HELPING INSURANCE COMPANIES MANAGE ENVIRONMENTAL RISK

By John Benvegna, Associate, White Plains, NY office and Tom West, Associate, Trumbull, CT office

Knowledge is power. For insurers negotiating a pollution claim on a 25-year-old general liability policy or underwriting a new policy to cover potential cost overruns for future remediation, this means access to expert information about the regulations, processes and costs involved in investigating and cleaning up hazardous and non-hazardous waste releases.
   As property-casualty insurers are painfully aware, many industrial clients are filing claims against decades-old general liability polices to recover the substantial costs of investigating and remediating pollution or hazardous waste releases as required under federal and state environmental programs, including RCRA and CERCLA. Of course, many of these policies were written prior to the development of exclusions for these types of claims. As a result, insurers are involved in legal battles over the value of their financial obligations. And when it comes to adjusting one of these claims, it's no mere fender bender but a potential multimillion dollar settlement that is at stake.
   Typically, a policyholder comes to the table with its environmental consultants' documentation of the violations, recommendations for the processes that must be used in investigating and/or remediating the problem, and estimated costs for doing so - often at multiple sites across the country. In most cases, the work already is in progress or has been completed. In others, the work may not have begun.
   Either way, the insurer must be able to assess whether the recommended clean-up approaches are the most effective and whether the costs are accurate and reasonable - or else run the risk of overpaying on the claim. But few insurers have the internal environmental consulting resources to analyze the data or the experience to assess the proposed methods and estimate fair costs.

Supporting settlement negotiations
   In LBG's experience -- providing environmental consulting services to insurers on claims representing over 200 sites throughout the U.S. - policy holders' cost estimates for work at these sites often are overly conservative and can be reduced by as much as 40-60 percent. Claim values have ranged from less than $1 million to $370 million on a range of sites, including manufactured gas plants, power plants, oil refineries, wood treating facilities, chemical manufacturing facilities, industrial and municipal landfills, and electric substations. LBG's evaluations involve a complete review of the regulatory status of each site, an examination of applicable regulations, an analysis of the proposed investigation and remediation methods, and an assessment of costs. As part of the evaluation, a written report is presented to the insurer that includes revised costs based on vendor quotes and the rationale for recommending changes in or elimination of any procedures that are considered unnecessary or inappropriate. An insurer can use the report to support its settlement negotiations with the client.
   The bottom line: LBG determines for the insurer whether the remediation must be performed as stated and at what cost or, in the case of work already performed, whether it was the most cost-effective solution.

Guidance to underwriters
   Today, insurers are offering new policies to industrial clients to cover potential cost overruns for future environmental investigations and remediations at multiple sites -- often projected at more than $200 million. The companies that approach insurers for this type of coverage are usually from industries that are far along in their RCRA programs. They are savvy when it comes to the environmental process and have used consultants to assist them in preparing what they believe are reasonable estimates of costs they will incur in future clean-ups.
   Since the mid-80s, the environmental industry has matured and better predictions can be made about the risks for handling certain hazardous materials and the costs for clean-up of leaks, spills and releases. As a result, the insurance industry has access to better information to allow it to more carefully underwrite the costs of remediation. However, few underwriters have the technical expertise to identify the factors that unexpectedly could drive up those costs.
   In these cases, an insurer will call upon LBG to review the technical nature of a remediation proposal and to identify the financial risks involved with underwriting a particular policy. LBG's environmental consultants examine the unit costs of each aspect of the remediation process, assess whether or not the site has been effectively characterized, and evaluate the prospective insured's relationship with the regulatory agency. In examining the proposed clean-up approach, the consultants will assess whether it is cost-effective and likely to achieve the desired result.
   From this analysis, an underwriter is provided with the information needed to develop an insurance program that will protect its client and prove to be profitable for the insurer. LBG also provides quarterly assessments of insurance company portfolios to identify potential problems and ensure that the client's approaches are remaining on track.
   Whether providing information to support an insurer in its settlement negotiations on existing policies or guiding underwriters in developing profitable new business, LBG's environmental consultants draw on the firm's many years of diverse site remediation experience. This expertise can allow insurers to better manage the risks they face with an extremely complex environmental remediation process.