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NOT ALL ENVIRONMENTAL claims are complex or involve significant financial exposure, but even minor environmental claims differ from the traditional claims insurers and risk managers handle.
Take, for example, an oil spill in the Houston ship channel last year. A barge buckled in rough seas off Galveston, Texas, spilling nearly 200,000 gallons of heavy oil. In the weeks after the accident, the oil came ashore over more than 300 miles of shoreline from Galveston to the Mexican border, contaminating shorebird rookeries, turtle nesting areas, recreational areas and a large section of national seashore. Response operations continued for a month, with more than 300 workers laboring to contain and recover the oil at the height of the cleanup. Final costs of the operation totaled more than $18 million. Once response operations were completed, the task of assessing the damages to the affected natural resources began. The task of assigning a monetary value to the natural resource damages continues to this day, with potential exposures well into the millions.
Unlike traditional claims, environmental claims tend to have significant involvement of multiple federal, state and local agencies charged with the oversight of environmental affairs. As such, one may have to serve multiple masters in an attempt to evaluate and satisfy both the demands of the claimant and the sometimes stringent regulatory framework imposed by these agencies.
A notorious component of agency involvement is a quagmire of ever-changing and often conflicting regulations. In addition, the demands of the claimant may differ from or even conflict with these regulatory requirements.
The assessment and verification of property damage claims asserted as the result of an environmental incident is a much more complicated matter than, for example, the adjustment of storm damage. Even a general assessment of the nature and extent of contamination on a claimant's property can take months to complete. The results of any subsurface assessment then are subject to wide variations in interpretation by expert geologists, hydrogeologists, chemists, toxicologists, engineers et al. Assigning a reliable monetary value to this damage is a field arguably still in its infancy. Similarly, property damage claims are enhanced as a consequence of stigma and diminution in property value allegations.
In the event that bodily injuries are presented, they are oftentimes complicated by unique exposure injuries. These incidents require the involvement of liability experts, such as indoor air quality experts or toxicological experts with knowledge of specific materials, e.g., lead and mercury. Furthermore, a host of medical experts to consider both causation and damages is required.
Perhaps the greatest complicating factor is the actual remediation of a contaminated site. The selection, retention and supervision of a remediation contractor can have a significant impact on the cost associated with an environmental claim. Unlike many other types of claims, such as construction or medical claims, where there are designated degrees, there is no established level of professional competency for environmental remediation contractors.
In a typical claim, a risk manager may look for an individual with a particular credential, such as a professional engineering designation, board certification for a doctor or a certified public accountant. While some states have begun licensing or certification for certain tasks, such as subsurface assessment, a risk manager has no such option available for an environmental claim. In fact, numerous "mail-order" credentials have been developed in the environmental field over the past several years, and that can foster a false sense of security on the part of a client while demonstrating no verified competence on the part of the "professional."
The remediation business, now a large segment of the traditional construction and engineering sectors, has seen tremendous growth in the past 20 years. Many large companies have appeared virtually overnight, all of which have areas of specialization as well as limitations.
First, it is critical to verify the experience and reputation of a remediation contractor for the job at hand. Has the company performed the type of work required for the particular loss, e.g., emergency response or underground storage tank removal? What are the contractor's geographical, technical and equipment/labor limitations?
Second, investigate the potential remediation contractor's reputation by acquiring references from colleagues or even state regulatory agencies. While most state representatives are unable to formally recommend a single remediation contractor, many will provide a list of remediation contractors they consider to be qualified.
Even after a competent contractor has been obtained, many other issues still exist with regard to philosophies surrounding the staffing of a project, remediation strategies and disposal alternatives. As anyone who has handled a large environmental claim will attest, the choice of remediation technologies and the negotiation of cleanup endpoints with claimants and agencies can have enormous impacts on the time frame and ultimate cost of a claim.
In the wide range of technical choices available today for ground water treatment, for example, capital costs may differ by several orders of magnitude, while cleanup duration may range from months to years. Claims handlers' range of cleanup choices may be limited due to constraints placed by third-party property holders, including the threat of litigation.
Therefore, once a qualified remediation contractor has been found, a written contract must be executed to address some of these additional concerns. For instance, the contract should make clear that any significant deviations from the scope must be approved in writing by the retaining party. Further, additional non-emergency activities such as disposal or long-term remediation also must be broken out in this fashion.
Quite predictably, form contracts, which are typically used by remediation contractors, can range between one and a dozen pages in length, depending on the nature and duration of services rendered. All the contract provisions should be carefully explored. While much of the language may be boilerplate, such as terms of payment, termination, force majeure, ownership of documents, assignment, etc., a number of provisions should be investigated so as not to expose your company to additional liability in the event a remediation effort fails.
Almost all contracts prepared by remediation contractors contain two provisions that are important to understand: indemnification and limitation of liability. Typically, a limitation of liability clause will limit liability to the dollar amount of the contract. A handful of state courts have examined the issue of the legality of limitation of liability clauses and, in some instances, have found them to be enforceable, particularly where the fees involved were significantly disproportionate to the liability that would otherwise attach.
Take, for example, an environmental consultant who performed a non-intrusive site investigation costing only a few thousand dollars. The consultant's failure to discover an underground storage tank or other existing contamination from the routine document search during a first-phase assessment could lead to hundreds of thousands of dollars in liability to the company.
Remediation contractors also have sought to shield themselves from liability by including an indemnity provision with their standard contract. A typical indemnification clause would provide that the hiring company agrees to indemnify the environmental professional for any liability arising out of a claim brought by a third party with respect to the site at which the environmental professionals are performing work.
While limitation of liability and indemnification provisions are designed to limit the remediation contractor's exposure, risk managers are wise to ensure a remediation contract requires that the hired consultant maintain appropriate insurance, including general liability and professional liability.
A company may also wish to consider, depending on the size and scope of the remediation project, requiring that it be named as an additional insured on the remediation contractor's policies. At a minimum, the coverage should seek a certificate of insurance proving coverage is in place.
Notwithstanding the availability of very diverse and competitively priced environmental insurance in the marketplace, companies all too frequently do not have appropriate coverage in place. In addition, most insurers' claims departments are overburdened dealing with issues arising out of old historical policies rather than the liability and damage issues presented by a covered claim. Many insurers that do offer environmental coverages persist in using traditional claims handlers and adjusters to handle even complex technical matters.
Effective management of an environmental incident by a risk manager or insurance company claims department requires specialized legal and technical expertise. Legal expertise is clearly needed with regard to issues such as liability, interpretation of statutes and regulations and negotiations with agencies involved in a loss. Technical expertise is needed to support these efforts as well as all aspects of remediating the subject site.
It is important to distinguish between long-term incidents of gradual pollution and sudden losses. In the case of a long-term contamination, a risk manager has time, at least to some extent, to evaluate both liability and a remedial strategy. Unfortunately, in the case of a catastrophic loss, a risk manager does not have the luxury of time to respond. However, in either case, planning is clearly the linchpin of an effective claims management program. Whether an incident involves gradual contamination, as from a leaking tank or a "shock loss" such as a train derailment, all parts of an organization, from the risk manager to the public relations chief to senior management, should know exactly the steps to take in responding to an incident. In addition, available outside resources, such as those available from the insurance companies or from contractors, should be identified and their roles clearly understood.
Understanding the unique nature of environmental claims is only the first step toward more effective management of such claims. Developing a comprehensive, focused environmental claims management program, often in conjunction with a company that specializes in managing such incidents, is the most effective means of minimizing the impact of these claims.
Randall E. Hobbs is vp of ECS Claims Administrators in Exton, Pa.