability risk associated with operations in federal waters. The means for meeting liability coverage may include, but is not limited to self-insurance, insurance pools, dedicated assets, or private insurance policies.

And industry should:

Create an Organization for Offshore Safety Operations (OOSO) to collect/distribute safety data, establish and certify best practices, and share information, as appropriate, with federal regulators. Third party monitoring would reduce corner cutting and provide sufficient response time to anomalies. Further, safety certifications from such an organization could inform insurance premiums and risk assessments; and

Demonstrate response and preparedness to ensure adequate response capabilities can be brought to bear in the case of an accident. Doing so will reduce the economic and environmental damage of an oil spill. The response and preparedness would require liable parties to: accurately assess damage of a spill, have the necessary equipment, have the capacity to participate in disaster response, ensure proper and adequate federal oversight and provide for a complementary federal response capability.

This system:

Promotes safety: Assigning liability calculations and insurance premiums to accurate risk assessments will create a strong financial incentive to operate safely. Including a third-party safety certification process will ensure that the best techniques and technologies are being used will be complementary to federal regulations.

Assigns full liability: Relying on professional risk assessors to determine liability removes the need for arbitrary, legislated liability caps. Creating an independent administrative process, as opposed to relying on courts and lawyers, will protect all parties involved in any claims process.

Protects the tax payer: Oil and gas operators are fully liable for damages. Should legitimate claims exceed a company’s resources, then the offshore oil and gas industry as a whole will be assessed the difference. The not only protects the tax payer but creates peer-pressure to engage in safe operations.

Allows offshore gas and oil exploration to continue: Allowing multiple insurance options to meet liability under a $1 billion and creating an industry funded, government overseen, insurance pool for larger claims will allow small and large companies to continue operating.

Check out the full paper, “Oil Spill Liability: A Plan for Reform.”