Pollution Containment

Whenever there is a release of a hazardous substance that could cause injury or give rise to a pollution claim, an immediate response is required. Those responding to such an incident need to have expertise in many areas, including remediation and environmental law.

Examples of environmental disasters include the 1989 crude oil spill from the Exxon Valdez off the coast of Alaska; chemical contamination in homes built over the Love Canal in Niagara Falls, New York; and the 2010 explosion of the Deepwater Horizon offshore drilling platform.

Recent incidents in Canada – such as the Mount Polley mine disaster in British Columbia and the Lac-Mégantic train derailment in Quebec – show that environmental incidents can originate from numerous sources and can pose severe damage to the environment, property and public health. They can also damage a business and its reputation.

Unlike other traditional property and casualty insurance claims – where damage is done and the state of damage remains relatively inactive once it is inflicted – damage from an environmental incident can grow exponentially, quickly.

Quite simply, pollution spreads. Depending on where an environmental incident occurs, it can spread even more rapidly, causing both physical environmental and financial damages to climb. For instance, a fuel oil spill in a paved parking lot may not pose a costly threat. But say that contaminant trickles from the parking lot into a storm sewer, which, in turn, discharges into a stream several hundred metres away.

The resulting damage – which could include clean-up, fine, public relations and national resource restoration expenses, among others – can grow by a factor of 10.

SPECIAL EXPERTISE

One characteristic of environmental claims is a sense of urgency. All environmental claims require an immediate response. Environmental claims have specific areas of complexity, including the immediate need to contain a pollutant, whether the pollutant is released into the ground, air or water.

They also require substantial specialized expertise in a variety of different areas (such as science, engineering and environmental law) to contend with the issues and tasks that typically follow a pollution incident. Those tasks include the following:

• understanding the dynamics of all the parties involved and then dealing with them to meet local, provincial and national environmental oversight and regulatory requirements;

• choosing an appropriate and cost-effective remediation method;

• assessing environmental/natural resource damages;

• monitoring long-term clean-up costs and progress;

• handling local stakeholders, from homeowners to grassroots environmental activists; and

• providing legal defence support.

SPILL RESPONSE PLANS

One company’s environmental disaster may not be considered disastrous to all companies. The cost of a 750- litre fuel spill along a highway could devastate a small trucking company, but a spill of the same size may be deemed a minor incident by a large oil company.

Yet regardless of a company’s size, an environmental incident has the potential to pose a bigger financial loss and more reputational damage if not handled properly.

Many facility operations are legally required to prepare response plans in the event of a spill situation. As environmental incidents require instant attention, these plans help set responses in motion quickly. This is critical to reducing costs and controlling liability when a disaster takes place.

Development of a response plan may require outside assistance, which can be advantageous for the different perspectives a third-party can bring. Consulting companies specialize in identifying exposures, recommending preventive measures, engineering controls, and preparing the response protocols.

Others that can be called in to help with response planning include local fire departments and regulators, as well as a variety of other sources that insurance companies make available to their clients to help with loss prevention efforts.

Likewise, companies have come to realize that the adequacy, or inadequacy, of their insurance is an important consideration in their survival and well-being, especially in the event of an environmental incident. A commercial general liability (CGL) policy will likely not cover all of a business’ exposure to the extent it may need.

Most CGL policies offer little or no pollution coverage. Instead, most actually contain a pollution exclusion. Likewise, most property polices do not offer coverage for clean-up of the company’s owned property in the event of a pollution incident.

The environmental insurance market has grown and developed over the last 30 years to address these coverage gaps. However, in Canada, not all insurance companies can offer local in-house expertise on technical environmental matters.

PRE-QUALIFICATION

In addition to coverage designed to address pollution-related expenses that most other coverages exclude, another advantage of specialized pollution coverages is the specific environmental expertise of technical consultants, legal and claims experts that some environmental insurers offer their clients.

Claims specialists work with underwriting teams to provide clients with a very integrated environmental risk management approach, helping strengthen both loss prevention and preparedness just in case the worst happens. This expertise is particularly instrumental in facilitating a quick response to an environmental incident that helps contain and minimize potential liability and control clean-up cost severity.

Claims specialists with engineering/science-oriented backgrounds bring a great understanding of the physical and chemical characteristics of pollutants, including how they react in any given environment, what remediation methods have proven most successful, or what environmental regulations could be called into play.

In the event of an environmental disaster, a business needs to be ready to act. Environmental insurers and their claims specialists put considerable effort into pre-qualifying environmental emergency response contractors and consultants, looking to determine which vendors have the proper equipment, trained personnel and appropriate insurance coverage to address a situation. This pre-qualification process also allows a business to pre-establish rates, terms and conditions that will allow immediate mobilization of the necessary resources and avoid the kind of price gouging that many fall victim to during times of crisis.

FIRST RESPONSE

Many parties become involved in pollution claims. Environmental claims specialists – working with their loss prevention teams – often serve as important liaisons even before an incident occurs. For instance, local first responders, including fire departments, must have the proper training and equipment to respond to a large release at an industrial facility property.

To help manage severity concerns, many insurers will provide local fire departments with the opportunity to visit a site, point out potential issues or even conduct training at a business’ facility to establish a level of trust. This type of liaison also gives first responders the advantage of having previously been to the site before any disaster situation.

Other agencies also play a key part in planning, including provincial ministries of environment or labour, as well as various municipal or regional agencies. Immediately following an environmental incident, part of an environmental claims consultant’s job is establishing good lines of communications with these agencies, as well as neighbouring businesses, homeowners, local environmental organizations or others who may be directly affected by a pollution incident or are ready to voice their concerns.

Three examples of hazardous material releases give some guidance on the necessary response, and the potential magnitude of an insurance claim.

RAIL SPILL

In one case, a chemical manufacturer received rail cars of sodium hydroxide on a rail spur located on its property. While offloading operations were performed, a two-inch hose dislodged from its connection coupling. As a result, more than 38,000 litres of sodium hydroxide was released into a gravel area along the rail line. The spill entered drainage ditches on both sides of the rail line.

Environmental claims counsel and a technical consultant worked with the manufacturer to co-ordinate and manage the clean-up of the pollution release at the insured’s location. Claims counsel retained a hazmat contractor to remove more than 800 tons of contaminated soil and collect 132,000 litres of sodium hydroxide water. The technical consultant worked closely with the insured to ensure that the remediation response was timely, performed properly and the insured’s property was returned to its pre-release condition.

As a result of this release, the company’s environmental insurer paid US$1.9 million under an environmental policy to clean up the pollution release.

WAREHOUSE FIRE

In another incident, a fire erupted at a general storage warehouse, spreading to its hazardous chemical storage area. This resulted in a release of toxic smoke and chemical vapours into the surrounding community. Hazardous liquids were also released into the surrounding soils through firefighting water runoff. The local fire department’s hazardous materials response team responded to the fire to contain the contamination. Hundreds of surrounding community members filed a class action lawsuit, citing health problems from inhalation of toxic vapours and property damage from hazardous firefighting water run-off. On behalf of the warehouse, an environmental claims consultant responded and interacted with regulatory agencies to determine clean-up actions and retain local counsel to handle the class action lawsuit.

The warehouse’s pollution insurance paid US$545,000 to settle the citizens’ suit and cover remediation and legal defence costs.

AMMONIA RELEASE

Another example of a release, of a toxic inhalation hazard, involved the renovation and expansion of a food distribution centre. The construction manager hired a contractor to construct and install a new refrigeration system at the facility. As the contractor was cutting a section of piping, a cloud of ammonia was released inside the facility.

It took more than an hour to contain the release. Four workers and two medical technicians were sent to hospital as a result.

The contractor’s environmental insurer responded. The contractor had pollution liability coverage as part of a combined pollution and professional liability policy. It was also determined that there was US$100,000 of pollution coverage available in its general liability policy.

Additionally, the claim investigation revealed that the facility owner was not a “passive” observer, as originally reported. This was due to the fact that the facility owner’s “refrigeration expert” provided guidance and advice during the line-cutting operation.

The contractor’s environmental insurer was able to facilitate a reduction in the initial demand based on the involvement in the facility owner refrigeration expert. The general liability carrier paid its US$100,000 pollution limit. The contractor’s pollution policy covered the remaining damages, paying in excess of US$250,000.

The immediate decisions that must be made surrounding an environmental incident are most effective if they have received prior thought and planning by experienced professionals. Past environmental disasters have left many businesses thinking about what could happen. Preparation for an environmental incident mitigates potential future liabilities, controls clean-up costs, potentially reduces insurance costs and maintains a positive image with employees, customers and the public at large.