Beyond the loss of life and livelihoods, natural disasters generate a huge bill that must be paid to compensate the victims and replace or repair lost property. Floods, hurricanes, earthquakes, explosions, fires and tornadoes have uprooted millions of people and damaged property and the environment. Who bears the cost of these disasters? Whether it's the government or an insurance company, in the end we all pay the bill through taxes and higher premiums. Let's look at a few of these that occurred within the past two decades, and the estimated costs for each. (For more on insuring against natural disasters, see Preparing For Nature's Worst.)
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BP Gulf of Mexico Spill
History tells us that it may be years before the total cost of the Deepwater Horizon spill is known. The Exxon Valdez supertanker ran aground in 1989, but it wasn't until 2008 that the U. S. Supreme Court heard the case on damages. While the monetary cost to clean up such disasters can be estimated at some point, it's very difficult to assess the true financial impact of lost jobs, wildlife lost and damage to the environment.
The cost of this spill grows by the day as oil continues to leak from the ocean floor. While BP is spending between six and seven million per day attempting to cap the well, the greater cost will be to repair the environmental damage and to settle all the lawsuits that will arise. BP has committed reimbursement up to $12 billion to cover damages and the cleanup effort, but the full extent of those damages can't yet be calculated. This would include repayment to federal and state agencies for their expenses related to containing the spill. (For related reading, check out Deducting Disaster: Casualty And Theft Loss.)
Lawsuits are already being filed, and the Oil Pollution Act of 1990 opens the door to new causes of action. A plaintiff no longer needs to be physically touched by the oil to be compensated. It is now possible to recover for related economic damage that can be traced to the spill. This means that anyone whose livelihood was impacted by the spill has the potential for recovery. If the oil creates a disruption to transport along the Mississippi River, the losses could extend to companies that ship goods through the port of New Orleans.
The spill could create an even bigger cost to consumers in the form of higher gasoline prices. Since the spill will reduce the supply of oil, the price of gas will rise even if demand remains constant. It's less clear how this disaster will affect current offshore drilling and plans for future drilling. If operations are curtailed in any way, this would cause higher prices at the pump as well.
This category five hurricane caused mass destruction along the Louisiana and Mississippi coastlines in 2005, and is the costliest and one of the deadliest in U. S. history. The cost estimates generally exceed $100 billion, but the full impact is difficult to quantify. In an early study completed by Risk Management Solutions, it assessed economic damage by calculating the value of more than 150,000 flooded properties and related losses. It estimated insured losses at $10 billion to $25 billion, but that was before factoring in the levee failures in New Orleans.
A White House fact sheet issued in 2007 stated that the federal government has provided more than $127 billion in disaster funding, including tax relief. The aid covered a range of assistance including temporary housing, infrastructure construction and school repairs. The final tally is yet to be determined. (For more on the financial impact of Katrina, see Tax Relief For Katrina Victims.)
Northridge, California Earthquake
The earthquake that rocked southern California in 1994 was a major seismic event with a Richter scale magnitude of 6.7. In addition to 57 lives lost, it caused substantial damage to highways, bridges and buildings. The costs ranged from infrastructure repair to emergency shelters and were borne by government agencies, insurance companies, businesses and individuals.
The total cost is estimated to be $44 billion, with $24 billion of that amount attributed to documented losses and the remaining $20 billion to undocumented and uninsured losses. Recent estimates indicate that roughly half of the documented losses were covered by insurance. These figures do not reflect the impact of human casualties and the indirect ripple effect of the estimated economic loss.
Exxon Valdez Oil Tanker
The 1989 oil spill that wreaked havoc on Prince William Sound and 1,200 miles of coastline was over two decades ago, but the aftereffects still linger. The tanker dumped an estimated 250,000 barrels of oil along the pristine Alaska coastline, killing birds, fish and other wildlife. It also had a severe impact on those who relied on the coastal waters to make a living.
According to ExxonMobil, the company has spent over $4.3 billion to cover the cleanup, fines, compensatory payments and legal settlements including punitive damages. The cost could have been much higher if the Supreme Court hadn't reduced the punitive damages from $2.5 billion to $500 million. The resolution of that case will limit the liability of BP for the Deepwater Horizon oil spill. Under maritime law, the Court ruled that the punitive damages could not exceed the compensatory damages that Exxon had already paid. The fisherman and property owners along the Gulf coast will be limited the same way as their counterparts in Alaska.
The cost of such disasters is likely to grow with inflation and increased commercial activity in areas prone to these occurrences. Stricter building codes have helped to lessen damage from earthquakes and hurricanes. Emergency preparedness has also improved at all levels as lessons have been learned through experience and past inadequacies. While there's nothing we can do about acts of nature, minimizing human error can help to reduce the cost in both lives and money. (To learn how the Deepwater Horizon spill has affected the markets, check out The Great Oil Spill Of 2010.)
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