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(Updates with comment from head of the American Petroleum Institute and more details.) By Siobhan Hughes Of DOW JONES NEWSWIRES WASHINGTON (Dow Jones)--The U.S. House of Representatives on Friday voted to overhaul the entire system of offshore drilling, responding to the worst offshore oil spill in U.S. history with new drilling safeguards and the elimination of a cap on damages that companies must pay for such spills. The 209-193 vote came more than three months after a rig leased by BP PLC (BP, BP.LN) exploded, killing 11 workers and dumping tens of millions of gallons of into the Gulf of Mexico. But oil-state Democrats broke ranks with their party to join Republicans in warning that the response goes too far and will put independent oil and gas producers out of business. The defections suggest that spill legislation is running into obstacles as action moves to the U.S. Senate, where it is unclear that Democrats have the votes to move forward. "It will kill jobs and increase our reliance on foreign oil," said Rep. Gene Green (D, Texas), who voted against the bill and had estimated that about 30 Democratic lawmakers were in opposition. House Democratic leaders are pushing to change every aspect of the offshore-drilling business, from the time a company bids on a lease to the point when it designs deep-water wells and puts safety equipment on drilling rigs. The most contentious part of the legislation involves eliminating the cap on economic damages paid to residents and businesses harmed by oil spills. Democrats want to discard liability caps, currently set at $75 million, in order to avoid putting taxpayers on the hook for damages that go beyond the costs of clean-up. On Thursday, the White House called liability limits an "implicit subsidy" for the oil and gas industry, and said it "strongly supports" repealing the limit on economic damages claims. But independent oil and gas producers fear being put out of business. Insurers have indicated that they will not offer offshore-drilling insurance without a cap on damage claims. The result would be to leave offshore drilling to state-owned and giant corporate oil companies, which can self-insure against damages. "It's unfortunate that the House has now taken action--I might say by a very slim margin--that has the potential to destroy jobs and threaten the economic recovery," said Jack Gerard, the president of the American Petroleum Institute. "Liability is clearly one of the largest issues because it has such an immediate adverse impact on the industry." House Democrats also used the bill to deliver a message that the U.S. is willing to take away drilling privileges from companies with poor safety records--a measure that would likely hit BP especially hard. Under the bill, companies seeking leases or permits would have to certify that no more than 10 safety-violation related deaths had occurred at their facilities over the prior seven years. With 11 deaths on the Deepwater Horizon rig in April, BP faces the risk of being disqualified. BP has asked House leaders to soften the legislation, warning that the measure "could result in the loss of thousands of jobs." Sentiment is running against BP, even among Republicans. Rep. Steve Scalise (R, La.) told reporters, "I don't have any problem" with the safety-record measure. "BP has got a long track record of not playing by the rules." The clash between Democrats and Republicans reflects has a broader fight about the role of government in offshore drilling. Where regulators under the Bush administration and later under the Obama administration had deferred decision-making to the oil industry, the Democratic-controlled House is proposing that the government become involved in the design of safety equipment and procedures for constructing offshore wells. "Big oil was writing their own rules," said Rep. Nick Rahall (D, W.Va.). "The industry should take a look at the spill in the Gulf to see how an overly permissive attitude can turn into a real horror story." Under the bill, companies would be required to conduct a cement bond log test when drilling wells. BP decided not to conduct the test at its failed Macondo well, even though Halliburton Corp. (HAL), which was contracted to do the cementing work, has said the test was the only way to ensure the quality of the job. Drilling rigs would also have to have two sets of blind shear rams on blowout preventers. Blowout preventers are supposed to shut off wells in the event of a catastrophic disaster, with the shear rams the last line of defense because they are supposed to cut and seal the drill pipe. BP was unable to activate its blowout preventer. Officials are looking into whether the single set of shear rams on BP's blowout preventer failed, something that will not be known until the blowout preventer is pulled from the sea floor. House Speaker Nancy Pelosi (D., Calif.) and other members of the Democratic leadership had heard all week from oil-state Democrats that the legislation went too far, prompting Democratic leaders to make a number of concessions. The most visible sign of the dealmaking came when the Democratic leadership allowed a vote on an amendment that would allow smaller companies to meet financial responsibility requirements by pooling of resources or through joint insurance coverage. The leadership also allowed a vote on ending a six-month ban on deepwater drilling. Both amendments passed, but weren't enough to keep oil-state lawmakers from voting against the overall bill. The bill is H.R. 3534. It is titled the Consolidated Land, Energy, and Aquatic Resources Act of 2010. -By Siobhan Hughes, Dow Jones Newswires; (202) 862-6654; siobhan.hughes@dowjones.com (END) Dow Jones Newswires July 30, 2010 18:52 ET (22:52 GMT)