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Flint learns tough lesson in risk management


The drinking water crisis in Flint, Michigan, shines a bright light on the risks that public-sector entities take when they self-insure their exposures and make decisions based on their limited budgets.

And the hard-won risk management lessons learned by the local and state authorities in Michigan should serve as warning to numerous other municipalities in the United States.

In April 2014, the city of Flint switched from purchasing treated water from Detroit Water and Sewerage to sourcing and treating its water supply from the Flint River, according to an October report by the U.S. Environmental Protection Agency.

Flint’s treatment of the new drinking water source did not include a process for reducing the corrosion of lead-containing pipes and connections, which allowed lead to leach into the drinking water. After the switch, some of the nearly 100,000 resident customers of the city’s community water system reported water color and odor problems to the EPA, with the public health risk of lead were identified in the drinking water supply.

Young children who drank the water supplied by the Flint River, without appropriate corrosion control measures, had blood-lead levels that were significantly higher than when the Detroit water system was the supply source, according to the results of an investigation by the Centers for Disease Control and Prevention released in June.

“Fundamentally what occurred in Flint was there was a change, and the health implications of that change were not embedded into any of the planning processes,” said Jamie Bartram, director of the Water Institute at the Gillings School of Global Public Health at the University of North Carolina at Chapel Hill.

“In principle, I would assume that if there’s going to be a major change to a major public service, there ought to be some moment to reflect on whether that change is going to beneficial, neutral or detrimental, and that did not occur. And the fact it didn’t occur worries me because it seems to be a gap in the organizational setup,” he said.

Who’s at fault?

The Flint water crisis has led to state and federal emergency declarations; criminal indictments against officials for misconduct in office, tampering with evidence and treatment and monitoring violations of the Michigan Safe Drinking Water Act; and a flood of litigation against the city, the state of Michigan, the U.S. EPA and engineering companies that advised government officials about the switch.

“They’re trying to get their hands in any pots they can because it’s not typically easy to get a lot of money recouped through municipalities or state entities,” said Justin Maack, an account executive in the public entity and education practice at Assurance Agency Ltd. based in Schaumburg, Illinois.

“They definitely want to pull the state in because the state has a lot more funds than just the smaller local municipalities. Private companies might have some more assets that you can get your hands on,” he said.

The city has been named in lawsuits because it was responsible for operating the Flint water plant, but the state also has responsibility because the governor appointed the emergency managers who decided to switch the water supply without exercising due diligence, said Trachelle Young, of Trachelle C. Young & Associates P.L.L.C. in Flint, who is one of the lawyers representing the more than 6,600 plaintiffs to date.

“They didn’t do their homework and they made decisions based on financial outcomes,” she said. “We believe the city has some culpability, the state has some culpability, and the EPA has some culpability.” A March report by the Flint water advisory task force placed primary responsibility for what happened with the state government because of the role the state-appointed emergency managers played in making the switch to the Flint River and the failures of the Michigan Department of Environmental Quality.

Although Michigan Gov. Rick Snyder took full responsibility for the water crisis during his State of the State address in January, Michigan has invoked the sovereign immunity defense, meaning that it would be immune from civil litigation under most circumstances.

However, there is a gross negligence exception that could apply in the Flint situation because the emergency managers allegedly failed to do due diligence in ordering the switch, and the criminal indictments allege that state officials may have intentionally misled the public and altered or manipulated water quality testing to demonstrate compliance with the Safe Drinking Water Act, according to legal experts.

“There was ill intent but also, we believe, outright fraud,” Ms. Young said.

In late October, a Michigan state court judge refused to dismiss parts of a lawsuit filed by Flint residents against Gov. Snyder and several state agencies that alleged they made arbitrary decisions to switch the water supply source despite knowledge of the danger and intentionally concealed data and made false statements to try to downplay the health dangers posed by using Flint’s tap water, according to court documents.

“Such conduct on the part of the state actors, and especially the allegedly intentional poisoning of the water users of Flint, if true, may be fairly characterized as being so outrageous as to be ‘truly conscience shocking,’” Court of Claims Judge Mark Boonstra said in his ruling.

Insurance or no insurance?

Both the city of Flint and the state of Michigan are generally self-insured, and a spokesman for the state said via email he was unaware of any insurance policies maintained by the state or whether the state had previously considered buying insurance that would have covered costs related to the Flint water crisis.

Even if the city and state had secured insurance coverage, it is questionable whether standard general liability or property policies would cover bodily injury or property claims arising out of the Flint water contamination situation, experts say.

“Those exposures are real for public entities — and specifically municipalities — and that particular line of coverage is important and almost always excluded under a normal general liability policy,” said Ryan Isaacs, Grand Rapids, Michiganbased area president for Arthur J. Gallagher & Co.

However, there could be exceptions based on the specific wording of the policy, said Jared Zola, a New York-based partner in the policyholder-only insurance coverage practice at Blank Rome L.L.P.

If, for example, the acidity of the water caused corrosion of the pipes and they needed to be replaced, the ability to invoke the pollution exclusion would depend on the policy language.

“The insurance is fascinating because every commercial property and commercial general liability insurance policy has some version of a pollution exclusion in it,” he said.

“It seems to be everyone’s first reaction to assume that a pollution exclusion would bar coverage under a traditional property or general liability policy. Policyholders would be well-served to take a really close look at that before they reach that conclusion,” he said.

In addition, bodily injury coverage could have come into play given the elevated lead levels in the blood.

“I think it would be an uphill battle to find bodily injury coverage from lead exposure in a traditional CGL policy,” Mr. Zola said. “But pollution legal liability policies certainly do have the option of providing that coverage.”

The Flint crisis has prompted conversations with public entity risk managers and their brokers about insurance options that could exist to address such a risk, namely policies that cover or include coverage for contaminated drinking water, Mr. Isaacs said.

“Pollution or contamination is a real exposure for public entities, especially for those that are supplying drinking water to the community,” he said. “There are a number of different ways contaminations can occur. These entities need to be regularly testing the infrastructure, the quality level of the drinking water, and evaluating the overall pollution and contamination risks that could be present. The last part of that is are they willing to accept that risk or do they think there is value in transferring that risk to an insurer?”

This is particularly important with public entities that have limited resources and likely do not set aside money in their general funds for unbudgeted litigation expenses, according to Arthur J. Gallagher’s Mr. Isaacs.

“We have seen from Flint that costs can be substantial,” he said. “Pollution or contamination itself is typically not a frequency issue. It is a severity issue. Typically, when these claims do occur, they tend to be large.”

It is unclear what the ultimate costs of the Flint water crisis will be, but Gov. Snyder asked for and received $28 million from the state legislature earlier this year – in addition to the $9 million in supplemental aid last October – partly to pay for Flint to return to Detroit Water and Sewerage. He stressed that the January appeal would not be the final budget request for Flint and followed that up in February with a $195 million request for the fiscal year 2017 budget to address the water crisis.

Beyond Flint

The federal Safe Drinking Water Act went into effect in 1974 to protect public drinking water supplies in the United States by empowering the EPA to set standards for drinking water quality and partner with states to implement technical and financial programs to ensure safe drinking water supplies.

The law has effectively decreased the number of instances of compromised drinking water supplies, experts say.

“The U.S. overall has done a good job of reducing detected outbreaks,” the Gillings School’s Mr. Bartram said.

However, the U.S. regulatory approach differs from that in other countries, where regulators are increasingly emphasizing preventing contamination over detection and response to contamination, Mr. Bartram said.

“In the U.S., the regulatory approach that has been taken has focused on identifying specific contaminants and monitoring them,” Mr. Bartram said. “It’s quite self-evident that that’s not an optimal system. Contamination has to occur before you can detect it, so you expose people to bad things before you can do anything remedial.”

The U.S. regulatory system encourages suppliers to conduct the minimum required testing, he said.

“I find the U.S. one of the most difficult countries to do water and health work in because many suppliers are frightened of finding out they have a problem, and that impedes inquisitiveness and exploration,” Mr. Bartram said.

“There is very limited incentive to go looking for problems,” he said. “You could contrast that with the duty-of-care risk management approach, which would require that if you have reasonable suspicion, you really need to follow up.”

And the aging water infrastructure in the United States means that lead contamination and other potential issues could sneak up on communities.

“It would not surprise me if there were other communities that had lead in drinking water problems,” said Richard Glick, a partner with Davis Wright Tremaine L.L.P. in Portland, Oregon.

A March estimate by Chicago-based Fitch Ratings Inc. pegged the cost of replacing all lead service lines in the entire U.S. water sector in the range of a few billion dollars to $50 billion.

“It’s a very serious public health issue, not only for Flint,” Mr. Isaacs said. “I believe it’s an infrastructure issue for much of the United States. I think the problem and the issue that was presented in Flint is very real, and I think it’s one that a lot of other jurisdictions and geographies can learn from and hopefully be proactive about.”