Terror Policy on Trial As Oxy Faces Insurers

By AMANDA BRONSTAD

Staff Reporter

With incidents of terrorism against corporations on the rise, the courts could become a testing ground on how businesses should be compensated for their losses.

Just months after two real estate firms filed suit against their insurers stemming from losses suffered in the destruction of the World Trade Center, Los Angeles-based Occidental Petroleum Corp. has sued its insurers in a dispute over coverage for a series of bombings at a South American pipeline.

During 2000 and 2001, the Cano Limon oil pipeline, in which the company shares ownership with the government of Colombia, was the scene of 266 bombings, forcing it to shut down for several months. Two terrorist groups, the National Liberation Army and the Revolutionary Armed Forces of Colombia, have targeted the 480-mile-long pipeline for the past two decades.

The pipeline represents only 1 percent of Occidental’s global assets. But the closures have caused the company to come to loggerheads with its insurers over the nature of its coverage.

In papers filed March 29 in Los Angeles Superior Court, Occidental said its deductible during 2000 and 2001 was $2 million for each occurrence, with a maximum of $10 million for business interruptions in a 15-day period. As a result, Occidental suffered losses of “hundreds of millions of dollars,” the suit said.

The company claims that the ongoing terrorist attacks during 2000 and 2001 constitute a single occurrence of damage and require payment of only a single deductible. Its insurers claim that each bombing should be considered separately and that a “separate deductible was therefore triggered by each bombing,” the suit said.

Issues echo larger suit

The basis of the suit is similar to that at the heart of the litigation over coverage of the World Trade Center in New York.

In that case, however, the argument is reversed. Silverstein Properties and L.A.-based shopping mall operator Westfield Corp., covered for up to $3.6 billion per occurrence, claim the destruction of the towers was the result of separate acts. Their insurers, led by Swiss Re, claim there was a single occurrence.

Occidental’s insurance policy, while it includes a “terrorist” clause, is a standard business interruption policy, not a specific terrorist policy.

Oil companies, which have operations in politically sensitive regions, often carry additional terrorist insurance, said Michael Leahy, head of the risk management and insurance law practice group at L.A.-based Haight Brown & Bonesteel LLP.

Those policies can cost up to 100 times more than standard business interruption insurance especially after Sept. 11, he said.

The consortium of insurers named in Occidental’s suit is led by Lloyd’s of London and includes a number of overseas firms. Executives at Lloyd’s of London’s U.S. office would not comment on the litigation.

Disputes about the definition of “occurrence” in such insurance policies are not new, however. They have come to light recently because of the publicity surrounding the World Trade Center, said Dean Hansell, managing partner of LeBoeuf Lamb Greene & MacRae LLP in L.A. “It’s not the most common dispute, but in major cases it is a frequent issue,” Hansell said.

Government a partner

The Cano Limon bombings are a part of 38-year-old civil war in Colombia. The pipeline, which is 44 percent owned by Occidental and 56 percent owned by the Colombian government, moves oil from the Cano Limon oil field out to the ocean ports.

Eighty-five percent of the revenue generated by the pipeline goes to the Colombian government. It constitutes 1 percent of Colombia’s gross national product and 3 percent of the country’s annual budget, said Larry Meriage, a spokesman for Occidental.

Occidental produced 18,000 barrels of oil per day during 2001, down 58 percent from the 43,000 barrels per day produced in 1999, according to the company’s filing with the Securities and Exchange Commission. Seventy percent of the company’s oil and gas reserves are in the United States.

There is no indication how much effect the pipeline squabbles have had on the bottom line, though the company reported a net loss of $247 million for the fourth quarter ended Dec. 31, compared to net income of $333 million in the like period a year ago. The fourth quarter results were the weakest since third quarter 1999, primarily because of increased supply and low demand in the industry that led to lower gas prices.

Production at the Colombian pipeline has been substantially reduced during the past two years because of the terrorist attacks.

Lehman Brothers energy and power analyst Paul Cheng noted the Colombian situation in his report on Occidental’s fourth quarter.

Occidental “expects average production for the full year 2002 to be approximately 490,000 boe [barrels of oil equivalent] per day, or 3 percent higher than 2001 production,” Cheng said. “However, the 2002 target is based on smooth operations out of Colombia, which are always unpredictable.”