Environmental Liability: What’s Good Today, Could Be Bad Tomorrow

Environmental Insurance Delivers the Best Shield of Defense Against Emerging Pollutants

The changing character of environmental regulation fits any definition of a moving target. Since the Environmental Protection Agency (EPA) was launched on a wave of environmental consciousness in the early 1970s, the underlying science determining what constitutes a hazardous contaminant has evolved and expanded. This evolution resulted in the often unexpected redefinition of many commonly known chemicals and substances as hazardous materials worthy of control, reduction or elimination, with challenging and costly implications for individual businesses and entire industries.

A central dilemma for many organizations is that a chemical or manufacturing process used completely legally by a business or industry could overnight be deemed a hazardous pollutant due to refinements in the scientific understanding of the nature of that substance. The regulatory implications and resultant costs of mandated clean-ups, process changes, new technologies and other actions could be potentially crippling financially.

Coping with what will continue to be an expanding suite of regulated pollutants and persistent chemicals is a concern facing many businesses, especially at a time when a difficult economy is making sustainable profitability a challenge. The addition of significant financial liabilities due to changes in environmental regulation, fines and possible legal action represent a burden that no organization can afford.

The history of environmental regulation is replete with examples of substances previously considered benign and sometimes even beneficial, abruptly transformed into grave environmental pollutants and threats to human health.

Good Today, Bad Tomorrow

The classic example is asbestos. Once considered a miraculous substance for its fire-retardant properties, until the late 1970s asbestos was a fixture in institutional construction for many years, including thousands of schools and hospitals, as well as serving in shipbuilding, insulation and many other roles. Nevertheless, growing suspicions about the potentially harmful health effects of asbestos began to drive increasing scientific and regulatory inquiry. When the harmful effects ultimately were confirmed beyond doubt, the resulting blizzard of regulation, litigation and potential liabilities drove the largest producer of asbestos into bankruptcy.

A more recent example is the phenomenon of mold. One of the oldest forms of life on earth, mold predated the dinosaurs. Many strains have survived into our era to spoil our bread, discolor our bathroom tile grout and generally act as minor nuisances. But in the 1990s, certain strains of mold came to be recognized as serious toxic hazards, overnight making mold worthy of rigorous cleanup protocols ordinarily reserved for industrial chemicals and other hazardous materials, and giving birth to a growing mold remediation industry.

Consider as well the evolving roster of air pollutants. In the 1970s and 1980s, sulphur dioxide was a key atmospheric pollutant targeted for remedial action. A waste gas generated by a host of industrial and power generation activities, sulphur dioxide became recognized as the primary agent behind acid rain. Government mandated expenditures of billions on new technologies to reduce emissions, resulting in a 33 percent reduction in sulphur dioxide emissions between 1983 and 2002, and continuing progress today.

Later in the 1980s, the regulatory winds shifted. Chloroflourocarbons (CFCs), widely used in business and industry for everything from dry cleaning and spray can propellants to fire extinguishing and refrigeration systems came under increasing scrutiny. CFCs were ultimately identified as potent destroyers of the atmospheric ozone layers protecting the earth’s surface from ultraviolet rays. Once again, regulatory action mandated major investments in new technologies to engineer a phase-out of CFCs, costing billions of dollars over time.

Now, carbon dioxide has taken center stage as the primary culprit driving global climate change. The Kyoto Protocol set global standards for the reduction of carbon emissions. Even though the United States is not a signatory of Kyoto, a growing number of municipal and state governments are considering local regulations that would have substantially the same financial and regulatory impacts on businesses and institutions. The result could be expenditures for new technologies such as carbon sequestration, cap and trade arrangements, as well as others.

Now in development at the EPA is a proposed strategic plan indicating the agency’s growing interest in regulating carbon emissions, as well as continued expansion of the list of contaminants to be targeted by mandates in the near future. The moving target of environmental regulation is keeping its pace, if not accelerating.

No organization can be certain what form future environmental regulatory actions will take or what commonly used chemicals, substances or processes will morph into tomorrow’s costly environmental liability.

Managing the Risk of Emerging Pollutants

Given the continuing evolution of environmental regulation, organizations need to ask themselves whether they are willing to gamble their futures on the possibility that today’s legal substances will become tomorrow’s pollution poster children. If, as most companies would agree, this is not a gamble worth taking, the prudent alternative is to take positive steps to tackle the growing liability risks of emerging pollutants.

One strategy is to self-insure against potential environmental liabilities, but it is not an ideal solution. The major drawback of this approach is that there is no way to know which substances or products will suddenly emerge as the next targeted contaminant. Neither is there any reliable way to ascertain the breadth of potential liabilities, regulatory burdens and costs. It’s a roll of the dice, at best, at a time when the financial stability, reputation or even survival demand a sure thing.

That sure thing is the true risk transfer that environmental insurance can provide, from an insurance carrier experienced in this specialized field. Such policies can be readily tailored to address an organization’s current and future needs, with the benefit of providing immediate protection once coverage is bound.

Why purchase a dedicated environmental insurance policy? Simply because environmental policies are designed and underwritten to address past, present and future environmental problems in ways that commercial general liability policies will not, since pollution coverage is almost always specifically excluded from the CGL policy.

If the past is any guide, the continued collaboration of the environmental sciences, regulators, the courts and the media will continue to identify new and costly pollutants from a long list of substances used by business and industry for decades. Prudent organizations will address this eventuality by turning to insurance products from an experienced environmental insurance provider, geared to respond to the known hazards of today and the unanticipated risks of tomorrow.

Topics Legislation Pollution Chemicals