SPEAKERS CONTENTS INSERTS
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THE FEDERAL REQUIREMENTS FOR VESSELS TO OBTAIN EVIDENCE OF FINANCIAL RESPONSIBILITY FOR OIL SPILL LIABILITY UNDER THE OIL POLLUTION ACT OF 1990
PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Transportation and Infrastructure. Additional material pertinent to this transcript may be found on the web site of the Committee at [http://www.house.gov/transportation]. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.
COAST GUARD AND MARITIME TRANSPORTATION
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TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTH CONGRESS
JUNE 26, 1996
Printed for the use of the
Committee on Transportation and Infrastructure
COMMITTEE ON TRANSPORTATION AND INFRASTUCTURE
BUD SHUSTER, Pennsylvania, Chairman
DON YOUNG, Alaska
WILLIAM F. CLINGER, Jr., Pennsylvania
THOMAS E. PETRI, Wisconsin
SHERWOOD L. BOEHLERT, New York
HERBERT H. BATEMAN, Virginia
Page 3 PREV PAGE TOP OF DOCHOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
SUSAN MOLINARI, New York
WILLIAM H. ZELIFF, Jr., New Hampshire
THOMAS W. EWING, Illinois
WAYNE T. GILCHREST, Maryland
Y. TIM HUTCHINSON, Arkansas
BILL BAKER, California
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
PETER I. BLUTE, Massachusetts
JOHN L. MICA, Florida
JACK QUINN, New York
TILLIE K. FOWLER, Florida
VERNON J. EHLERS, Michigan
SPENCER T. BACHUS, Alabama
JERRY WELLER, Illinois
ZACH WAMP, Tennessee
TOM LATHAM, Iowa
STEVEN C. LaTOURETTE, Ohio
ANDREA SEASTRAND, California
RANDY TATE, Washington
SUE KELLY, New York
RAY LaHOOD, Illinois
Page 4 PREV PAGE TOP OF DOCBILL MARTINI, New Jersey
DAN FRISA, New York
TODD TIAHRT, Kansas
RICHARD H. BAKER, Louisiana
JAMES L. OBERSTAR, Minnesota
NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
WILLIAM O. LIPINSKI, Illinois
ROBERT E. WISE, Jr., West Virginia
JAMES A. TRAFICANT, Jr., Ohio
PETER A. DeFAZIO, Oregon
BOB CLEMENT, Tennessee
JERRY F. COSTELLO, Illinois
PETE GEREN, Texas
GLENN POSHARD, Illinois
BUD CRAMER, Alabama
BARBARA-ROSE COLLINS, Michigan
ELEANOR HOLMES NORTON, District of Columbia
JERROLD NADLER, New York
PAT DANNER, Missouri
ROBERT MENENDEZ, New Jersey
JAMES E. CLYBURN, South Carolina
CORRINE BROWN, Florida
JAMES A. BARCIA, Michigan
Page 5 PREV PAGE TOP OF DOCBOB FILNER, California
EDDIE BERNICE JOHNSON, Texas
BILL K. BREWSTER, Oklahoma
KAREN McCARTHY, Missouri
FRANK MASCARA, Pennsylvania
THOMAS C. SAWYER, Ohio
GENE TAYLOR, Mississippi
JUANITA MILLENDER-McDONALD, California
ELIJAH E. CUMMINGS, Maryland
Subcommittee on Coast Guard and Maritime Transportation
HOWARD COBLE, North Carolina, Chairman
TILLIE K. FOWLER, Florida
DON YOUNG, Alaska
SUSAN MOLINARI, New York
BILL BAKER, California
VERNON J. EHLERS, Michigan
BUD SHUSTER, Pennsylvania
BOB CLEMENT, Tennessee
ROBERT A. BORSKI, Pennsylvania
ELIJAH E. CUMMINGS, Maryland
GENE TAYLOR, Mississippi
JAMES L. OBERSTAR, Minnesota
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Gallagher, John J., Chairman of the Board, Gallagher Marine Systems, Inc
Hobbie, Richard H., III, President, Water Quality Insurance Syndicate, on behalf of the American Institute of Marine Underwriters (AIMU)
Horrocks, Chris, Secretary General, International Chamber of Shipping
Ringbakken, Svein, Chief Counsel, International Association of Independent Tanker Owners (INTERTANKO)
Sheehan, Daniel F., Director, National Pollution Funds Center, U.S. Coast Guard
Wyman, Winthrop, Vice Chairman, OMI Petrolink Corporation
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Gallagher, John J
Hobbie, Richard H., III
Page 7 PREV PAGE TOP OF DOC Horrocks, Chris
Ringbakken, Svein, submitted statement of Dagfinn Lunde
Sheehan, Daniel F
SUBMISSIONS FOR THE RECORD
Horrocks, Chris, Secretary General, International Chamber of Shipping, additional comments, July 15, 1996
Sheehan, Daniel F., Director, National Pollution Funds Center, U.S. Coast Guard, responses to post hearing questions
ADDITIONS TO THE RECORD
DiBona, Charles J., President, American Petroleum Institute, letter to Rep. Coble, July 26, 1996
The International Regime for Liability and Compensation for Oil Pollution Damage, statement
International Group of P and I Clubs, statements
Page 8 PREV PAGE TOP OF DOC Jacobsson, Mans, Director, International Oil Pollution Compensation Funds 1971 and 1992, statement
Roverud, Steven M., Chairman of the Board, Trunkline Gas Company, letter to Rep. Coble, July 17, 1996
Shea, Donald B., President, United States Chamber of Shipping, letter to Rep. Coble, July 19, 1996
Smith, Duncan C., III, Counselors at Law, Dyer, Ellis, and Joseph, on behalf of the Greek Shipping Co-Operation Committee, letter with enclosure to Rep. Coble, July 3, 1996
THE FEDERAL REQUIREMENTS FOR VESSELS TO OBTAIN EVIDENCE OF FINANCIAL RESPONSIBILITY FOR OIL SPILL LIABILITY UNDER THE OIL POLLUTION ACT OF 1990
WEDNESDAY, JUNE 26, 1996
U.S. House of Representatives,
Subcommittee on Coast Guard and Maritime Transportation,
Committee on Transportation and Infrastructure,
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The subcommittee met, pursuant to notice, at 10:04 a.m. in room 2167 Rayburn House Office Building, Hon. Howard Coble (chairman of the subcommittee) presiding.
Mr. COBLE. The Subcommittee on Coast Guard and Maritime Transportation will come to order.
The ranking member, the gentleman from Tennessee, Mr. Clement, is en route. I don't like to penalize people who have, in a timely way, made the effort to be here, so we will start the hearing, and then when Bob gets here we'll pick it up.
Before I give my formal statement I want to visit informally with you all for just a minute.
The environment is an issue that remains volatile, and any time anyone suggests any changes, he or she is automatically labeled an extremist.
I sort of resent that. In fact, strike that, I don't halfway resent it, I thoroughly resent it.
I don't know of any democrat, republican, liberal, conservative, who is in favor of oil spills, who is in favor of dirty water, who is in favor of dirty air, but just because people suggest possibly applying different standards to these problems does not mean that we're not in favor of a sound environment.
Page 10 PREV PAGE TOP OF DOC So I just wanted to get that out front before we start our hearing today.
I welcome the gentleman from Tennessee. Bob, it's good to have you here.
Mr. CLEMENT. Thank you, Mr. Chairman.
Mr. COBLE. And the lady from Florida.
The subcommittee is meeting today to hear testimony on the Federal requirements for vessels to obtain evidence of financial responsibility for oil spill liability under the Oil Pollution Act of 1990.
As you all no doubt know, we will generally limit opening statements to the chairman and the ranking minority member. If other members have statements, they may be included in the hearing record.
I welcome all of you to today's hearing to review the Coast Guard's implementation of the financial responsibility requirements for vessels under the Oil Pollution Act of 1990.
It has been several years since the Coast Guard issued the first certificate of financial responsibility for vessels operating in U.S. waters. The witnesses today have firsthand experience with the current regulatory regime and will give the subcommittee a valuable perspective on the effectiveness of the Coast Guard's system.
Page 11 PREV PAGE TOP OF DOC The business section in Sunday's ''Washington Post'' featured an article on the oil industry's emphasis on vessel safety that is credited with sharply reducing the risk of major oil spills in United States waters.
The oil industry recognized that oil spills are not only bad and harmful for the environment; they're bad and harmful for the business community.
I commend the oil transportation industry for working to ensure that oil transportation in U.S. waters is as safe as possible. Of course, when oil spills do occur, the spiller must promptly respond to the spill and compensate the victims of the oil spill.
The Oil Pollution Act of 1990 established a system that was designed to clean up spills and compensate oil spill victims promptly and hopefully without costly litigation.
Under the Oil Pollution Act, vessel operators must demonstrate that they have a reasonable level of assets available to clean up the oil that they may spill and compensate victims for oil spill damages.
Today's hearing will focus on the effectiveness of the Coast Guard's implementation of the financial responsibility requirements under the Oil Pollution Act. We must make sure that the Federal financial responsibility requirements for the oil industry are implemented in the most cost-effective manner possible.
Every dollar that is required to pay for Federal regulatory requirements is a dollar that may be diverted from vessel safety improvements. We must, it seems to me, develop a common-sense oil spill regime that encourages oil spill prevention to the greatest extent possible, while at the same time avoiding unnecessary regulatory requirements that add little to the environmental protection.
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This is what I had in mind when I uttered my informal statement.
The Chair is now pleased to recognize my friend from Tennessee, the ranking member of the subcommittee, Mr. Bob Clement.
Mr. CLEMENT. Thank you, Mr. Chairman.
The chairman and I have a real friendship, as well as a real respect for one another, and it's a pleasure working with him at any time.
Thank you, Mr. Chairman, for scheduling this hearing on certificates of financial responsibility commonly referred to as COFRs, that are required under the Oil Pollution Act of 1990 to help insure that vessel owners have the sufficient resources to pay for the cleanup and damages related to any oil spill they may cause.
Mr. Chairman, as you may recall, we both were original co-sponsors of the Oil Pollution Liability Compensation Act of 1989. We served on the Subcommittee on Coast Guard and Navigation in the 101st Congress when this bill was written.
Today's hearings will give us the opportunity to review how these revisions of OPA have been implemented by the Coast Guard. We'll receive testimony on the impact of COFR requirements on the industry, and be able to see the extent to which these COFRs will be used to pay for the cleanup of oil spills and compensate those that suffer losses from these accidents.
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Two weeks ago this subcommittee received much testimony on the Jones Act. Some carriers testified that they would like to use old single-hull tankers to transport grain in the coastwise trade once they reach their phase-out date under OPA. However, it has been brought to our attention that these vessels may continue to have a tanker COFR, even though they are not moving oil in bulk but are moving bulk grain products.
It is this type of a requirement that increases the cost of moving dry bulk products in the coastwise trade, when compared to moving dry bulk products on foreign-flagged dry bulk carriers.
Again, thank you, Mr. Chairman, for scheduling these hearings. I look forward to hearing the testimony of the Coast Guard, the tanker industry, and the insurance industry on their views on the certificate of financial responsibility requirements for oil spill liability under the Oil Pollution Act of 1990.
Mr. COBLE. I thank the gentleman.
Without objection, any opening statements by members of the subcommittee will be made part of the record.
I am now pleased to introduce our first panel: Mr. Daniel Sheehan, director of the National Pollution Funds Center, United States Coast Guard.
Mr. Sheehan, as you know, we try to, on this subcommitteewell, strike that. We ask our witnesses, if they can, to present their oral testimony within a 5-minute time frame. If you can't do that you will not be keel-hauled and hauled off to jail. We're not on a real inflexible run today, but we do have other meetings scheduled today, so if you and the other witnesses can keep in mind, if you can stay on or about the 5-minute range, that will be appreciated. Keep in mind, of course, all written testimony will be made a part of the record.
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It's good to have you with us, Mr. Sheehan.
TESTIMONY OF DANIEL F. SHEEHAN, DIRECTOR, NATIONAL POLLUTION FUNDS CENTER, U.S. COAST GUARD
Mr. SHEEHAN. Thank you, Mr. Chairman. I will try and meet those guidelines.
Mr. Chairman, members of the Coast Guard Subcommittee, it is my pleasure to be here this morning to address the economic impact of certificates of financial responsibility. The acronym, of course, as many of you know, is COFRs.
The Oil Pollution Act of 1990 significantly expanded a program which had its genesis in the Federal Water Pollution Control Act. The principle upon which the program is based and which is embodied in the law, itself, is that a polluter be able to demonstrate the ability to pay for pollution cleanup and damage up to certain specified limits.
OPA 1990 raised those limits significantly above what was in the FWPCA, as well as substantially expanding the scope of damages that a polluter was potentially liable for.
When I last testified, in July of 1994, the Coast Guard had just published the interim final rule implementing the OPA 1990. To say that the time between the 1 July publication and the 28 December implementation deadline for self-propelled tankers was one of substantial activity certainly understates the incredible effort that was undertaken by the national and international financial community, ship owners and operators, the insurance and surety industry, and, indeed, members of the international group of P&I clubs, themselves, to find acceptable mechanisms to address the requirements laid down in OPA 1990.
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As you may recall, when we testified in July of 1994 our estimates, assuming a worst-case scenario of cost projections, were that it could cost the maritime industry and ultimately the American public approximately $450 million a year for this COFR program. As indicated in our written testimony today, those costs are substantially lower and are in the range of $70 million per year.
What do the citizens of the United States get for that $70 million? They get the assurance that vessels which ply the waters of the U.S. and are subject to OPAand this includes most types of vessels and varieties of vessels above 300 gross tonsthat they have the financial resources to respond for spill removal and for the broader range of damages that individuals, companies, and other entities might suffer as a result of the spill. They also are benefiting from companies that are clearly doing a better job in the maintenance and operation of their fleets.
Our Coast Guard field inspectors are reporting this positive change, and the statistics are beginning to verify their qualitative observations.
The total oil spill and prevention and response system in the United States has been markedly improved through the system integration and coordination brought together by OPA 1990, and certainly through the active cooperation and participation by the maritime industry, the numerous Federal agencies, State and local governments, and all through the participation, as well, in the area planning committees.
It's my view that title one of OPA 1990 is a full partner in that system, and that the COFR provisions play a critical role. The value of the COFR provisions has been demonstrated time and again. As a case in point, I would refer to the unfortunate spill that occurred in Rhode Island in January. The spill occurred from a barge, and it's an example of the impact that the law has had with respect to the financial impact and standpoint of this law.
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WQIS, whose president is testifying today, was the COFR guarantor for that barge. His organization promptly stepped forward with funding for the removal, as well as establishing a claims office to handle the myriad of claims that ensued.
COFRs are part of the overall system that was implemented and improved as a results of OPA 1990, and it's my belief OPA 1990, and it's my belief that the improvements that Congress envisioned when it passed OPA 1990 are being realized, and that the American public and that the environment are better served because of it.
Thank you, Mr. Chairman. I would be pleased to answer any questions.
Mr. COBLE. Thank you, Mr. Sheehan.
The lady from Florida has another meeting pending, so I'm going to yield my time to her at this time.
Mrs. FOWLER. Thank you, Mr. Chairman. I'll be brief, but I hope you would just indulge me in making a few comments regarding the operation of the oil spill liability trust fund.
Mr. COBLE. I say to the lady, if you comply with the 5-minute rule as well as Mr. Sheehan did, you will receive gold marks.
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Mrs. FOWLER. I assure you I will be under that, Mr. Chairman. Thank you. I do want to commend Mr. Sheehan for sticking with it.
I do have some concerns about the operation of the oil spill liability trust fund, even though I know that's not totally the context of this hearing.
Mr. Sheehan might recalland I know this is in litigation, so you probably cannot comment on it, but I've had several contacts with your office during the last year on behalf of one of my constituents, Dosty Development Corporation, and their experience in filing claims for damages under the fund.
I know the intent of the fund is supposed to be that it's non-adversarial, expeditious, and less costly than protracted litigation in Federal court, the experience of the Dostys would argue to the contrary.
This particular case has involved over 2 years of negotiations and appraisals, and has cost them tens of thousands of dollarsthis, despite the fact that numerous appraisals clearly showed a definable loss to the Dostys. So I just want to bring this one particular experience that I am personally aware of to the chairman and the subcommittee's attention and to stress upon Mr. Sheehan that I am very concerned with the handling of this case and hope that other similarly-injured claimants are not treated in this manner, because I do think, when we had this set up, this was to move in a much different fashion than the way I've seen it operate over the past year.
Page 18 PREV PAGE TOP OF DOC Thank you. I yield back, Mr. Chairman.
Mr. COBLE. Do you want to respond, Mr. Sheehan?
Mr. SHEEHAN. I believe I'm somewhat constrained because we are in litigation. I do appreciate the comments. We have had substantial correspondence back and forth on that issue. I think probably the one point that I would respond with is that the fund is a secondary insurer, and a claimant has to first go through and to the responsible party for a claim, and wethey went through that process. They then came to us. We adjudicated the claim. It is now in litigation. But we are a secondary insurer, not a primary insurer.
Thank you very much.
Mr. COBLE. I thank the gentleman and thank the lady from Florida.
The gentleman from Tennessee?
Mr. CLEMENT. Mr. Sheehan, we've been told that the P&I clubs will continue to pay for oil spill liabilities, and that the instruments of financial responsibility issued under the Oil Pollution Act of 1990 will probably only be used in catastrophic cases to pay claims in excess of the $500 million paid by the P&I clubs.
Do you agree with this assessment?
Page 19 PREV PAGE TOP OF DOC Mr. SHEEHAN. There are many, many instances where the fund has been utilized to pay for a wide variety of claims. Not all vessels, for example, are insured by P&I clubs. The P&I clubs do have a very good record of payment for pollution claims.
However, if you look at the experience that we've had in terms of the fund, itself, 50 percent of the cases which we have had to open the fund for are mystery spills where there is no responsible party. Indeed, in that particular instance there is no P&I club, so we're the principal source for not only the cleanup, but for claims, as well, in that type of instance.
There are also many types of entities, responsible parties, that don't carry P&I insurance. Many of the members of the barge industry do not have P&I club coverage. They are covered by the Water Quality Insurance Syndicate.
So the P&I clubs, while they do have an enviable record, don't cover the full spectrum of all the exposure that is there.
Mr. CLEMENT. What about if an owner does not have P&I club coverage, but only has a COFR issued by a Firstline or Shoreline? Will these two insurers be able to cover all of the claims in a disaster such as the ''Exxon Valdez''?
Mr. SHEEHAN. One of the conditions of insurance or coverage for Firstline and Shoreline is that their assured must be a member and must have coverage under the P&I club rules.
Page 20 PREV PAGE TOP OF DOC Mr. CLEMENT. Do insurers such as Firstline and Shoreline have sufficient assets to pay for multiple disasters in a single year?
Mr. SHEEHAN. They have a very adequate reinsurance program. They are regulatedboth organizations are regulated by an insurance regulatory organization. We check them for their assets. We have no doubts that they are able to handle any claims that would come forward.
Mr. CLEMENT. Should an old single-hull tanker that is transporting bulk grains as cargo, not oil, have to carry the more expensive tanker COFR, or should they be allowed to have the same amount of a COFR as other dry bulk carriers, and why?
Mr. SHEEHAN. I think that we'vemy office has addressed that question in probably one or two other cases where we've had tankers which have been converted by a flag administration. They are no longer declared a tanker by that administration. I believe that they have been converted to a cargo vessel other than a tanker so that they are not required then to have a tanker COFR. They would be required to have a lower limit of liability.
Mr. CLEMENT. We will be receiving testimony that insurers should be able to have policy defenses based on fraud and misrepresentation by the vessel owner such as understating the size of the vessel or type of cargo carried. Why didn't the Coast Guard regulations allow for these types of policy defenses?
Mr. SHEEHAN. We went through a very extensive examination of the issue of policy defenses in the rulemaking. There were certainly pros and cons to the issue of which policy defenses would be acceptable. We went through and looked at those in a very detailed manner and decided that if we wanted to provide surety to third-party claimants, if we wanted to provide surety to the United States Government for the recovery of removal costs and damage costs, that policy defenses would not be an insurance against that. We decided that it was inappropriate to do it at that time.
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Mr. CLEMENT. The American Institute of Marine Underwriters believes that OPA 1990 should be amended to require that all claims be brought into one court rather than in multiple State and Federal courts. Would the Coast Guard support such an amendment?
Mr. SHEEHAN. I think we would certainly have to take a look at the details of a specific proposal. The system, as we have seen operate in the last 6 years, has been one that has appeared to focus claims. It has appeared to be working as intended. There is not a significant amount of litigation that has gone on.
I understand the concern for obtaining concursus, if you will, putting all of the claims into one jurisdiction. I think that it would be something that we would have to look at, at its merits, based on the intent of what the law appears to have.
Mr. CLEMENT. Thank you.
Mr. COBLE. I thank the gentleman.
Mr. Sheehan and ladies and gentlemen, in preparing for this hearing the subcommittee attempted to locate a United States representative of the two primary financial responsibility guarantors, Shoreline and Firstline. We were unable to locate any U.S. contact for these firms and were finally forced to contact their main offices, which are located outside the United States in Bermuda.
For your information, these two entities, whose very existence depends on U.S. law, declined invitations to appear today. I wanted that to be known for the record.
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Mr. Sheehan, it is my belief or my interpretation that the Coast Guard regulations require providers of financial responsibility to have sufficient assets in the United States to cover their guarantees. Do Bermuda-based Shoreline and Firstline have sufficient assets in the United States to cover their guarantees, if you know?
Mr. SHEEHAN. Coast Guard regulations don't require that all providers of financial responsibility have sufficient assets in the U.S. to cover their guarantees. Only self-insurers and financial guarantors or financial guarantee corporations which must meet the U.S. asset requirement are required to meet that.
We've never held that a foreign-based insurer must meet this requirement. We've never held that the P&I clubs, when they were providing the basis for COFRs, meet that. So it is not a requirement.
Mr. COBLE. Procedurally or logistically, how would a claimant take direct action on Shoreline or Firstline located in Bermuda?
Mr. SHEEHAN. All foreign-based guarantors, be they a P&I club, an independent insurer, Shoreline, Firstline, all have to have a U.S. agent for service of process and receipt of claims.
Now, we have that information. Shoreline's agent in the United States is Hill Betson Nash in New York. Firstline's agent is the CT Corporation located here in Washington, D.C.
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If there were a spill andthere is a requirement that the Coast Guard designate the source of the spill. At the same time of designation, if there is a potential for claims there is also a requirement that there be an advertisement within 5 days indicating where claimants can file claims. It normally is required that they have to notify the responsible party, have to indicate the responsible party, as well as the guarantor, and where that guarantor can be reached. It's nominally and normally through their U.S. agents here in the United States.
Mr. COBLE. I understandI may be wrong, but I understand that Shoreline and Firstline have reinsurance contracts which would pay a portion of an oil spill's cleanup cost should a vessel's primary insurance with the P&I club fail to pay because of a policy defense unavailable to the guarantor. Is that a valid conclusion, Mr. Sheehan?
Mr. SHEEHAN. A P&I club could do that. They could exercise a defense.
Mr. COBLE. Well, how is Shoreline's and Firstline's reinsurance more dependable than the P&I club's excellent record, as best I can tell, history of paying for oil spills?
Mr. SHEEHAN. I wouldn't say that it was more or less dependable. I would say that it was equivalent. We reviewed both of their reinsurance programs to the same standard that we reviewed the P&I club's reinsurance program. My insurance examiners have told me, and I've looked at the reinsurance treaties, themselves, that they are really both a gold-plated, world-class reinsurance treaty made up of some of the best-known names and organizations in reinsurance around the world.
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So, as I would say, it's not better, it's not worse, it's equivalent.
Mr. COBLE. Yes. Mr. Sheehan, could you tell us why the P&I clubstraditionally the most cost-effective marine insurers, it seemswould be reluctant to become guarantors under OPA 1990?
Mr. SHEEHAN. I would hesitate to speak for the clubs, so I would
Mr. COBLE. I guess your best answer would be for me to ask them that.
Mr. SHEEHAN. I wouldI know that there has been substantial previous testimony about that. I would proffer my opinion about my understanding of what the
Mr. COBLE. You'd qualify that as your opinion?
Mr. SHEEHAN. Yes, sir. My understanding that their principal concern with respect to becoming a COFR guarantor was the possibility of them being possibly subject to unlimited liability.
I disagree with their concern. We have thought and we have stated on the record, as well as in writing, that OPA 1990 clearly provides protection for a guarantor, clearly provides protection for them up to the limits of their liability. We havewe felt that the Congress put together a very strong fortified castle, if you will, for the guarantor in our regulations when we were looking at the comments and taking this concern into account. We put down some additional defenses in terms of what we called a moata land mine and barbed wire. It still didn't meet their concern and their test, but I believe that's their principal concern.
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Mr. COBLE. Thank you, sir.
The gentleman from California, Mr. Baker.
Mr. BAKER. I'm fine, thank you, Mr. Chairman. I enjoyed the testimony.
Mr. COBLE. We are pleased to have Mr. Taylor of Mississippi and Mr. Bateman of Virginia, who are members of the full committee but who are not members of this subcommittee. Normally we don't permit questioning by them, but, in view of your having complied with my earlier request, Mr. Sheehan, we're in a pretty good time frame.
Mr. Taylor, do you or Mr. Bateman have a comment to make? Mr. Taylor?
Mr. TAYLOR. Thank you, Mr. Chairman.
Mr. Sheehan, I'm curious. I remember when the versions of OPA were first coming down, the law of unintended consequences was that the small ''Mom 'n Pop'' dockside fuel businesses that were there primarily to refuel pleasure boats were being held to the same liability standards as someone who was refueling the Exxon ''Valdez.'' Has that been addressed?
You can see the difference between a 500-gallon spill and a 500-barrel spill or a 5,000-barrel spill.
Page 26 PREV PAGE TOP OF DOC Mr. SHEEHAN. Yes, sir.
Mr. TAYLOR. I can see the need to address that so that they don't have to have the same type of liability.
Mr. SHEEHAN. As I understand it, there is legislation pending at this point which would reduce that liability, so, to that extent, I believe it has been addressed.
Mr. TAYLOR. Is thereI guess my question would be: is there anything administratively that you can do to address that?
Mr. COBLE. Would the gentleman yield to me?
Mr. TAYLOR. Sure.
Mr. COBLE. Mr. Taylor, I think what you are referring to has been addressed in the Coast Guard authorization bill. I think, Mr. Sheehan, that's what you had in mind.
Mr. SHEEHAN. Yes, sir.
Mr. COBLE. If we can ever get the other Body to move on that bill, that will be law, and I think that will answer your problem.
Page 27 PREV PAGE TOP OF DOC Mr. TAYLOR. Great.
Second question. Mr. Sheehan, I am a ship-building nut. I'm an even bigger ship-building nut if the ships are built in this country. Something that I think would help get more double-hulled tankers built in this country sooner is if, through legislation, we could provide an incentive for reduced liability for those people who voluntarily build double-hulled tankers before the deadline, because then they have taken the necessary financial steps and spent the money to try to prevent a spill, rather than having you all come back and fix something after the fact.
What would be your position on something like that should it be introduced?
Mr. SHEEHAN. I think, as in all of these instances, we would certainly want to take a look at the detail of the proposal.
To our mind, the more rapid implementation of double hulls is something which would be very worthwhile. If there could be an incentive which could be provided which would not relieve an owner or possibly an operator from doing things which they would not normally do and provide a disincentive, we would certainly consider something like that.
I believe that there has been a proposal made in the Senate to amend OPA 1990 to do something similar to that. That's currently under review.
Mr. TAYLOR. May I askand, again, the chairman has been very generous. I will wrap it up by saying I will ask you to give some thought to that. If you can put some recommendations along those lines in writing, I would certainly appreciate it.
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Mr. SHEEHAN. Yes, sir.
Mr. TAYLOR. Thank you, Mr. Chairman.
Mr. COBLE. The gentleman from Tidewater, Virginia, Mr. Baker.
Mr. BAKER. Mr. Chairman, I'm in my listening and reading mode this morning, so I have no questions.
Mr. COBLE. Thank you, sir.
Mr. Sheehan, again, we appreciate your being here, and I thank you for your testimony.
We will ask the second panel to come forward, if they will.
I will introduce the second panel as they advance to the podium: Mr. Richard H. Hobbie, III, president, Water Quality Insurance Syndicate, also representing the American Institute of Marine Underwriters, known as AIMU; Mr. Chris Horrocks, secretary general, the International Chamber of Shipping; Mr. John Gallagher, chairman of the board, Gallagher Marine Systems, Inc.; and Svein Ringbakken, chief counsel, International Association of Independent Tanker Owners, known as INTERTANKO; and Mr. Winthrop Wyman, vice chairman, OMI Petrolink Corporation.
Page 29 PREV PAGE TOP OF DOC Gentlemen, it is a pleasure to have you all before us. If you all will do as well as Mr. Sheehan didand, I repeat, nobody is going to be penalized if you violate the 5-minute rule, but there are five of you, and if you could stay within, on, or about that 5-minute time frame, we would be appreciative.
If you all have a preference of your order of appearance, I'll leave that to you. If not, I can start with Mr. Wyman and work our way to my right. I'll let you all make that call. Mr. Wyman, you will be first.
When the red light appears, that means that the 5 minutes have elapsed.
TESTIMONY OF RICHARD H. HOBBIE, III, PRESIDENT, WATER QUALITY INSURANCE SYNDICATE, ALSO REPRESENTING THE AMERICAN INSTITUTE OF MARINE UNDERWRITERS (AIMU); CHRIS HORROCKS, SECRETARY GENERAL, THE INTERNATIONAL CHAMBER OF SHIPPING; JOHN J. GALLAGHER, CHAIRMAN OF THE BOARD, GALLAGHER MARINE SYSTEMS, INC.; SVEIN RINGBAKKEN, CHIEF COUNSEL, INTERNATIONAL ASSOCIATION OF INDEPENDENT TANKER OWNERS (INTERTANKO); AND WINTHROP WYMAN, VICE CHAIRMAN, OMI PETROLINK CORPORATION
Mr. WYMAN. Thank you, Mr. Chairman. Good morning to the members of the committee.
My name is Win Wyman. I'm vice chairman of OMI Petrolink in Houston, a company that provides lightering servicein fact, the only U.S.-owned, American-owned company that providers lightering services in the Gulf of Mexico.
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It is my pleasure to be here this morning, and I appreciate the opportunity to share my thoughts with you on the impact of the COFR, which was implemented right at the end of 1994.
OMI Petrolink has been in business since 1987. We were a profitable business until 1995, when we sustained major losses. A very substantial portion of those losses can be attributed directly to the cost of compliance with COFR requirements, and I'll try to explain why.
Petrolink is a $50 million company which has employed as many as 100 persons, right now about 25 percent less. We provide lightering services to companies that charter large, very large, and ultra large crude carriers to bring oil to feed the refineries in the United States.
Our company provides the mooring master and all equipment and supplies needed for lightering the ships, which typically make several trips from a mother shipespecially the larger onesto the port, delivering the cargo to the refineries.
We own a number of supply boats, lightering support boats, but we charter the vessels that are needed to bring the oil into port.
Typically, these ships bring in oil in 500,000 barrel lots.
The vessels we charter must carry $700 million in P&I pollution coverage; in other words, the basic $500 million and $200 million optional. We require that and our customers require it of us.
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Since December 28, 1994, vessels have complied with this COFR requirement by either self-insuring, if the owner has sufficient U.S. assets, or by purchasing coverage from, as everyone knows here in this room, from Shoreline or Firstline, two Bermuda companies which were set up for that purpose.
For the size vessel we need, the cost of a COFR purchased through Shoreline can be up to $12,000 for each of the first 20 voyages. I understand that for Firstline it can be more than that.
This cost is paid by us, one way or another. It's either paid directly by us to the ship owner, which is frequently a condition of the charter party, or, if the vessel is owned by a company which is large enough to self-insure, the ship chartering market being as competitive as it is, it's reflected in the cost.
Under normal market conditions, the owner that self-insures can obtain a time charter for his vessel higher, more or less, by the amount that these Bermuda companies charge to the smaller companies.
If we charter a vessel for an entire yearand this is something we've had to start doing with the implementation of the P&I surcharge and the COFRin order to spread the 20-voyage cost over a lot more voyages, since we do very short sea voyages, we can reduce the daily cost impact to down around $700 or $800 per day per ship. I say ''down,'' but in our business that's a lot of money.
Page 32 PREV PAGE TOP OF DOC The more ships we have to charter for an entire year, the greater our carrying costs are during times when lightering volume is low. The business is not rateable. It tends to fluctuate seasonably.
If we charter ships, which we do, on a voyage basis, in times of high demand for lightering, the added cost of COFR insurance multiplies. I'll try to explain that.
It's simply that, since the owner has to pay for each call, and if we do a lightering in three or 3 1/2 days, we divide the cost of that call by the 3 1/2 days, so it can be up to $4,000 a day extra for the COFR.
We can't generally pass these costs along to our customers, simply because we operate in a market where one of our primary competitors owns its own lightering vessels and self-insurers. That competitor, which happens to be foreign-owned and includes a significant foreign government equity interest, is organized also to pay little or insignificant taxes to the U.S.
Their lightering rates don't have to be raised to take into account the added COFR cost because they are large enough to self-insure.
So lightering is a very competitive business, thin-margin business. When we try to raise our rates to cover our additional cost, we lose business. Our COFR insurance costs come out of our pockets.
In 1995, we paid more than $1 million in COFR costs. A new and sudden $1 million cost for a $50 million company is staggering. And what do we get for it? Insurance that provides no additional funds for cleanup damages, since all ships of the size we charter must belong to P&I clubs.
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COFR coverage only provides a guarantee for a fraction of the P&I club coverage in the unprecedented event the P&I club should refuse to honor its coverage. This is insurance that's unlikely to be needed and which could, if it were simple excess coverage, be obtained in the normal insurance market for a very reasonable costthat is, if the OPA requirements related to policy defenses and direct action were either not controlling or somehow settled with the clubs.
No matter the original intention of OPA, the COFR requirement has resulted in two primary impacts. First, it has created winners and losers. Whether that was the intended or not, the market is now divided into those who can self-insure and do not have to pay the additional premium cost, and those who cannot and must assume this enormous expense.
Of course, it's the biggest companies that can afford to self-insure and the smallest ones which cannot.
Petrolink is, in fact, a good example of the small-to medium-sized businesses that are the economic backbone of this country, but as a result of the enormous cost of COFRs, companies like Petrolink are finding it more and more difficult to maintain our business.
If the smaller businesses that are the competitive engine of a market economy are forced out of business, the market is defaulted to the larger self-insured companies who can then raise their prices with less resistance. This is precisely what may happen in the Gulf of Mexico lightering business.
Page 34 PREV PAGE TOP OF DOC OPA may have the perverse effect of handing the Gulf lightering market on a silver platter to a large foreign company, forcing out a business that has been a profitable U.S. company with an exemplary safety record.
The second major impact of the COFR requirements results from extreme prices that must be paid for what, in all likelihood, will be a non-producing asset. When Congress makes a decision that we must spend our money in this manner, the funds must come from somewhere. Vessel owners operate in a highly-competitive market with small operating margins. Funds for the COFR payments must compete with the funds needed to train employees, undertake audits and inspections of operations, and numerous other activities.
Everyone agrees that human error is the overwhelming cause of most spills. Most people also acknowledge that more attention needs to be focused on preventing spills. But COFR tends to tie the hands of the smaller operator. OPA forces us to spend a very substantial portion of our limited revenues on what is essentially a short-lived and non-producing asset. By forcing this on us, OPA takes away our ability to spend more money on items such as crew training, vessel inspections, new equipment, and so forth.
Choice is what this is all about. Congress has made the choice for us on where we are to spend our limited funds. We believe this decision needs to be re-examined, and we urge this committee to undertake that effort.
Protecting the environment is important to ship owners. It is important to us. We just want to make sure that the funds spent help ensure a clean environment, are directed to the most effective means of achieving that goal.
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I very much appreciate the opportunity to appear before you. I apologize for taking a little extra time.
I'd be happy to answer any questions that you may have.
Mr. COBLE. Thank you, Mr. Wyman.
Gentlemen, we have a vote on, but, Mr. Gallagher, can you be heard in about 5 minutes, do you think? Why don't we hear from you; then we'll go vote and come back.
Mr. GALLAGHER. Thank you, Mr. Chairman, members of the subcommittee.
My name is John Gallagher. I'm chairman of Gallagher Marine Systems, Inc., and we're a company that provides spill response management services to more than 400 tank vessels in U.S. waters. I'm also the director of the Center for Marine Environmental Protection and Safety at the Massachusetts Maritime Academy, where we create training and teach industry and government in response to marine oil spills in compliance with the OPA 1990 requirements.
Responding to spills for more than 25 years, I have been involved in probably more than 100 spills, including such notable ones as Argo Merchant, Exxon Valdez, and the Desert Storm oil spill in Saudi Arabia.
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For the most part, I've acted in the role of spill response manager, hiring, directing, and compensating oil spill contractors mobilized to clean up oil on the water. I've also worked with academia, ship and cargo owners, underwriters, and State and Federal Government agencies.
I served as a member of the panel convened by the General Accounting Office to evaluate Coast Guard responses in connection with legislation triggered by Argo Merchant in 1976.
My interest in testifying today is a concern that the features of OPA 1990 are counterproductive and wasteful of economic resources without providing any identifiable benefit.
Among the measures that I feel in OPA 1990 do this are the change requirements in OPA 1990 concerning certificates of financial responsibility.
My unique experience may be of benefit in evaluating the efficacy of the COFR requirements, and of some use in addressing the problems that have been created by them.
During the years I have been in this business, I have worked extensively with reliance on support from the P&I clubs. I've obligated many millions of dollars on behalf of ownersmillions of dollars which have been readily and unfailingly supplied by a P&I club. At no time before or after OPA 1990 had I any reason to be concerned with or have recourse to written contracts. The clubs have always been there.
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In view of the trouble-free history of the P&I clubs, both prior to and subsequent to OPA 1990, it appears that the changes in OPA 1990 appear to try to fix something that wasn't broke.
In addition to mandating financial backing, the law now gratuitously and unnecessarily requires that the provider also become a guarantor of that backing. For reasons that others testifying here today would be more qualified to present, the clubs have found it impossible to be a guarantor or out in front of their insured. Vessel owners are therefore forced to pay heavy premiums to a new breed of insurer for a redundant, unproductive, and unneeded layer of insurance.
These COFR guarantors provide coverage which, though meeting the terms of the new COFR requirements, run very little risk of having to pay out on liabilities. Because it precludes traditional P&I support for COFRs, interpretation of the COFR requirements provides an inordinate windfall for the COFR guarantors.
They collect substantial premiums from a great number of vessels entering U.S. waters, while, as a practical matter, the P&I clubs continue to provide the financial support for spill responses.
In responses I have managed since OPA 1990, I continue to look to and be supported by the P&I clubs, with no concern with or interest exhibited by any COFR guarantor. Guarantors have not played a part in financial support of any of the oil spills which have occurred, to my knowledge, since the creation of these entities.
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Because of the increased premiums, ultimately increased costs to the consumer inevitably result from this situation. The consequences are that a substantial hemorrhaging of financial resources occurs, with no corresponding improvement of environmental protection or support responses.
Such wasted resources would be much better directed toward something which actually provides protection for the environment or better supports response. I urge that serious consideration be given to eliminating the needless and costly extra layer of insurance they have spawned. If this is properly done, the ability and dedication of vessel owners to respond would be undiminished. At the same time, an utterly useless and wasteful dissipation of financial resources would be eliminated.
I sincerely appreciate the opportunity to make this presentation to the committee, and I trust that my comments will be helpful in the deliberations.
Mr. COBLE. I'm sure they will, Mr. Gallagher, and I thank you.
Gentlemen, we will stand in recess while we go to the floor to vote. We will return, and you all rest easy in the interim.
Page 39 PREV PAGE TOP OF DOC Mr. COBLE. The best laid plans of mice and men, you know, sometimes go awry, folks. When we departed, I had no idea there would be four subsequent votes. That's what happened. But we did get the word back to you all so you at least know what was coming down.
Mr. Hobbie, I'm pleased to recognize you.
Mr. Sheehan, I want to thank you for staying, as well, because I think when we hear these problems and sometimes perhaps disagreements, you fellows may be able to get your heads together and work out something because, as a practical matterand I'm thinking aloud nowI doubt that any legislative relief will be forthcoming during this session of the Congress, because we'rein fact, we're, very frankly, running out of time. But I think we need this hearing to assemble information that we are assembling today, and for that reason I'm glad you hung around, Mr. Sheehan. I was going to suggest, if your schedule permitted, that you do that.
Mr. Hobbie, we'll be glad to hear from you.
Mr. HOBBIE. Mr. Chairman, thank you very much.
I'd first like to say that, in the entire process of the COFR implementation, that we have appreciated the professionalism and the courtesy and the cooperation that we've received from the Coast Guard vessel certification branch and think that they continue to try and work hard with the industry.
Page 40 PREV PAGE TOP OF DOC We do not charge per se for issuing a COFR. We charge an insurance premium to our assured and, as a service to the assured, we provide the guarantee. That does not mean to say that built within OPA and the process that there are not additional expenses and costs.
I've submitted my statement for the record, and I'd like to just emphasize a couple of points.
The first is that one of the problems with the COFR process is that, in promulgating the final regulations, insurers or guarantors were not given any policy defenses.
The main difficulty we have with the lack or the main policy defenses that we're concerned about are misrepresentation, fraud, misdeclaration of material fact.
Someone can come in to us and say that they have a deck barge, that it's 3,005 gross tons, that they have a pump on board and therefore need a COFR. We can then issue the guarantee to the United States of America saying, ''Here is a deck barge. Here is this barge. We've charged $100 or $200 for the coverage,'' and then it subsequently turns out that that barge is a 3,005 gross ton black oil barge that just broke in half, and we will be obligated to pay $10 million to the United States of America under the guarantee.
We think this is flatly wrong.
That costand there have been some small cases where we have had to pay claimswhere the vessels have been misdeclared, where coverage has been inappropriate, yet, the burden under this system is that the insurer must pay. We must take those costs and spread them around the rest of our insured base.
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I want to emphasize that second piece. When we make a guarantee to the Government, we are guaranteeing that vessel for whatever it is, not for what we perceive it to be, but for whatever it is. So, again, where misrepresentation and fraud occur, where we are told a vessel is one kind of vessel, once we guarantee we are on the hook for that guarantee. We have no defense of that.
We also have raised in our comments the conflict of jurisdictions. That adds a great cost to many pollution events, and when you think of the logic of it, maritime rivers, maritime provinces, and areas transit and cross many States. A spill in the Delaware River is Delaware, New Jersey, and Pennsylvania.
The probability and possibility of ending up in Federal court and three separate State courts is expensive and places a major burden on the industry.
We also have a problem with the Coast Guard's regulations that the owner and operator need to be guaranteed, and that the owner and operator is anyone owning, operating, or chartering by demise.
This means that we must automatically cover people that we don't know exist. An assured comes in and purchased the policy as operator of the vessel. We understand we must insure the owner under the guarantee. But the way the guarantee is worded, we must also insure ''a demised charterer,'' and we can only get off that guarantee with 30 days notice of cancellation, which means when the operator returns the vessel to the owner and our insured ceases using it, we are still on the hook for 30 days, and that vessel, when returned, could then be chartered to someone who we've refused to give insurance to, and we could end up being liable for that person's discharge or spill.
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We've made the comment in our comments about a clarification of limitationnot necessarily a COFR issue, but one of the items in OPA which allows breach of limitation is the failure to cooperate on the part of the responsible party.
We are very concerned that, should a responsible party utilize their right to limitation, that that would be deemed to be failure to cooperate.
We also have put in a section and feel that the major cost and the major uncertainty to the continuation of the COFR program is the natural resource damage assessment problem and those regulations, the lack of standards. Should our fears prove true, we may find that no insurers are going to be in a position to issue guarantees.
Lastly, I'd simply like to comment that our comments here on COFRs are with respect, as the institute and WQIS, as to vessels. We acknowledge very much that there is also the off-shore facilities. That is a different insurance market. It is of different limitslimits piled upon limits. It is a completely separate problem, and I just wanted to point out that the comments of our industry with respect to off-shore would be very different to the problem that we have had in the specialty market we are with respect to vessels.
I apologize for running over and thank you.
Mr. COBLE. No harm, Mr. Hobbie. Thank you, sir.
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Mr. HORROCKS. Chairman, thank you.
I'm the secretary general of the International Chamber of Shipping. We are an organization of national shipowners' associations throughout the world. We represent, of course, not just the tanker industry, but the shipping industry, at large, and I'm proud to say the American Institute of Merchant Shipping is, of course, a member of ours until it changes its format at the end of this week.
In our view, this hearing on certain aspects of OPA 1990 is timely. We had in the last quarter of 1994 a period of very heightened activity, during much of which it remained unclear whether COFR facilities would be established in a form acceptable to the Coast Guard, and it was uncertain whether ships would be able to continue trading to the United States.
In the event, of course, that deadline of the 28th December, 1994, passed without great drama, and it's fair to say there has been relative quiet for the past 18 months, which may suggest that everything was working well.
Certainly there has been no train wreck. There has been no disruption, as far as I am aware, in the flow of oil to the United States, and no obvious increase in the cost to American consumers at the moment.
So at first sight the problems that we in the industry and others were citing prior to that time may appear to have been overstated and it may be thought that we were simply wrong.
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Maybe we were, but I'm bound to say that the underlying view in the shipping industry remains that the concerns that we expressed in testimony to the Coast Guard and elsewhere prior to that time remain essentially as they were then.
There are a number of reasons for this, and perhaps I can just try and summarize them briefly.
First, I think it will be expected of me to say, and I will say, that we remain very much committed to the concept of the international regime for pollution liability and compensation.
We think that it's not just the industry, but also the potential victims of oil pollution damage who, in the long term, are best served by falling in line with the international regime.
I'm merely stating what is well-known when I say that 95 countries in the world have ratified the 69 civil liability convention, 69 have ratified the parallel fund convention, which is a considerable indication of international support.
Perhaps even more to the point, the limits available internationally were increased very substantially, with effect from the 30th of May this year when what are known as the 1992 protocols to these conventions came into force for the first ten countries, which include quite a lot of the European states, it includes Mexico, includes Japan, and by the end of this year there will be another six added to the list, including: Australia, Greece, Liberiaanother major fleet. Clearly that number is going to grow.
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So we're seeing a measure of international support for rapidly increasing the compensation levels available to the victims of pollution damage.
Secondly, as regards the COFRs, themselves, I have to say we continue fully to support the stands taken by the P&I clubs that they cannot expose themselves as guarantors under OPA 1990 to strict and potentially unlimited liability, which would threaten the continued existence of the worldwide P&I insurance structure.
It remains within the industry a source of very real regret that a way hasn't been found to enable the economical and well-tried system which the P&I clubs provide to be utilized directly as evidence of financial responsibility in the United States.
In our view, removal of the direct action provision in OPA would in no way jeopardize the protection of the victims of oil pollution damage.
Thirdly, the COFR requirement imposes a significant expense on the industry, which provides, as we've heard earlier, no value added to the U.S. consumer or the U.S. public, in general.
The annual cost of providing COFRs has been quoted this morning, and we've heard the same figure$60 to $70 million, something of that order, excluding, of course, the indirect costs of self-insurance and surety bonds, that sort of thinga sum which simply provides nothing more than the ticket to trade, a piece of paper which enables you to continue trading to the United States. It's, one has to say, an unproductive expense which, in due course, must find its way through to the consumer.
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Fourthly, COFR guarantees today are generally provided by the two commercial entities to whom you referred earlier, ChairmanShoreline and Firstline. We're not experts in insurance and we have no reason to doubt the credibility of these companies, but it has to be said that within the shipping industry there is great skepticism about the long-term sustainability of these entities.
There is doubt about whether thethat the reinsurance arrangements which, contrary to the system operated by the P&I clubs, are new and therefore somewhat untested, would be sufficiently robust to accept a major spill in U.S. waters, must less two in rather quick succession.
In short, we feel that there must be a real question about whether the U.S. public is as well protected as would be the case if the clubs were able to be directly involved.
One last point, if I may. This is certainly not a minor point in any sense. Within the industry there is fundamental concern about the exposure under OPA 1990 to potentially unlimited liability. We know, of course, that the act retains the principle of limitation. We know that there is legal dispute about whether, in fact, limitation would be breached in real life.
But, in our view, the shipowners' defenses under OPA are weak, and certainly some of the legal advice is to the effect that the owner must expect his ability to limit to be challenged in the event of any significant spill in U.S. waters.
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We therefore remain as concerned as we ever were about uninsurable liabilities under OPA 1990 and a handful of companiesit is only handful, I acceptstill refuse to carry black oils to the United States simply because they find the risk unacceptable.
In sum, therefore, ships, of course, are continuing to trade to the United States without disruption. COFRs are obtainable. But the industry remains concerned that in a number of respects OPA 1990 is and remains prejudicial to the interests not only of the shipping industry, but also to those of the U.S. public.
Our concernand this is something that we dreadis that it will take another major spill in U.S. waters for the shortcomings of the present system to be graphically exposed, and it's for that reason that we really urge your subcommittee to address these matters carefully.
Thank you very much, Chairman.
Mr. COBLE. Thank you, Mr. Horrocks.
Mr. RINGBAKKEN. Thank you, Mr. Chairman.
I'm appearing today on behalf of the International Association of Independent Tanker Owners, or INTERTANKO. I'm INTERTANKO's legal counsel and appear today as a substitute for our managing director, Mr. Dagfinn Lunde.
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Mr. Lunde has submitted a detailed written statement conveying INTERTANKO's views on the issues before you today. I ask that that statement be included in the record of these proceedings. My oral remarks will summarize the concerns expressed in that testimony.
INTERTANKO members transport approximately 60 percent of all oil imported to the United States. We represent 400 members and associate members throughout the world, including the United States. Our members own or operate more than 1,700 tankers, and INTERTANKO members comprise the majority of the world's independent tanker tonnage.
INTERTANKO is grateful to the subcommittee and the staff for dedicating valuable time and effort to review the financial responsibility components of the Oil Pollution Act of 1990.
OPA, like all human endeavors, has its good and bad points. INTERTANKO believes that the protection of marine environment is always a work in progress. The task for you and for us is to keep what is good about OPA, improve that which is less than the best, and keep working together to advance the goals we all share.
It will surprise no one to hear INTERTANKO say that the financial responsibility provisions of OPA are not among its better points. We understand that the focus of this hearing is the Coast Guard's administration of the certificate of financial responsibility, or COFR program.
Page 49 PREV PAGE TOP OF DOC The primary problem with COFRs is not how they are administered by the Coast Guard. The problem is that OPA has created a requirement that ignores the international insurance mechanisms that ultimately must support the liability structure that the United States has adopted.
The COFR requirement, tied as it is to a direct action provision that has deterred traditional insurance from offering evidence of financial responsibility, is simply a layer underneath a substantial insurance structure that is the real protection to claimants in the event of a spill.
Because OPA's direct action requirement has deprived vessel owners of traditional marine insurance as a device to meet the COFR requirements created by OPA, enterprising alternative providers have arisen in the marketplace to provide evidence of financial responsibility.
Two of these entities provide guarantees to about 25 percent of vessels of all types. More than half of the tanker fleet relies on these two companies to meet U.S. COFR requirements. INTERTANKO has seen figures indicating that the aggregate premium costs in 1995, alone, for this source of evidence of financial responsibility are approximately $60 million U.S. dollars.
The total annual cost for all types of vessels cannot be easily determined at this date because of the phase-in effect of the Coast Guard's program in 1995. Nonetheless, these costs are not trivial, and eventually they will find their way to the U.S. consumers.
Page 50 PREV PAGE TOP OF DOC There is no real benefit to offset these costs. Tanker owners typically carry $700 million worth in pollution cover from the P&I clubs to cover response and damage claims. The record of the international P&I system for promptly covering claims from pollution events is superb. In addition to insurance, there are other resources available for meeting the amounts of claimants. These resources include the oil spill liability trust fund, itself.
It would be a most peculiar and unusual circumstance where the separate resource of the COFR evidence of financial responsibility would be called on. This leads INTERTANKO to conclude that both the United States, as a society, and the tanker industry, itself, are incurring costs for a phantom insurance that sits inside, not on top of, an insurance that is already paid for. Such a structure is wasteful and unnecessary.
If all of us are serious about translating our efforts into measurable improvements in environmental protection, we should concentrate on the following areas.
First, United States must not lose site of the need for reconciliation of the U.S. and the international liability regime.
Second, the liabilities imposed on vessel owners under OPA are subject to dramatic inflation because of the methodologies embraced by agencies of the United States in calculating natural resource damages.
Third, INTERTANKO understands that the States were afforded broad latitude to impose liability and compensation regimes that differ from the Federal scheme. Until uniform domestic and international regimes are achieved, this committee should at least consider legislation that provides for coordination and concursus of claims in a single action. Such a step would in no way impinge on OPA's grant to the States of the right to impose different liability standards, but would require claimants to bring actions arising from a given incident in one court at one time.
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INTERTANKO very much appreciated this opportunity to appear and pledges its continued support to the Congress in efforts to improve the environmental protection measures that govern the marine transportation of oil.
This concludes my oral presentation. I will be happy to answer any questions you may have.
Thank you, Mr. Chairman.
Mr. COBLE. Thank you, Mr. Ringbakken.
I have a good number of questions, and if I exhaust my 5 minutes I will then recognize the gentleman from Tennessee, and then we'll start a second round, but we'll get you fellows out of here in time to have the luncheon meal in due time.
Mr. Wyman, to your knowledge, have there been oil spills in the lightering business where the P&I clubs have not paid for the cleanup and damage claims?
Mr. WYMAN. No, sir.
Mr. COBLE. How does the cost incurred as a result of COFR coverage and the coverage provided compare with that of P&I club coverage?
Mr. WYMAN. The basic P&I club coverage is a worldwide coverage and is included in their total P&I premium for all types of liabilities.
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In the case of the U.S., they limit towell, they've limited it all to $500 million since the ''Exxon Valdez,'' but in the case of the U.S. there is a surcharge for each arrival in the U.S., and it's structured not dissimilarly from the COFR, which is to say that the first 20 calls that a tanker makes in the U.S. in each club yearthe club years run from the 20th of February to the 19th of the following yeareach one of the first 20 calls you pay a P&I premium.
I believe your question is: how does that P&I premium compare with the cost of the COFR?
Mr. COBLE. Yes, sir.
Mr. WYMAN. It's higher, but not a lot higher. One of the reasons I can't be more specific without having and giving numbers is that there is quite a difference between Shoreline and Firstline. Firstline is more expensive.
In preparation for this, on the 10th of June I got a copy from Bermuda of Firstline's current tariff, and the minimum per call that they list there is $25,000 per call in the U.S. port, which means for 20 calls that's half a million dollars, and you give a 15 percent discount for a double-hulled ship.
So, assuming those numbers are correct, the minimum would be $425,000 a year.
Page 53 PREV PAGE TOP OF DOC I must say that we have been successful on the ones where we're paying for COFR at something less than that, and that's why you'll see, in the text of what I presented, lower figures.
But this means that effectively I'm assuming our chartering department has been successful in not having to charter ships that have Firstline coverage. That's just an assumption.
So let's say the worst case would appear to be $425,000 or $500,000 a year for a ship. I may be wrong, and maybe Chris could help me on this, or somebody from the P&I clubs, but I think if you look at that much it's probably pretty close to being as much as the entire premium charged by the P&I clubs for the USA surcharge, so it's ait was a big shock to us when these numbers started to emerge.
Mr. COBLE. Does anybody want to add to this? Mr. Horrocks?
Mr. HORROCKS. Chairman, I'll try, because I was trying to do some homework on this before coming across, as well.
I don't think these figures are publicly quoted, but when the P&I clubs were trying to devise a scheme which might have been acceptable for meeting the COFR problem back in mid1994, the figure that was quoted for the U.S. premium, the income that the clubs earned for the U.S. surcharge, which they charged for tankers coming into the United States, was something in the order of $80-something million a year.
Page 54 PREV PAGE TOP OF DOC Quite by chance, we are now discovering that the cost of obtaining COFRs is broadly the same figure. I mean, a figure of $60 or $70 million has been quoted this morning.
But, of course, you are in no sense comparing like with like. The U.S. surcharge that the P&I clubs charge is for their perceived expectation that any spill in the United States is going to lead to claims and cleanup costs greater than elsewhere in the world.
The COFR cost, whether it's Shoreline or Firstline, is, of course, simply an add-on for obtaining the certificate that enables you to trade. The underlying insurance is still provided by your P&I club.
Mr. COBLE. Thank you, sir.
Mr. Gallagher, let me put a hypothetical to you. Are you familiar with a situation where independent tanker operators or small oil companies which do not have adequate resources to self-insure or to set up a special guarantor subsidy, under the Coast Guard's regulations have been put at a competitive disadvantage to larger carriers and oil companies which do, in fact, have the assets to exercise these options?
Mr. GALLAGHER. No, sir, I wasn't specifically aware of that until I heard Mr. Wyman's testimony today. That is definitely an example of the problem.
Mr. COBLE. So you have not experienced that personally?
Mr. GALLAGHER. No, I haven't.
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Mr. COBLE. All right. I think my 5 minutes have expired. Let me recognize the gentleman from Tennessee, then we'll come back.
Mr. CLEMENT. Mr. Wyman, are there more cost-effective ways of making sure that adequate resources are available to pay for oil spill liability that would accommodate the P&I clubs' concerns and allow you to spend that $1 million per year on training and spill prevention rather than for an insurance policy that you say may never be used?
Mr. WYMAN. That's an excellent question, sir. I would say that the only solution would be an accommodation between the Coast Guard and the U.S. Government on the one hand and the P&I clubs on the other.
I've had not many recent conversations with the P&I clubs, but back in 1994 I had several conversations with them, and certainly I could say that the tenor of some of the conversations that I perceived were taking place between the clubs and the Coast Guard was people digging in their positions a bit, but I think the ingredients have always been there if there had been some more flexibility shown on the U.S. side, quite honestly.
I think that there is nothing in the record of the P&I clubsand this is what Mr. Horrocks said in his talk, toothat would indicate anybody should be worried about the P&I clubs failing to stand behind the obligations they assume for the premiums they collect.
Just to give you an example, I certainly was told very early on by the P&I clubs that if the Coast Guard wanted some sort of an undertaking from them, that they would advise by wire immediately if any owner failedwas in arrears on premium or had resigned from a club, or something like that, so that the Coast Guard could intercept the ships and never let it get into U.S. waters. That's just a small example.
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But there is flexibility on both sides.
Mr. CLEMENT. Thank you.
Mr. Gallagher, you state that since the P&I clubs have never failed to pay a claim, that the additional insurance required by OPA 1990 results in wasteful spending without producing tangible results. Do you believe that the $60 to $70 billion that we've been told that is spent on coffers takes away from a company's ability to pay for training and equipment designed to prevent oil spills?
Mr. GALLAGHER. Well, it certainly is a waste of resources, and those resources could be much better applied to training and other preventive measures.
There are certainly no tangible benefits to the owners, except for the fact that they have a piece of paper that meets the terms of the COFR rules right now, so that's about their only benefit from it.
Mr. CLEMENT. Mr. Hobbie, on page five of your testimony you state that the cost for removal and damages associated with a spill are as much as ten times greater since the enactment of OPA 1990. Why, then, haven't we charged any additional premium for providing the coffers under OPA 1990?
Mr. HOBBIE. Let me be very clear. WQIS has been forced to increase premiums since the enactment of OPA, somebased on different classes of vessel, i.e., we may have increased 50 percent on fishing vessels and 600 or 700 percent on the higher-risk classes of business.
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Overall, we've increased premium roughly 600 to 700 percent.
We do not charge for the issuance of COFR; we charge for the indemnifying our assured for the liabilities under OPA, and built as a small factor in here are some of the elements that we must spread around our entire book, which I've referred to in my testimony.
Mr. CLEMENT. Mr. Horrocks, do you agree with the assessment that P&I clubs will continue to pay for the small spills and that the insurers, such as Shoreline and Firstline and other COFR instruments, will only be used to pay for claims which the P&I clubs won't pay due to policy defenses or claims in excess of the P&I clubs' $500 million limit on liability?
Mr. HORROCKS. Yes, sir. I mean, my clear understanding is that the role of the clubs as insurers will continue exactly as it has stood in the past, and that the guarantorsthe guarantee of the guarantors will only be invoked in those, frankly, very rare cases where for some reason policy defenses are invoked or for some other reason the P&I claim is not sustainable.
Mr. CLEMENT. Mr. Ringbakken, what percentage of the INTERTANKO members use Firstline and Shoreline as insurers, and what percentage use self-insurance or some other method of complying with the COFR requirements?
Mr. RINGBAKKEN. I'm afraid I cannot provide you with detailed statistics on that. I'd say that a majority of our members utilize Firstline and Shoreline, and that a very small minority of our membership would utilize a self-insurance scheme.
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Mr. CLEMENT. Could you submit that for the record?
Mr. RINGBAKKEN. We could submit that for the record.
Mr. CLEMENT. All right.
Mr. RINGBAKKEN. To the degree it's possible to get them. I think that would be possible.
Mr. CLEMENT. All right. Thank you.
Mr. COBLE. Thank you, sir.
Mr. Hobbie, do you know of a situation where one of your insured customers had claims filed in more than one court of jurisdiction? If so, I'm interested in procedurally how you addressed that.
Mr. HOBBIE. Well, first let me answer the question.
Because of the strict liability under OPA, and because of the requirements and the practicality of quick settlement, the general process is that the responsible party receives the claims and we tend to settle them, so we do not tend to end up in that kind of litigation very often.
Page 59 PREV PAGE TOP OF DOC Number two, after 90 days, if the responsible party fails to pay, then the claims are submitted to the National Pollution Fund Center, who also has an obligation and a right to settle those claims to the claimants.
So, generally speaking, if the claim comes under OPA, they are generally settled and it does not become that kind of issue.
Off the top of my head, I'm unable to specifically point where we have had claims filed in those courts and have been unsuccessful in having them remanded to Federal court; however, the concern and the expense of even having them centralized to one suit, we have had instances where we have to go into court and have that done, and that costs money.
If we have to do that in three States, for example, it will cost us.
Mr. COBLE. That was the direction in which I was headed. Thank you, sir.
Mr. Horrocks, you contend that the $60 to $70 million per year being spent by vessel owners and operators on COFR premiums provides the public with virtually no additional protection from environmental oil spill damage. Elaborate a little more in detail in support of your contention.
Mr. HORROCKS. Yes, Chairman. Thank you. That $60 to $70 million, as various people have said, is the cost of obtaining the COFR. It is the cost of ensuring that there is, as OPA requires, a guarantor.
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The underlying insurance, of course, is still provided by the P&I clubs and, as Mr. Sheehan said earlier, it's a condition of obtaining your Firstline or Shoreline certificate that you are entered with a P&I club.
So you are getting no additional cover in any sense for being connected with Shoreline or Firstline. You are simply paying for them to act as guarantor, so that $60 to $70 million is essentially only providing for the very rare case where, for whatever reason, the P&I clubpolicy defenses, or whateverthe P&I club fails to pay up.
Now, that, I suggest, is a very substantial cost for a very, very, very small risk, particularly when one has behind Shoreline, Firstline, and the P&I clubs the trust fund, as well.
Mr. COBLE. Permit me, Mr. Horrocks, to put to you a similar question I put to Mr. Wyman. Are you aware of any situation where a P&I club failed to respond to an insured oil spill claim? Second, do you know of any time when a P&I club attempted to use a policy defense to avoid payment of an oil spill claim?
Mr. HORROCKS. I should stress I'm not an insurance expert, and the answer to the second question is no, I am not. But I did specifically ask the question before I left London as to whether there had been any case where the clubs had failed to pay up in respect to an OPA claim, and therefore Firstline or Shoreline, as guarantor, had been called in. I understand that there has been or is in the pipeline at the moment one case which I think is not a policy defenses case, but there is some formal dispute between the P&I club and I don't know which of the two insurers' guarantors, it isFirstline or Shoreline.
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So I understand that there may have been one case during the last 18 months where there is a question of calling in the guarantee, if you like, but I know nothing of the details, I'm afraid.
Mr. COBLE. But a rare occurrence, it would be your belief?
Mr. HORROCKS. Yes. Certainly that. Yes.
Mr. COBLE. Thank you, sir.
Mr. Ringbakken, in your testimony you state that the potential pay-out under the international convention of civil liability 1992 protocols will often exceed OPA 1990's claim payouts. Give us some specific examples, if you can, of how the international system of oil spill liability could better compensate the victims of an oil spill, as opposed to OPA 1990 requirements.
Mr. RINGBAKKEN. Without having the specific details, I'll try to outline the concept of the international regime.
The international regime would set a liability limit at a set level, while OPA 1990 will havethe liability limit of OPA 1990 will follow a linear graph.
So for a good number of different tonnages, you would have a higher limit under the international regime than you would have under OPA 1990.
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We'd be glad to submit for the record the actual figures.
Mr. COBLE. I would appreciate your doing that, if you will.
Gentlemen, I thank you all for being here today. Mr. Sheehan, I thank you for your appearance, as well.
I'm just thinking aloud now. This was enacted in August of 1990, I think, and perhaps at conference if we had done this, that, or the other, we might could be avoiding some problem, but this is applying 20/20 hindsight, and I'm real adept at applying 20/20 hindsight.
But perhaps we can start here to review the process. Mr. Sheehan heard your testimony. You all heard his. Maybe we can start some building blocks here to address some problems. Hopefully that will be the desired result.
Does anybody want toMr. Sheehan, you or any member of the second panel want to have a last shot before we adjourn?
Mr. COBLE. Again, I appreciate very much you all being here and sharing your testimony with us.
The members of the subcommittee may likely have additional questions for the witnesses, and we will ask you all to respond to these in writing, and the hearing record will be held open for these responses.
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If there is no further business, I again thank the Members who did appear today, and for you all, again, for your appearance.
The subcommittee stands adjourned.
[Whereupon, at 12:35 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]