The Value of Environmental Insurance Programs: What You Can Do to Protect Yourself

The risks tied to environmental accidents are enormous and growing. Globally, environmental regulations are becoming stricter, as both developed and emerging nations attempt to limit and repair the damage of pollution and establish legal means to fund remediation. And the costs associated with cleanup and remediations have soared.

More Threats, Higher Costs

While isolated accidents like the Gulf oil leak capture media attention, the real threats to average companies are more mundane and far more common:

• Asbestos and mold. Companies replacing air ducts need to be mindful of the potential to spread these materials.
• Lead paint. Painting in buildings erected before 1978 require testing to determine if lead paint is present – and if it is present, measures must be taken to contain it.
• Dust. Silica dust from concrete block cutting could be an issue, and would require contractors to contain it.
• Fuel spills. Many companies have fuel and lubricant stations on site. Spills of these materials can require serious – and seriously expensive – remediation.
• Storm water runoff. Rain water can create a risk for companies if it affects wetlands, streams or surrounding areas.

Earlier this year the EPA fined a home builder $1 million for run-off from construction sites in eighteen states. In July, the EPA fined a builder in Maricopa County, Arizona (which includes the city of Phoenix) $106,000 in July for failing to control dust at its construction sites. Enforcement activities are often affecting relatively small projects.

Even a relatively small fine can compromise a company's earnings and dividends. Hundreds of companies ranging from large multinationals to small family owned enterprises routinely find themselves forced to set aside reserves for remediation. Typically, these reserves range into the millions of dollars.

No One Is Safe

Most people associate environmental risk with industries like petroleum or mining, but more sweeping regulations have expanded the liability to companies in manufacturing, agriculture, energy, aviation, commercial development, transportation and myriad other industries. And the threats are only getting worse:

In the United States, companies may be liable for pollution incidents that took place before tougher standards were imposed – even if the company had fully complied with earlier standards.

• Regulators can force companies to perform environmental remediation even on their own properties – or on property acquired from and polluted by others.
• The European Union demands remediation and correction of “biodiversity” damage, which may require fully restoring damaged resources or the creation of similar resources elsewhere.
• The list of substances posing a threat of environmental liability is growing. The U.S. EPA, for example, is now adding sixteen chemicals to its list of potential carcinogens.
• The EU Environmental Liability Directive applies to toxic waste, poisonous chemicals and environmental damage allegedly caused by the release of genetically modified organisms.

All these situations involve pose significant and costly threats to corporate finances.

Most Companies Cannot Survive Alone

Every responsible business strives to avoid accidents, but spills and leaks still take place. The cost of cleaning up a site after a pollution spill can quickly reach the hundreds of millions of dollars. And, then companies must recognize that legal defense costs generally represent 40 percent to 60 percent of the cost of remediation in countries like the U.S.

Just as a business may not have cash available to rebuild a plant after a fire, it may not have the resources to remediate one of its sites. And, frankly, many companies simply do not have the resources in place to keep up with all the regulatory changes. But with the potential risks, companies must protect themselves either by hiring environmental specialists or engaging them as outside consultants.

An underutilized resource is the knowledge that environmental insurance specialists like ACE Environmental can offer. These specialists are familiar with the intricacies of regulatory regimes and liability standards of countries around the world. And can help companies both protect themselves against liability and raise awareness to guard against accidents.

For many years, companies sought coverage for pollution liabilities through commercial general liability, umbrella and excess policies insurance that were never designed to provide protection for such claims. The insurance industry separated most pollution coverage from general liability policies so the actual risks of a pollution incident could be assessed and property underwritten. This created a pool of environmental insurance experts who fully understand the risks companies’ face – risks that go well beyond the routine liabilities covered by general liability or umbrella policies.

But this means executives must seek out environmental insurance specialists to obtain the protection they need. Because every company confronts unique risks, an individual consultation is critical. And good environmental insurance brokers can also provide companies with assistance to help companies reduce their risks by embracing environmental management practices.

William P. Hazelton is Senior Vice President, ACE Environmental Risk, part of ACE USA. With more than 20 years of underwriting and claim experience in the environmental insurance arena, Mr. Hazelton joined ACE USA in 2005. He is a graduate of James Madison University and holds a Bachelor of Science degree in both political science and history, and received his Master of Arts degree from Rutgers, the State University of New Jersey. ACE Environmental Risk, a business unit of ACE USA, offers a full range of environmental liability solutions designed to minimize bottom-line impacts and provide hands-on management for those liabilities. Insurance is provided by ACE American Insurance Company, Philadelphia, PA, and, in some jurisdictions, other insurers within the ACE Group. ACE USA is a U.S.-based business division of the ACE Group.