Environmental Insurance in a Changing Regulatory World

During these difficult economic times, it is more important than ever for businesses to effectively manage their risk -- in order to survive the myriad of factors that might otherwise undermine their financial performance and threaten their long-term viability. Environmental risks present a unique set of challenges that extend to most commercial and industrial ventures, including land owners, lessees, contractors, consultants, manufacturers, and transporters. A consistently evolving regulatory regime, combined with the continuing progression of scientific and epidemiological data, as well as changes in public perception, make it imperative that environmental risks be identified and properly managed, to the greatest extent possible. Environmental liability insurance, also known as Premises Pollution Liability Insurance, is an important risk management tool for managing continuous fluctuations in both environmental risks and environmental regulations, and the potential pitfalls that they present.

Environmental liability insurance was first developed in response to financial responsibility regulations put forth in 1976, under the Resource Conservation and Recovery Act (RCRA). The RCRA established new regulatory requirements for handling and managing hazardous and non-hazardous waste. Most notably, Subtitle C of RCRA instituted what is generally known as a “cradle to grave” system of regulation that requires detailed tracking and recordkeeping of hazardous waste from its point of origin to its final destination for treatment and/or disposal1. Early environmental insurance policies were written to support these financial responsibility obligations. Policies were written for businesses operating from a specific site or sites that were recognized as RCRA facilities, based on the waste streams handled as part of their operations. Examples of some of the types of facilities regulated under RCRA include chemical manufacturers and distributors, landfills and recycling facilities, waste treatment facilities, and bulk storage locations.

The insurance policies originally available for these types of sites have grown into sophisticated products that can also meet the needs of businesses in the industrial, commercial, and habitational markets, to manage their risks. Originally, environmental regulations addressed obvious risks and exposures through legislation, such as RCRA. The growth of our knowledge and understanding regarding environmental impact in our daily life has an ever expanding web of regulations attempting to manage a wide range of those impacts. One of the primary exposures that environmental liability insurance can manage is the financial impact risk associated with constantly changing regulations.

While it is important for a business to identify the regulatory risks that may impact their specific industry, environmental liability insurance provides an effective risk transfer tool for a portion of the financial liability associated with changing regulation. That said, environmental insurance must be considered proactively and not reactively if it is to provide the most effective transfer of risk. Examples of exposures that pose potential liabilities for property owners, operators, and tenants who could be impacted by developing regulations are summarized below:

  • Vapor intrusion is the process by which volatile contaminants in soil and groundwater migrate into buildings and homes, resulting in degradation of indoor air quality with a potential for impacting occupant health.. The EPA has proposed to add evaluation of vapor intrusion risk as a component of the Hazard Ranking System for evaluating Superfund sites, and a decision on potential rulemaking is expected by January, 20122. Regulatory responses to vapor intrusion pathways may include reducing currently acceptable standards for contaminants in soil and groundwater in order to protect indoor air quality.

  • Coal fly ash, a byproduct of the coal burning process, is currently regulated by individual states, however legislation is being considered at the Federal level that would make coal fly ash a special waste under hazardous waste standards3. Coal fly ash often contains elevated concentrations of contaminants including metals, polyaromatic hydrocarbons (PAHs), and dioxins. It is also frequently reused as an amendment to Portland cement and other building materials. This issue has the potential for substantial financial impacts to the coal industry and the building materials industry, should more stringent regulations be adopted.

  • Air quality impacts associated with the emission of greenhouse gases is another area where regulation has been proposed that could have far-reaching impacts. Regulations proposed by the EPA would lower the standards for ambient air quality and air emissions, in order to improve overall quality of life and reduce public health costs4. Compliance and enforcement actions associated with lower emissions standards will have significant financial impacts across many manufacturing industries5. This politically-charged issue will likely continue to be fought publicly and passionately, and the regulatory outcome is still uncertain.

  • Nonpoint source pollution, including erosion and stormwater runoff, has the potential to degrade surface water quality due to the deposition of silt and sediments that may contain metals, fertilizers, pesticides, and other contaminants. It may also impact surface water quality by increasing turbidity and salinity, while reducing biologically available oxygen. The EPA’s Clean Water Act Action Plan first discussed in 2009 may result in changes in the permitting and enforcement program under the National Pollutant Discharge Elimination System (NPDES)6. New enforcement activity and potential regulation changes in this area may result in financial impacts to property developers, construction firms, manufacturers, and agricultural dischargers.

  • Some of the developing areas of environmental risk and potential regulation include the handling and disposal of e-waste (electronic waste); nanotechnology due to the unique properties of nanoparticles; green building projects that use vegetative roofs and/or collect and reuse rain runoff; bacterial pathogens carried through the water supply, generally, and that are present in healthcare facilities; and possible contaminants related to products imported from other countries within the global economy.

It is essential that your risk manager or safety director is aware of the impacts associated with environmental risks, and is aware of the protection that a sound environmental insurance program can add to your asset protection plan. Contact your insurance agent/underwriter to learn more about the coverages available to assist you with this critical addition to your insurance portfolio.

1 History of RCRA. http://www.epa.gov/epawaste/laws-regs/rcrahistory.htm

2 EPA to Announce the Possibility of Adding Vapor Intrusion as a Component to the Hazard Ranking System. http://www.rpelawalert.com/2011/06/articles/environmental/epa-to-announce-the-possibility-of-adding-vapor-intrusion-as-a-component-to-the-hazard-ranking-system/

3 EPA considers tougher rules against fly ash. http://www.tulsaworld.com/news/article.aspx?subjectid=11&articleid=20100711_12_A15_Thoseo780666

4 Cross-State Air Pollution Rule (CSAPR). http://www.epa.gov/airtransport/

5 Another Challenge to Greenhouse Gas Regulation. http://green.blogs.nytimes.com/2011/02/03/another-challenge-to-greenhouse-gas-regulation/

6 Clean Water Act Action Plan. http://www.epa.gov/compliance/civil/cwa/cwaenfplan.html

About the Authors

Barbara Deas is division president, environmental, for ACE Westchester, the U.S.-based wholesale focused property and casualty operation of the ACE Group.

Todd LaBandt is executive underwriter, ACE Westchester Environmental Division, part of the ACE Group.