Environmental Liability, Marine Insurance and An Optimal Risk Sharing Strategy for Marine Oil Transport

Recent changes in the U.S. liability regime for oil pollution damage are precipitating a potential insurance crisis for oil carriers operating in U.S. waters. While liability rules can be useful in causing the oil transport industry to internalize the costs of oil pollution, unlimited liability combined with uncertainty in damage valuation can result in great costs to society, including the possible disruption of oil supplies. We formulate a model to determine an optimal level of risk-sharing for oil pollution damage between the public and the foreign tanker industry, and show how a socially optimal limit to liabilitycan be determined.