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,
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
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
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."
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.