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Cover pricey and tight in closing hazardous waste, landfill sites


Owners and operators of hazardous waste sites face numerous exposures when shutting down facilities, but finding adequate insurance coverage to help minimize those risks is becoming more difficult, experts say.

The market for so-called "closure/post-closure" insurance is sluggish, they say, with a limited number of players willing to write coverage at high prices and short policy terms.

Beyond insurance to shield owners and operators from potential risks of pollution legal liability or third-party claims for bodily injury emanating from the cleanup of a site, a chief concern is meeting state and federal closure and post-closure financial assurance obligations for landfills as well as facilities to treat, store and dispose of hazardous waste.

Such sites can terminate operations only after regulators approve a detailed closure plan that outlines steps necessary to decontaminate a site, a closure timeline and proof of sufficient funds to safely shut down the unit.

For post-closure—a process that requires groundwater monitoring and other on-site maintenance—the U.S. Environmental Protection Agency mandates regulated waste facilities to carry 30 years of financial assurance that the facility and the land it sits on will not pose future threats to human health and the environment, said Ann Waeger, a partner at the law firm of Farer Fersko P.A. in Westfield, N.J.

Market tightens and flattens

During the 1990s, insurance became a popular alternative to other accepted methods—including bonds, letters of credit and trust funds—for fulfilling regulators' financial assurance requirements, said Ken Berger, executive vp, Zurich North America. But its use has lessened during the past few years as the closure/post-closure insurance market has tightened.

Operators and firms are witnessing "a general flattening out of capacity in the environmental insurance business," Mr. Berger noted. Furthermore, "the regulations really overestimate and are conservative in terms of what they want people to set aside for closure/post-closure," he said. "I think (owners and operators) would probably find it more difficult than they would have five years ago," to obtain policies for closure and post-closure care today.

Waste site operators most commonly use a specialized policy known as an "environmental protection program" to satisfy financial responsibility requirements for closure/post-closure, and to help cover future costs and monitor a hazardous waste site, experts say.

Closure/post-closure programs typically exclude third-party bodily injury, property damage or defense claims, they say. Such a policy must be obtained for a face value at least equal to the cost estimate for closure/post-closure expenses and increase annually to account for inflation.

Such policies are considered a combination of risk transfer and risk funding because collateral—as much as 80% or more of the expected cost of post-closure work—is required on the front end, said Elizabeth Banister, senior vp with Marsh Inc.'s environmental practice in Atlanta.

Compared to other financial assurance options, the advantage in using an EPP for closure and post-closure work is that "if you blow through the limit, there's actually insurance to step in and pay for that," said Howard Tollin, managing director at Aon Corp.'s environmental services group in Jericho, N.Y. "Regulators like that because they see this as a high level of protection," he said.

Key players in the closure/post-closure space are New York-based American International Group Inc., Schaumburg, Ill.-based Zurich North America and—to a lesser degree—XL Environmental Inc. of Exton, Pa., experts say.

"AIG is probably the biggest (player) because they are the one that's most willing to take a risk. Some of the other companies are smaller and more conservative and are not willing to take that risk," Farer Fersko's Ms. Waeger said.

"The carriers' fear is that the company is no longer financially viable and then the insurance carrier would be on the hook for closure/post-closure" costs, Ms. Banister said.

"If there is a loss, it's going to be really large vs. doing some small pollution policy for a local gas station," said Brenna Melvin, senior vp in the Boston environmental practice for broker Beecher Carlson Holdings Inc.

"It's a really long process to get a policy put in place" due to necessary regulatory approvals for the policy terms and limits, Ms. Melvin said. "It could take two months vs. property insurance, which, depending on the risk, you could get something done in a week."

Insurers and brokers were unwilling to say how much the coverage costs, since price hinges on a variety of factors that include the size of the landfill or hazardous waste site, number of contaminants present at the site, and proximity to the general population and other commercial entities.

Still, experts concur that the coverage is costly, and usually an option only for the largest sites.

"It's very expensive," said Ms. Melvin. "In my experience, if they can find a less expensive alternative than the insurance, they'll take it," she said, including "cash or some sort of creative financing provided by a bank."

Ms. Banister noted that in an EPP type of program, companies are generally looking for minimum clean-up and maintenance costs of $5 million. "I don't see the market getting soft in this area," she said.

Another key problem for insureds is that limits have been slashed in recent years, experts say.

"An overall hardening of the market with regard to longer-term policies" has resulted in cutting policy terms to 10 years from 30 years in just the past couple of years, Ms. Banister said. "You may be able to get 15, but typically, they are all drawing the line in the sand at 10."

"The industry used to support 30 years, which paralleled the general statutory requirements for financial assurance," said Richard O. Wagner, senior vp and manager of national accounts for AIG Environmental in New York. But in the past two years, "that has retracted."

"We can offer as much as 15 years for the expected closure costs on the EPP," Mr. Wagner said. Operators would need to fill in the remaining 15 years following the policy term with "some form of guaranteed investment product or surety."

The new, shorter term limits are likely here to stay, Mr. Wagner said. "I don't think it will change to where it will go higher," he said.

Mr. Wagner noted that going forward, regulators overseeing the closure and post-closure of landfills and other hazardous waste facilities should be expected to become "more aggressive in reviewing...and making sure they have enough money to get these sites closed."