A proposal by the U.S. Environmental Protection Agency to impose federal limits on a group of chemicals known as PFAS in drinking water under the Safe Drinking Water Act would bring added liability and regulatory risks for utilities and municipalities. 

Public water system operators and other potentially affected organizations, including industries that discharge wastewater, should review their insurance coverage and take steps to mitigate the risks, experts say. 

The proposed regulation, which the EPA announced March 14 and expects to finalize by year’s end, would establish legally enforceable maximum contaminant levels for six perfluoroalkyl and polyfluoroalkyl substances, including an MCL of 4 parts per trillion for perfluorooctanoic acid, or PFOA, and perfluorooctane sulfonic acid, or PFOS. A public comment period on the proposed regulation ends May 30.

Interim advisory levels published by the EPA last summer updated the health guidance for PFOA and PFOS to even lower levels of 4 parts per quadrillion and 20 parts per quadrillion, respectively. 

Exposure to PFAs, also known as “forever chemicals,” has been linked to various health conditions such as cancers, thyroid disorders, fertility issues and liver damage. The substances were used in a wide variety of manufacturing processes but have been phased out in several countries due to health concerns.  

The PFAs contamination limit proposal is a significant shift from health advisory levels of 70 parts per trillion for PFAs that the EPA issued in 2016, said Cameron Douglass, Denver-based regional director of environmental at Arthur J. Gallagher & Co. 

Numerous states, including California, Vermont and New Hampshire have implemented testing requirements for PFAs in drinking water, Mr. Douglass said. 

“As this develops on a national scale a number of municipalities will need to address not only notification of PFAs contained within drinking water but also appropriate measures to treat that drinking water appropriately, whether it’s finding new sources or implementing some form of treatment technology,” he said. 

If the rule becomes final, public water system operators could face statutory penalties under the Safe Drinking Water Act if the concentration of PFAS in drinking water exceed the maximum contaminant levels, said Reza Zarghamee, Washington-based partner at Pillsbury Winthrop Shaw Pittman LLP. 

“They would have to take steps to address and clean up the PFAS contamination to attain the acceptable levels, which could be very costly,” Mr. Zarghamee said. 

The proposed regulation also opens “the potential floodgates” for public water operators and owners to face third-party toxic tort liability if consumer confidence reports they issue indicate contamination above the limits enforced by the EPA, he said. 

Not only is this “a low level that is difficult to attain if you’re in a situation where you have to clean up, but the technology for the remediation and also end-of-life disposal of these chemicals is still evolving,” Mr. Zarghamee said. 

Coverage for PFAS 

Historical commercial general liability insurance policies that either have no pollution exclusions or limited exclusions could be a source of recovery for damages, said Tamara Bruno, Houston-based partner at Pillsbury Winthrop Shaw Pittman.

“If you’re talking about water utilities, a lot of these infrastructure and water projects have been around for some time, so they may have historical policies,” Ms. Bruno said. 

However, if there have been liability or other cleanup claims at specific sites — Superfund sites for example — some policyholders may have already used or released or sold some of the historic policies, she said. 

“That could be challenging, either for insurers who thought this claim was over, or for insureds because they have depleted their insurance in the prior mediation,” she said. 

In 1986, the insurance industry introduced an absolute pollution exclusion into commercial general liability policies, and court decisions have been mixed, Ms. Bruno said. “Defense coverage may be available for certain PFAS-related claims even under a CGL policy,” she said. 

Establishing a national MCL for PFAS chemicals would potentially add risk under occurrence-based policies, said Michael Miguel, Los Angeles-based principal at McKool Smith P.C. 

“Most historical environmental litigation has involved activity that was perfectly legal at the time, and during the policy period, but was subsequently discovered to be harmful to the environment,” Mr. Miguel said. 

The addition of PFOA and PFOS to the hazardous substances list means that the pollution exclusion would likely apply, though, he said. 

Also, the extensive use of claims made policies rather than occurrence-based policies means that fewer claimants will be looking to historical policies for coverage, he said. 

Current environmental liability policies could also provide coverage, though PFAS exclusions are being introduced, experts said. 

Given the increased regulatory attention on PFAS and the potential for litigation, more companies are buying pollution liability policies, or looking to contamination policies for coverage, said Adrian Azer, Washington-based partner at Haynes & Boone LLP.  

Some entities may decide to self-insure and many may decide to buy pollution liability insurance to address the exposures, but PFAS exclusions are increasing, Mr. Douglass said. 

Prior to the 2014 drinking water crisis in Flint, Michigan, it was fairly common for municipalities to purchase pollution liability coverages that included products pollution coverage not just for potable water but also for biosolids, he said. 

Since then, insurers have pulled back the availability of coverage or introduced exclusions for lead within potable coverage, he said.

“If products pollution coverage is provided for potable water, I would anticipate PFAS exclusions being implemented where necessary,” and those exclusions would also apply to biosolids, Mr. Douglass said.