With the massive oil spill still spreading in the Gulf of Mexico and forecasts of an active hurricane season, property owners in coastal areas could be faced with an oily cleanup should a storm drive oil-laden water ashore. Though the National Flood Insurance Program has said oil in floodwaters is covered under its policies, with a $10,000 pollution limit on commercial policies, coverage under excess flood policies is more ambiguous.

David White, an attorney with Thompson & Knight LLP, said he thinks policyholders who have flood coverage would likely see their claims paid. He said he does not think insurers would be able to exclude oil from a flood as pollution damage.

"Your property policy as a hotel owner, I think you'd be covered if you had flood insurance, and we're talking about damage from the water whether it's oily or not," said White, who mainly represents policyholders in insurance disputes.

"But I wouldn't put it past the insurance company to try to say, 'Well, no no no, this isn't covered because it's pollution,'" he said, but added that he "really would be surprised" if the insurance industry tried to take that position. Business interruption coverage generally excludes pollution, so that would not help business owners, he said. "If you're a hotel owner on the beach, it just wouldn't occur to you that you're going to have to deal with oil on your beach like that," White said. "So I doubt that any of the businesses that are impacted by this have pollution coverage. And without that they don't get business interruption."

Oil in floodwater is nothing new. It happens all the time, though some events are bigger than others. A ruptured oil tank in St. Bernard Parish, La., leaked as a result of Hurricane Katrina and affected about 1,700 homes.

"There [are] always pollutants in the water with the storm surge," said Chip Merlin, a policyholder attorney with Merlin Law Group.

"I think National Flood is absolutely going to be responsible for any pollutants and things like that," said Merlin, whose firm has offices in Houston and Tampa, Fla. "They've paid this in the past, they've already indicated they'll pay it in the future." For excess flood policies, not all "dovetail" with NFIP policies, Merlin said. "Some have exclusions with respect to pollutants and oil and the extra, increased costs associated with that. So it's important for commercial interests to ask" as they buy excess coverage, he said.

If the NFIP faced higher costs from oil cleanup, it would likely pursue claims against BP, he said. "Everybody eventually is going to go back to BP."

Mark Romero, executive vice president with Brown & Brown of Louisiana, said he thinks many excess flood policies have exclusions that could be applied to pollution-related damage. And commercial and personal property policies will generally exclude flood damage. "For the oil to impact the building, it will only probably occur as a result of a rising water event, which would be excluded on most commercial property and personal property policies," Romero said. "And I think that's the key. NFIP responded and said for those NFIP policyholders, we're going to recognize the oil in our form."

While Romero said he has not seen policyholders in disputes with carriers over oily floodwater in the past, the potential for contamination with the BP spill is far greater. "We think we have problems now with the spilling byitself. Let's just pray we don't have a hurricane come through here," Romero said.

As for pollution exclusions, Merlin said there has been "extreme debate" within his firm as to whether oil would be considered a pollutant.

"The truth of the matter is oil itself is a naturally occurring element," he said. "It depends upon the definition [in] the insurance policy, and that's of some debate," he said. "In the event people were to make insurance coverage claims and force them, I know it would be a raging contention."

So far, most insurance litigation related to the oil spill involves liability coverages for the companies involved in the Deepwater Horizon rig, Merlin said. It is easier to make a claim against BP, and there is no "driving economic engine" for people to file claims with their insurers, he said.

"That will change radically if BP were to [either] take a different position regarding its responsibility for the damage, or its inability to do so if it becomes bankrupt," Merlin said. "Then I would imagine there will be a lot of insurance claims that are going to be submitted. And there's going to be a lot of insurance coverage litigation by first-party people. But hopefully that won't happen and hopefully BP
won't go broke."

But Merlin is advising policyholders to notify their carriers of losses, as has Marsh & McLennan Cos. Inc. unit Marsh Inc. The brokerage warned of an emerging market trend, with certain excess liability carriers saying they plan to add broad, event-specific exclusions to their 2010-2011 policies to eliminate Deepwater Horizon-related coverage. Some carriers have said they plan to strictly enforce notification time limits, Marsh said, "without any weight given to the date the insured first became aware that they faced potential exposure."

A strict interpretation of an 80-day limit would have required notice before the end of the day July 8, Marsh said.