By David J. DePaolo
WorkCompCentral

The explosion of the Deepwater Horizon rig and continuing oil gusher is not only the greatest ecological disaster in the history of the world, but will also prove to be the greatest challenge the property and casualty industry has ever faced. As I write this, news reports of 50% increases in reinsurance for companies with exposure to states affected by the spill are just hitting the news.

Indeed, this disaster has broad implications to the workers’ compensation industry as well.

The scope of this disaster is still taking shape, but we now know that the volume of oil ultimately to be deposited onto the ecology is going to be many times that of the Exxon Valdez. There is no certifiable way to measure the actual quantity of oil that is being spilled from this well, but even the most conservative estimates are now at millions of gallons per day.

We have all read, heard, and watched the various news and event reports on the impact on Gulf state economies and ecologies, and of course the toxic waste from this “spill” will follow the currents and swing around the Florida Keys to threaten the Atlantic coast as well.

Property and casualty insurers will be facing claims for lost properties, business losses, toxic exposure, and many, many other forms of liability and property claims that ultimately are the product of the Deepwater Horizon explosion. Indeed, this disaster will magnify exponentially as the hurricane season, already forecast to be a very active one, stirs things up even more.

But what about the workers’ compensation industry? How does this disaster factor into work injury claims beyond the eleven who died on the rig and the seven who were taken to NAS New Orleans? I believe that this disaster will also prove to be a huge burden on the workers’ compensation industry for many, many years and that rates both in the directly affected states, and even those not directly affected will skyrocket. I anchor my belief in several disassociated factors:

• Toxic exposure – workers who come into contact with the environment polluted by this spill are going to be subjected to significant toxic levels of hydrocarbon, and they don’t need to be in direct contact with it.
• Payroll decomposition – work comp is based on payroll; entire industries along the Gulf coast are going to disappear, ergo so are jobs, ergo so will premium.
• Reinsurance availability – If reinsurance is going to be offered in the next few years, it will cost a fortune; already reinsurance for Gulf states insurers are being raised by 50%, and this is just the start.
• Double-dip recession – the economists have warned at the beginning of this recession that this one was different, and that there was a real risk of a “double-dip” recession should consumers not step and start spending or if there was a big enough disaster; we now have a disaster that will decimate hundreds of thousands of jobs and with that any prospect of increased consumer spending (and that doesn’t count the decline in spending when the price tag of this spill hits the pumps in the form of fuel price increases and taxes to pay for the clean up).
  

Toxic Exposure

Crude oil, and of course its refined derivatives, are extremely toxic. Toxic exposure can occur through skin contact, inhalation of contaminated air or soil, and ingestion of contaminated water or food. These can occur simultaneously. 

Exposure pathways may result in localized toxicity (e.g., irritation of the skin following contact), but most health effects are systemic because ingredients can move throughout the body.  Exposure varies based on the duration and concentrations in contaminated media. Differences may result from location, work and personal activities, age, diet, use of protective equipment, and other factors.  Concurrent exposure to other toxic chemicals must be considered when evaluating toxic effects. Some chemicals in crude oil are volatile, moving into air easily, and these can often be detectable by smell.

Crude oil and its derivatives readily alter the function of cells and the organs where they are located, including altering DNA. It is not likely that there would be a large population with acute exposure, but it is quite likely that there will be a large population with chronic exposure given the range, depth and breadth of this spill. Chronic health effects range from cancer to permanent neurological damage and can affect the respiratory system, the liver, kidneys, circulatory system, immune system, musculoskeletal system, nervous systems including the brain, reproductive system, endocrine system, gastrointestinal system and sensory systems.

Payroll Decomposition

Workers’ compensation premiums (including Longshore and Harbor Act workers’ compensation) is based on payroll. As early as May 6 economists predicted a near complete decimation of the Gulf Coast fishing industry in the short term with no prediction on the long term effects because no one can predict how fisheries are going to respond to the toxicity.

The shipping industry in the Gulf states, and consequently any region that ships to or from those states, will be threatened because oil will cling to the hulls of ships traveling through the region and it is illegal for ships to enter U.S. ports with dirty hulls. Indeed the entire Mississippi River system will be affected as it is a critical transportation route for the economy of the U.S. heartland.

Directly affected industries include tourism, especially in Florida along the Gulf Coast, and it is looking increasingly like tourism in the Keys and along the Atlantic Coast will also be affected. Asset values along the immediate spill impact zone are in free fall presently, and if the spill makes land fall along Florida’s prized white sand beaches, the tourism industry will go elsewhere – tourism is one of Florida’s largest employment industries and a sharp decline impacts many supporting industries.

Reinsurance Availability

The most immediate impact on reinsurance premiums is for oil operations obviously. But ultimately the grand scheme of spreading the risk hits all P&C lines, and workers’ compensation, which has seen its share of reinsurance supply and demand problems in the past following the Unicover debacle, is not immune.

Workers’ compensation, known as a long tail line, generally provides for medical attention through the life of the claim and the claimant/injured worker is not required to “cash out”.

Mentioned above, the toxic exposure claims that will arise as a consequence of the Deepwater Horizon disaster will certainly involve catastrophic, long term medical claims complete with cancer, nervous system issues, etc. All complex, nearly incurable and highly expensive medical claims. Ultimately reinsurers are not going to offer coverage at claim (or “strike”) points anywhere close to the exposure levels traditionally offered because the risk of having to insure a multi-million dollar cancer treatment is too great. Eventually front line carriers won’t be able to find reinsurance at risk levels that are acceptable to their business models. When that happens they stop writing, and when they stop writing rates skyrocket.

Double-Dip Recession

We are already feeling the hits to the workers’ compensation industry from the original recessionary transgression. Premiums are down, claims are down, jobs have evaporated, and costs continue to increase. The threat of a recession on top of a recession is now very real, and with it will go additional jobs, decreased spending, lower payrolls, etc.

This means less premiums, and in a cash flow sensitive business line like workers’ compensation, that means only two things will happen: rates must go up to support operations and jobs will be shed to decrease expenses.

Conclusion

I don’t believe for a minute that I have identified all of the issues that are yet to come of the Deepwater Horizon explosion. The well has yet to be capped, and may not be capped for many months, and every day the well spews toxins into the Gulf Coast region the affect on the ecology and the economy increase exponentially.

The sky isn’t falling – it fell. We just don’t know the full impact yet.

References

Gulf Oil Spill Health Hazards; Dr. Michael Harbut, Karmanos Cancer Institute & Dr. Kathleen Burns, Sciencecorps,  http://www.sciencecorps.org/crudeoilhazards.htm

CDC, 1999:  http://www.atsdr.cdc.gov/ToxProfiles/tp123.pdf
 
OSHA, 2010: http://www.osha.gov/Publications/3172/3172.html

The Business Insider: http://www.businessinsider.com/the-deepwater-horizon-oil-spill-could-change-everything-2010-5

The Economic Impact to Northwest Florida of the Deepwater Horizon Oil Spill, Harper PhD, University Western Florida: http://www.frbatlanta.org/documents/rein/southpoint/harper_economic_impact.pdf

Reuters News Service: http://uk.reuters.com/article/idUKTRE65227N20100603

<i>David J. DePaolo, a former workers' compensation defense attorney, is chief executive officer and founder of WorkCompCentral Inc.</i>