Guilty until proven innocent? Why the stakes are so high when the polluter pays

Environmental damage losses are growing in severity as unforgiving regulators take polluters to task.

In November 2015, the failure of a tailings dam in Brazil released a torrent of mud – waste from nearby mines – containing high levels of toxic heavy metals and resulting in the deaths of 17 people. In March, the companies involved had agreed to pay $5.1bn in damages over 15 years for environmental and community damages.

Increasingly stringent environmental regulation is resulting in new exposures for organizations of all sizes and from a wide range of sectors, and resulting in increasingly expensive clean-up costs and fines. In addition, there is growing awareness of the reputational impact a company can face.
Setting the benchmark

“The U.S. probably led the way in terms of statutory regulation of growing pollution challenges,” says David Waller, U.K. head of environmental adjusting, major and complex loss team, Crawford. “As early as 1980, the U.S. Superfund legislation brought in a regime of strict liabilities for polluters and since 2009, all countries in the EU have had standardized legislation that largely follows the U.S. model, which has broadly been referred to as the Environmental Liability Directive (ELD).”

“This has, in many jurisdictions, broadened the scope of liabilities arising and brought in lower thresholds for intervention for the regulator,” he continues. “It’s also empowered regulators to act where previously under national frameworks, they couldn’t. Under the ELD the regulator can intervene if there’s contamination impact to habitats and species, for instance.” With budgets reduced after the financial crisis, there is growing pressure on environmental regulators globally to identify polluters and hold them liable for clean-up costs. Where the original polluter cannot be identified, current site operators may find themselves liable.

There is also growing pressure from lobby groups and the public, particularly in North America, which has implications for suspected polluters and their senior management. Hitting the headlines currently is the water crisis in Flint, Michigan, where high levels of lead were discovered in drinking water after an outbreak of Legionnaire’s disease.

Another case grabbing the headlines is a methane leak which has forced thousands from their homes in Southern California. Officials say it could be months before the leak is contained and there are also health implications, with Porter Ranch residents complaining of headaches and nosebleeds.

The U.S. has a very active environmental tort liability regime, demonstrated by the history of U.S. toxic tort claims. In this market, when an environmental disaster occurs, there is inevitably a greater likelihood of third-party claims arising.

“Environmental cases are increasingly more complex because damages are not as often related solely to direct economic losses, as they are in consumer cases,” says Lorna Lightfoot-Ware, director of Operations at Garden City Group, LLC “People are affected personally and economically.”

“In addition to economic losses, these cases can include injury to real or personal property or natural resources, loss of property value, loss of subsistence use of natural resources, and physical and/or emotional injury or death,” she continues. “And to make things even more complicated, each of the foregoing can have both short and long term implications.”

“Executing on remedies for such a broad range of losses can be challenging,” she adds. “Increasingly, companies are establishing voluntary programs when the injury or crisis warrants a prompt and coordinated response. Voluntary programs bring claimants into the process early and provide immediate assistance.”

“Medical monitoring is very often a component in environmental cases because physical damages can be sudden or very gradual, potentially manifesting over decades, and encompass an emotional component as well,” says Lightfoot-Ware.
Growing cost of remediation

The requirement to return sites to their original state is complicated, increasingly expensive and not always insured under general liability policies.

“As with medical monitoring, environmental damages can arise immediately or endure an evolutionary process over an extended period of time affecting public and natural resources, as well as property values,” says Kristin Oates, director of special projects in Garden City Group’s New Orleans office. “Other contributing factors to the complexity of environmental cases are naturally occurring events.”

“In south Louisiana the coastline has been in a state of erosion for over a century resulting in an evolutionary process in the Gulf of Mexico ecosystem,” says Oates. “Another such example is the impact of climate change on the environment, as well as hurricanes and other natural disasters. Combined, these factors must be weighted relative to the effects of environmental damage.”

There are lots of complications involved in remediating contamination that has spread widely beyond a specific site, explains Waller. “If you have a spill and the site lies above a productive aquifer – a geological body that holds groundwater that may be used as a drinking water source – the contaminant can migrate downwards through soils and substrata to impact the water in the aquifer.” “Once this has happened, the contaminated water will eventually and inevitably be drawn into the local borehole, contaminating all the drinking water supplied to houses and businesses in the vicinity… and it’s then very difficult or even impossible to put right, and a very significant financial liability is unavoidable,” he continues.

“Previously, a regulator would impose on an operator who polluted the environment the requirement to clean up the affected area as best science allows,” he adds. “That in itself can be a very expensive process. The new regulations impose further requirements that an operator identified as a polluter will have to clean up the part of the environment directly affected, but if that exercise only restores the affected site to say 60% of the pre-incident environmental amenity, the polluter will have to spend further potentially significant sums to make up the shortfall by benefiting the environment elsewhere.”

It’s not all bad news. Remediation methods are improving and whereas once the response may have been to remove and dispose of all contaminated soil, now there are options to break pollutants down in other ways, minimizing the impact of the clean-up.

“There are now many innovative ways of remediating inland pollution that can avoid the necessity to excavate all affected materials and take it to landfill sites,” says Waller. “There are various options for in situ and ex situ treatment, and it is important to recognize that a successful remediation does not need to remove every last drop of contamination.”

“To ensure best possible outcomes, it is important to quickly and fully understand the nature and extent of environmental risks arising from a given event and to engage with the regulators and any stakeholders to identify and manage expectations and ensure the right remediation options are implemented,” Waller continues. “Conversely, it is equally important to avoid inappropriate ‘corner-cutting’ in a remediation scheme, as this can involve projects having to be re-opened following premature closure, often with much more significant cost and reputational damage.”

Once considered an exposure primarily for heavy industries, claims for environmental damage are increasingly being made against companies from all sectors. This includes schools, transportation companies, small manufacturers and landowners. “The market has recently seen some interesting new environmental challenges,” says Waller. “Among these have been well publicized incidents involving contamination allegedly created by members of the traveling community, leaving behind contamination issues when they leave temporary sites. The practicalities for a regulator pursuing a recovery against the travelers are prohibitive so the statutory liability to clean up tends to be imposed, under a fall back mechanism in the legislation, on the unfortunate landowner. Where certain contaminants (e.g. asbestos) are involved, the costs can be very significant.”

Mitigating reputational harm In Canada, recent complex and costly environmental damage claims have primarily stemmed from heavy industry. As in Brazil, tailing dam failures have been behind some of the more high profile claims. “A significant proportion of Canada’s GDP still comes from primary industry – oil, petrochemicals, timber, fishing, mining etc,” says Glenn Nadworny, executive general adjuster for Crawford Global Technigas cal Services®, based in Vancouver. “Those types of operations are often located in remote frontier areas, not close to the types of resources that might be necessary to address a severe accident.”

He recalls two mining accidents which caused widespread devastation. “Just recently there were two separate catastrophic failures of tailings ponds – one in Alberta and the other in British Columbia. In both these incidents all the retained water and tailings escaped out into the environment and water courses into some fairly major rivers. They were therefore considered to be huge environmental and political disasters, and invited significant public attention.”

Based on his experience dealing with high profile environmental accidents, Nadworny thinks this is a lesson many firms have taken on board. “Many of these large mining, oil and gas companies do have people in place and an emergency response ready from a communications perspective, so they can manage the company’s reputation and the storyline of what’s going on.”

There is also a growing recognition that directors and officers can be taken to task for environmental disasters. “In this recent mining spill claim it was called into question whether the senior executives of a mining company that experienced this failure were culpable,” says Nadworny. “They started looking for their coverages under their D&O because they thought they could be potentially exposed.”

In January 2016, the former director of an alumina plant in Hungary, along with 14 other employees, were acquitted of charges of negligence, violations of waste management and environment pollution after a catastrophic spill in 2010. MAL Corp, the owner of the alumina plant, was nevertheless held responsible. It was taken over by the government and put into liquidation.

These high-profile incidents and concerns about the reputational damage they can cause have helped to raise awareness of standalone environmental impairment liability (EIL) insurance. There is a recognition that not all instances of pollution – including those that have occurred historically or taken place over a long period of time – are covered by general liability policies.

As a result, EIL take-up is on the rise. “With today’s environmental legislation we’re talking about damage to the environment as being the key liability trigger, so pollution has become a subset of damage,” explains Cliff Warman, environmental practice leader for Marsh within the EMEA region.

“The insurance industry has had to step up and change its wording in response to that,” he continues. “We now have damage cover on EIL polices and it has led to increases in the amount of EIL that is bought and the reasons it is bought.”

“It’s no longer just those sectors perceived to be highly polluting that could now be subject to a polluter pays principle,” he concludes. “Anybody can cause damage to the environment. You don’t need to be handling hazardous or polluting substances to have the potential to cause damage.”

April 2016