Trends in Superfund reform.
Many businesses advocate Superfund reform. A system of proportional liability has been proposed, as well as a national coverage rule. The creation of a national trust fund and the elimination of retroactive liability has also been suggested. For the implementation of these proposals funding would have to be expanded through some form of tax. Congress will review the Superfund statue next year.

Superfund (Analysis)
Liability for environmental damages (Laws, regulations and rules)
Toxic torts (Laws, regulations and rules)
Christine, Brian
Pub Date:
Name: Risk Management Publisher: Risk Management Society Publishing, Inc. Audience: Trade Format: Magazine/Journal Subject: Business; Human resources and labor relations; Insurance Copyright: COPYRIGHT 1993 Risk Management Society Publishing, Inc. ISSN: 0035-5593
Date: August, 1993 Source Volume: v40 Source Issue: n8
Product Code: 9106400 Pollution Control & Abatement NAICS Code: 92411 Administration of Air and Water Resource and Solid Waste Management Programs
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ENVIRONMENTAL LIABILITIES are among the most formidable exposures facing businesses today. Whether their companies' exposures stem from the Comprehensive I Environmental Response, Compensation, and Liability Act (CERCLA) - better known as Superfund - the Resource Compensation and Recovery Act (RCRA) or any other of a wide range of environmental laws, risk managers must implement insurance and risk financing solutions that will cover their exposures, said Dean Jeffery Telego, president of Risk Management Technologies Inc. (RTM), an environmental risk management consulting firm based in Alexandria, Virginia.

Speaking at RTM's recent conference on the pollution insurance marketplace and new developments in environmental risk and claims management in New York, Mr. Telego reported that the changing nature of the environmental field has prompted insurers to develop a wide range of new products. "The current market conditions have forced the expansion of new niche markets," he said, adding that this expansion has resulted from Superfund's liability scheme; RCRA's financial assurance and corrective action requirements; and various state and local environmental laws, regulations and ordinances. Other forces are the continuing soft market and an increase in the number of insurers writing pollution policies, said Mr. Telego. "These new policies and policy form enhancements include endorsements and financial mechanisms that allow for multi-year contracts on environmental risks such as for voluntary cleanups of contaminated real estate property, and subsequent transfer of that property to environmental impairment liability coverage."

Risk managers will also notice a growth in customized coverages for landfills, underground storage tanks, asbestos, solvents, recyclers, lead paint abatement contractors and policies that cover buyers, sellers and lenders of commercial and industrial real estate. "No longer are we seeing off-the-shelf products," said Mr. Telego. "Products are becoming more customized, and the

existing environmental liability schemes will drive niche markets to expand further and create more flexibility in policy coverages and pricing structures."

Another key development is the increase in use of finite risk products and risk funding for environmental exposures, Mr. Telego added. "There is an accelerated movement in the insurance marketplace to create integrated environmental insurance products that encompass a combination of risk sharing and risk transfer that allows for off-balance sheet accounting, budget stabilization, and investment income and liability protection," he explained.

While these new developments in environmental policies have created more coverage options, many companies are also taking a more proactive approach to their environmental risks. "There's been a move toward voluntary cleanup of contaminated commercial and industrial properties, as well as a move toward pollution prevention," said Mr. Telego. "And with the increase in regulations and the associated liabilities, corporate risk managers will be playing a greater role in environmental affairs, overseeing environmental issues as part of risk prevention and risk control." Mr. Telego also predicted that risk managers will spend more time overseeing the environmental auditing of their companies' operations to identify any potential pollution loss exposures, as well as targeting ways to minimize pollution risks. Other risk control steps include the creation of crisis management programs, as well as risk communications strategies to deruse any concerns the local community may have about the company's activities, he added.

Superfund's Litigation Nightmare

BUT WHILE RISK MANAGERS can use risk control strategies and the new, enhanced insurance coverages for their environmental exposures, complying with regulations still represents a difficult challenge. And of all existing environmental legislation, perhaps the most onerous for U.S. business is Superfund, stated Peter A. Lefkin, vice president of government and industry affairs at Fireman's Fund Insurance Companies. "The Superfund law has failed miserably by every criteria," he added. "Thirteen years after enactment, only 5

percent of the sites on the National Priority List (NPL) have been cleaned up." Mr. Lefkin added that there are currently 1,275 sites listed on the NPL, and another 33,000 that are potentially eligible. Various studies estimate the cost of Superfund to be between $375 billion to $1.3 trillion.

The result is a system in disarray and "the most extravagantly wasteful environmental law on the nation's books," reported Leslie Cheek, III, director of domestic external affairs at Xerox Corporation. Mr. Cheek noted that a forthcoming Rand Corporation study is expected to show that smaller potentially responsible parties (PRPs) spend up to 40 percent of their ultimate cleanup liability on litigation expenses.

These exposures arise from the very nature of the Superfund statute, explained Mr. Lefkin. "When it passed the Superfund law in 1980, Congress sought to duck the difficult issue of funding, relying on the expedient 'polluter pays' principle." Since Superfund's inception, this principle has expanded exponentially the number of PRPs. "An estimated 25,000 PRPs have been identified," remarked Mr. Lelkin. "The OTA maintains that the PRPs confront deanup costs averaging $40 million per site."

Faced with enormous exposures, many of the major PRPs are intensifying their efforts to implicate smaller PRPs and to shift their liability to insurers, said Mr. Cheek. Mr. Lefkin said that in response, insurers are reluctant to provide coverage for some exposures. "Since many of these policies were written 20, 30 or even 40 years ago, the insurance industry argues that Superfund cleanup costs are not covered under past policies." He added that even those PRPs believing they can claim coverage may find their insurers use a number of defenses to bar coverage. "The most prominent of these defenses are factual determinations that the pollution was intentional or that the 'sudden or accidental' provision effectively excluded coverage under past policies."

However, after characterizing the current litigation battle between PRPs and insurers as "ugly," Mr. Cheek predicted that the worst is yet to come. "This is because the multi-step remediation process takes so long to reach the actual construction stage - about 10 years from site listing, on average that the great bulk of cleanup costs at hundreds of NPL sites has yet to be expended." Further obfuscating the matter are continually unpredictable rulings from the courts, said Mr. Cheek. "Even though state and federal courts have been deciding major Superfund insurance coverage cases for over 10 years, there is still no clear pattern as to how they will decide cases, and therefore who will pay."

Superfund Reform?

THERE IS, HOWEVER, a spark of hope in this otherwise gloomy picture: the prospect for Superfund reform. In recent years, a growing number of PRPs, insurers and others have raised their voices for change, said Mr. Lefkin. "Many are frustrated with the pace of the cleanup," he said. "They argue about the unfairness of the liability system as well as the irrationality of the cleanup standards." When Congress reconsiders the Superfund statute next year, it will have to examine many complex issues, said Mr. Lefkin. "A number of proposals are being considered."

Some argue, however, that the existing law is sound and should therefore be retained with either few or no modifications, said Mr. Lefkin. "Among those taking this stance are some environmental groups, which argue that the program's inefficiencies are attributable to the reluctance of PRPs to admit their misdeeds and the general lack of will to enforce the law during the Reagan and Bush administrations." This view is based on a number of convictions, induding the belief that precedent-setting court decisions will reduce cleanup delays; that Superfund has helped deter future pollution through the enforcement of past waste-handling practices; and that removing retroactive liability would eliminate the incentives for PRPs to improve future pollution control methods, said Mr. Lefkin.

Conversely, those calling for major changes in the law cite the fact that cleanup has not occurred in the way originally intended, said Mr. Lefkin. "They argue that under the current system, cleanup remedies have been severely retarded, and the cost to the taxpayer and society has been disproportionate to the actual threat to human health or the environment."

Specific Reform Proposals

REFORM PROPOSALS TAKE a variety of forms, cited Mr. Lefkin, induding the enactment of a system of proportional liability, in which a party's liability would be limited to its actual contribution of waste, and carve outs, which would exempt some PRPs that claim they have been unfairly implicated by the current system, such as lenders, municipalities and small businesses. "Another proposal is for instituting a national coverage rule, including a modest program that would establish uniform rules governing contract coverage," he said. "Having each party contribute a percentage that could later be adjusted for types of coverage and disputes would be consistent with this proposal." However, there is no widespread consensus on how this could be done.

Other proponents of reform advocate the creation of a national trust fund and the elimination of retroacrive liability, said Mr. Lefkin. "This program would eliminate retroactive liability on old hazardous sites and create a public works program that would manage Superfund cleanup," he said. "Instead of relying on the 'polluter pays' concept, Superfund would be financed by a broad-based tax on all businesses."

According to its proponents, this proposal will reduce litigation, and increase the system's fairness by eliminating penalties for environmental practices that were legal at the time they occurred. "However, there are arguments against this reform measure, principally from environmental groups," said Mr. Lelkin, which claim that removing retroactive liability will unfairly exempt companies from paying for their past polluting activities.

For any of these proposals, one thing is clear: funding would have to be expanded, probably through some form of tax. "Proponents of reform argue that while a tax is never really desirable, it certainly offers an improvement over the current system in which billions of dollars are wasted on transaction costs and in which businesses and insurers face enormous uncertainty over their potential liabilities," conduded Mr. Lefkin.
Gale Copyright:
Copyright 1993 Gale, Cengage Learning. All rights reserved.