Liability for Environmental Damages from the Offshore Petroleum Industry: Strict Liability Justifications and the Judgment-Proof Problem

Abstract

After the Deepwater Horizon oil spill of 2010, one of the worst environmental man-made disasters and the largest ever oil spill in the United States, scholars and government investigators analyzed the offshore regulatory regime and its implementation in search of failures that led to the accident and possible solutions. Relatively few critiques of the regulatory regime discussed strict liability for environmental damages from oil spills. Enacted in the Oil Pollution Act of 1990, this regime is a part of the solution, but is not a complete answer. One issue not addressed by this liability regime is the judgment-proof problem — some injurers are unable to pay the full amount for which they have been found legally liable because they simply do not have the economic assets. The judgment-proof problem significantly reduces deterrence and undercuts the protection that the strict liability regime seeks to implement. British Petroleum’s wealth and ability to repay tens of billions of dollars after the Deepwater Horizon spill obscured this issue. But the judgment-proof problem may arise in future oil spills if the operating company’s total assets are worth less than the actual amount of damages. The likelihood of this occurring increases in times of decreasing oil prices, when the value of some drilling companies is dramatically diminished. A number of policy tools used in combination could mitigate the judgment-proof problem: compulsory liability insurance, vicarious liability,minimum asset requirements, special tax, and criminal liability. Currently, a requirement for both financial responsibility and criminal liability has been incorporated into both U.S. and European legal regimes. To minimize the risk of judgment-proof parties, however, the United States should utilize a clearer requirement of minimum assets combined with liability insurance and additional vicarious liability for parties who have some control over the injurer’s behaviour (i.e. lenders). As practical difficulties may prevent the implementation of all these tools, additional policies should be explored to address the problem during this time of diminishing oil company values, such as a requiring that operating companies pay part of their dividends into a compensation fund and encouraging small companies to merge and create an entity with higher total assets.