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Risk managers required to address wide range of environmental issues

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Risk managers required to address wide range of environmental issues

PHILADELPHIA—Environmental issues affecting risk managers now extend well beyond traditional pollution liability exposures.

Financial assurance financing, climate change liability and natural resource damage liability are growing concerns for a wide range of organizations, panelists said during a session at the Risk & Insurance Management Society Inc. conference in Philadelphia.

Environmental financial assurances are mandated by federal authorities for certain industries. The tools demonstrate that there are sufficient financial resources for environmental risks and future environmental obligations to compensate affected third-parties and mitigate bankruptcy, said Michele Schroeder, vp of environmental for Zurich in New York.

Types of financial assurance instruments include surety bonds, bank letters of credit, insurance, trust funds or escrow accounts, and net worth tests and parental guarantees.

Over the past five years, due to economic pressures from the 2008 financial crisis, there has been a realignment regarding which instruments can be used, Ms. Schroeder said.

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For example, surety bonds have been retracted from certain classes, fees for bank letters of credit have increased and there is limited capacity available.

“There has been more of an interest in the insurance policy as a financial assurance tool than there ever was before,” Mr. Schroeder said during a session on emerging environmental liabilities.

“If insurance is something that you're interested in as a tool for a financial assurance requirement, there needs to be a dialogue and a discussion of an adjustment to the underwriting process for the expected future costs,” she said, which typically involves fronting arrangements such as collateral.

Also, new financial assurance regulations set forth by the Environmental Protection Agency—and expected to come into force in 2013—have identified new industry segments that previously were not compelled to have financial assurance in place, Ms. Schroeder said.

In addition to the expanding industry segments that will need financial assurance in place, risk managers are facing other emerging environmental liabilities.

John G. Nevius, shareholder and chair of the environmental law group at Anderson Kill & Olick P.C. in New York, said that risk managers need to effectively manage potential climate change exposures.

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A key legal issue for this exposure is causation, Mr. Nevius said during the session, noting that such questions as whether humans affect the temperature of the planet or whether defendants' conduct caused global warming are being debated. A key issue is whether insurers have a duty to defend any allegations.

“The duty to defend is a huge issue and generally the issue in a lot of environmental disputes because the allegations are mixed and the question is, do you get a defense against them?” Mr. Nevius said.

In addition, well-known cases such as the Deepwater Horizon oil spill have brought natural resource damage liability to the forefront, said Gene P. Devine, senior vp at Arthur J. Gallagher Risk Management Services Inc. in Garden City, N.Y.

Natural resource damage refers to the injury or loss of land, fish, wildlife, biota, ground water, drinking water and other such resources held in trust by any federal or state authority.

While many federal agencies' budgets recently have been reduced, the EPA has increased its enforcement budget and states are actively taking on any violations, Mr. Devine said (see box).

“Any party that has possibly contributed to the pollution or degradation of the natural resource is liable,” Mr. Devine said.

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The driver behind this exposure “is cleaning up the sediment and making these resources clean again—it's an expensive proposition.”

Most commercial pollution legal liability policies include natural resource damage within the definition of property damage, Mr. Devine said.

While approximately 30 insurers—many of them new entrants—offer such coverage, each form is underwritten differently, he said.

Still, Mr. Devine said, “there are a lot of options out there. There is a lot of capacity.”