Environmental Insurance: Do You Need It?

Environmental Insurance: Do You Need It?

If you move a lot of earth, handle chemicals, fuel, emissions beyond an ordinary vehicle, biohazardous material or any other kind of HAZMAT, you may be at risk for a nasty lawsuit. Or you could be fined by the Environmental Protection Agency, Fish & Wildlife Service, or a state environmental agency for endangering a rare species of animal or plant you didn’t even know was at the work site.

Unfortunately, many businesses are inadequately insured for this kind of risk. Environmental risk – the risk associated with damages to the environment and errors and omissions contributing to it – is generally not included with standard liability insurance policies normally sold.

You could do everything right at the executive level. But we all know that employees have minds of their own. If you have an employee who has a fuel spill out in the field, and he deals with it improperly, and the EPA finds out, you could find yourself answering to federal officials – and writing out a check for a hefty fine. You aren’t culpable – but you’re still responsible for your employee’s actions.

Environmental risk insurance helps protect your business against loss due to accidental pollution claims. Your exposure comes from three main sources:

Lawsuits by aggrieved parties claiming they were damaged by pollution you caused.  Violations of regulations and statutes, causing you to have to pay a fine.Costs associated with clean-up and/or mitigation. Contractual obligations to spend money to clean or mitigate pollution, which you do even without being sued.

Nightmare Scenarios:

Union Carbide

Sometime overnight between December 2ndand 3rd, 1984, there was a massive leak at a chemical pesticide plant near the city of Bhopal, India. The gas was heavier than air, and so hugged the ground, enveloping the slums and laborer communities surrounding the plant. The gas killed thousands overnight as they slept. All told, the chemical leak injured more than half a million people: Many of them severely. There was no bringing back the dead, of course. The Indian government demanded $3.3 billion in damages. Ultimately, Union Carbide reached a settlement with the Indian government to pay nearly half a billion dollars in compensation.

Naturally, this is an outlier case. But genuine aggrieved plaintiffs, nuisance lawsuits, and government regulators combine to make things pretty risky for small and medium-sized businesses.

Consider:

One of your drivers has an accident downtown, causing a chemical spill, which in turn causes surrounding businesses to have to close for two days during the clean-up. The businesses claim they lost hundreds of thousands in revenue during those two days as a result of your driver’s actions. Who is liable? You are.

Exxon Valdez

Bringing things closer to home, two more recent environmental catastrophes illustrate the dollar amounts that are potentially at stake with environmental claims. The Exxon Valdez oil spill resulted in a jury award of some $287 million in actual damages and $2 billion in cleanup costs for the grounding of a single ship. The jury also awarded plaintiffs another $5 billion in punitive damages, though that amount was adjusted downward by judges in a series of appeals going all the way up to the Supreme Court. In the end, the disaster cost the Exxon Corporation about $2.5 million, including cleanup, damages to seafood businesses, tourist areas, Native American tribes and others. There was some dispute over total insurance company liability – insurers pointed out that the ship’s captain was known to have alcohol issues, and yet Exxon kept him on the job. This underscores the importance of businesses taking reasonable precautions to prevent or mitigate claims long before the litigation stage. The captain was acquitted of having been under the influence of alcohol that day, though, and Exxon was eventually able to recoup over $780 million from its insurance carriers.

Deepwater Horizon

The catastrophic oil spill in the Gulf of Mexico is in the spring of 2010 still being litigated. British Petroleum has filed lawsuits claiming up to $40 billion against Halliburton, claiming that they were at fault for faulty certification and incompetence in using an industry software program that, if properly used, would have changed the construction of the well. The owner of the doomed Deepwater Horizon rig itself, Transocean, however, carried $700 million specifically in environmental insurance coverage – plus a $560 million hull insurance policy.[i]

BP has estimated the total cost of the spill to be as high as $40 billion. This amount will be split up between several companies and their insurance carriers, but the lawsuits are still winding their way through the litigation process. It will likely be several years before we have a solid accounting of the costs, however.

Strict Liability

Normally, if someone accuses you of negligence in a lawsuit, you can counter that claim by showing you took every reasonable precaution to prevent the accident. But any time you transport certain very hazardous material, you fall under strict liability doctrine. That means that you don’t get points for trying to do the right thing. You are taking on the full brunt of the potential liability regardless of how careful you are. If there are damages from a spill, it’s your fault, period. The courts will hold you responsible.

Most standard business liability insurance is not underwritten or designed to cover strict liability risk. Environmental risk coverage is specifically excluded on most standard forms.

Major Federal Laws

Anyone engaged in any kind of outdoor activity, construction, fleet management or anything beyond an office environment would do well to become familiar with the key federal environmental laws that affect business:

The Clean Air ActThe Clean Water ActEnvironmental Protection ActToxic Substance Control ActThe Oil Pollution Act of 1990The Resource Recovery and Conservation ActThe Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, also known as ‘Superfund”)

Most of these laws are enforced via regulators empowered to levy fines – which can amount to hundreds of thousands of dollars per day in some cases, for as long as the firm is not in compliance. Additionally, company managers could potentially face personal fines and potentially even jail time.

Coverages

The incidents listed above are, thankfully, outliers. Most claims are nowhere near that size. But in many industries, the potential risk for any given company is far greater than they can bear themselves. Depending on your business, you might want to consider one or more of the following specific types of environmental coverage:

Contractor’s Pollution Liability InsuranceDealer and Repair Pollution Liability InsuranceEnvironmental Services Package InsuranceHAZMAT transportation insuranceFixed Price Remediation InsuranceLender Environmental Protection InsuranceStorage Tank Pollution Liability Insurance

Note: There are certain federal insurance requirements for operators of motor vehicles involved in HAZMAT transportation.

Bottom Line

Don’t assume your standard business insurance covers you for this kind of risk. Generally, it does not. If you don’t have coverage specific to environmental risk, chances are you are going naked. That’s a very big risk to take.

[i] http://www.lexisnexis.com/community/insurancelaw/blogs/insurancelawblog/archive/2010/05/17/insurance-implications-of-the-deepwater-horizon-disaster-by-michael-cessna-of-counsel-lathrop-amp-gage-llp.aspx